THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SCHOOL  OF  LAW 


/tol^^2^^ 


SELECTION  OF  CASES 


ON 


PEIVATE  CORPORATIONS. 


BY 
JEREMIAH  gMITH, 

STORY  PROFESSOR  OF  LAW  IN  HARVARD  UKIVERSITT. 


SECOND  EDITION, 
m  TWO  VOLUMES. 

Vol.  I. 


CAMBRIDGE: 

THE  HARVARD  LAW  REVIEW  PUBLISHING  ASSOCIATION. 

1902. 


Copyright,  1901  and  190S^ 
By  Jebemiah  Smith 

T 


PRINTED  DY  H.  O.  HOUGHTON  &  CO. 
CAMBRIDGE,  MASS. 
U.  S.  A. 


in 


PREFACE  TO  SECOND  EDITION. 


This  edition  differs  from  the  first  in  the  following  respects  :  — 

1.  The  order  of  the  topics  has  been  changed. 

2.  Some  new  topics  have  been  added, 

3.  New  cases  have  been  added  :  not  only  under  new  topics,  but  also 
under  many  of  the  old  topics. 

4.  Some   cases  which  were  inserted  in  the  former   edition   have 
been  omitted,  and  some  others  have  been  abridged. 

J.  S. 

April,  1902. 


73538G 


PREFACE  TO  FIRST  EDITION. 


When  Professor  Gumming  was  preparing  his  "  Cases  on  Private 
Corporations,"  in  1892,  the  list  of  cases  then  in  use  on  that  subject  at 
the  Harvard  Law  School  was  placed  at  his  service,  with  the  under- 
standing that  the  same  list  was  liable  to  be  used  by  me,  at  any  time 
after  one  year,  in  preparing  a  selection  of  cases  on  the  same  subject. 
Such  use  has  now  been  made  of  that  list.  This  explains  the  similar- 
ity between  Professor  Cumming's  book  and  the  present  work,  in  re- 
gard to  the  cases  selected  on  some  topics. 

JEREMIAH  SMITH. 

April,  1897. 


TABLE  OF  CONTENTS. 


VOLUME  I. 


Paob 
Table  of  Selected  Cases xi 


CHAPTER  I. 
Defikition  of  Corporation 1 


CHAPTER  II. 

Distinction  between  Corporation  and  Stockholder 32 

Section      I.     The  Distinction  applied  Generally 32 

Section     II.     The  Distinction  as  applied  to  Questions  of  Taxation    .  68 
Section  III.     The  Distinction  as  applied  to  Jurisdiction  of  U.  S. 

Court  on  the  Ground  of  Diversity  of  Citizenship 94 


CHAPTER  III. 

Creation  of  Corporation 103 

Section      I.     By  what  Authority,  and  in  what  Method 103 

Section    II.     Acceptance  of  Charter 109 

Section  III.     Conditions  Precedent  to  Incorporation  Z>e /«re.     "One 

Man  Company  " 118 


CHAPTER  IV. 
Corporations  de  Facto 149 

CHAPTER  V. 
AcQxnsrriON  of  Membership — Subscriptions  for  Stock 212 

CHAPTER  VI. 
Promoters 232 

CHAPTER  VII. 
Interpretation  of  Charters •••• 262 


Vi  TABLE    OF   CONTENTS. 

CHAPTER  Vin. 

Paoe 

Powers  usually  Implied 295 

Section     I.     Power  to  acquire  Property  by  Purchase 295 

Section    II.     Power  to  acquire  Property  by  Devise 301 

Section  III.     Power  to  alienate.     Power  to  mortgage 305 

Section  IV.     Power  to  borrow  Money.     Power  to  issue  Negotiable 

Notes 317 

Section     V.     Power  to  make  By-Laws 327 

CHAPTER  IX. 
Mode  of  Contracting  and  of  Appointing  Agents 328 

CHAPTER  X. 

Directors 344 

Section     I.     Powers  of  Directors 344 

Section    II.     Duty  of  Care  due  from  the  Directors  to  the  Corpora- 
tion   358 

Section  III.  Special  Interest  of  Director,  —  how  affecting  Action 
taken  by  Board.  Dealings  between  Director  and 
Corporation 386 

CHAPTER  XI. 
Voting  Rights  of  Stockholders 407 

CHAPTER  XII. 
Power  of  Majority  of  Stockholders 446 

CHAPTER  XIII. 
Stockholder's  Right  to  inspect  Corporate  Records  and  Papers      483 

CHAPTER  XIV. 

Stockholder's  Right  to  bring  Suit  in  Reference  to  Corporate 

Management,  or  to  protect  Corporate  Interests 494 

CHAPTER  XV. 
Dividends.    Preferred  Stock 581 

CHAPTER  XVI. 
Transfer  of  Shares 612 

CHAPTER  XVII. 

Forfeiturk  ok  Charter  —  now  enforced.  Suit  by  State,  or  by 
Citizen,  to  restrain  ultha  vires  Acts,  or  to  compel  Perform- 
ance OF  Corporate  Duties 687 


TABLE   OF  CONTENTS. 


Vll 


VOLUME  II. 


CHAPTER  XVIII. 

Paor 

Liability  of  Corporation  for  Torts.    Right  of  a  Corporation  to 
SUE  for  a  Tort 733 


CHAPTER  XIX. 
Liability  of  Corporation  for  Crimes  and  Contempts 


791 


Effect  of  Ultra 
Section      I. 


Section  II. 

Section  III. 

Section  IV. 

Section  V. 

Section     VI. 

Section  VII. 
Section  VIII. 

Section    IX. 

Section      X. 


CHAPTER  XX. 

Vires  Transactions 806 

Transaction  within  the  Apparent  Authority  of  the  Cor- 
poration, and  rendered  Ultra  Vires  only  by  Reason 
of  the  Purpose  entertained  by  the  Corporation,  or 
by  other  Extrinsic  Facts 807 

Executed  Transfers  to  or  from  Corporation  in  Excess 
of  Charter  Authority      .     .     .     .     • 810 

Ultra  Vires  Lease.  Remedies  in  Case  of  Repudiation 
by  either  Party  before  the  Expiration  of  the  Term      822 

Bequest  to  Corporation  in  Excess  of  Charter  Author- 
ity ..     . 833 

Suits  for  Specific  Performance  of  Contracts  which  are 
in  Excess  of  Charter  Authority  ;  or  for  Declara- 
tions of  Trust  for  Purposes  in  Excess  of  Charter 
Authority 851 

Ultra  Vires  Contract  remaining  wholly  Executory  on 
both  Sides,  or  executed  only  in  Part  by  either  Side. 
Action  for  Breach,  or  for  Cancellation       ....     855 

Suit  by  Corporation  on  an  Ultra  Vires  Contract 
which  has  been  fully  performed  on  its  Part  .     .     .     866 

Suit  against  Corporation  on  an  Ultra  Vires  Contract 
which  has  been  fully  performed  on  the  Plaintiff's 
Part 877 

Obligation  to  restore  what  was  received  under  a 
Contract  which  has  subsequently  been  repudiated 
on  the  ground  of  Ultra  Vires 927 

Liability  of  Corporator  where  there  is  Crime,  Tort,  or 
Ultra  Vires  Contract  on  the  Part  of  the  Corpora- 
tion      944 


CHAPTER  XXI, 

Rights  and  Remedies  of  Creditors  against  Property  of  Corpo- 

^  RATION 96g 

Section        I.     GeneraUy qqq 

Section  II.  Effect  of  Dissolution  upon  respective  Rights  of  Cred- 
itors and  Stockholders  ;  and  upon  the  Enforcement 

of  Corporate  Contracts 978 

Section  III.  Rights  and  Remedies  of  Creditors  in  Cases  of  Con-^ 
solidation,  Merger,  or  Transfer  of  Assets  to  another 
Corporation  1006 


viii  TABLE   OF   CONTENTS. 

CHAPTER  XXII. 

Paob 
Power  of  Insolvent  Corporation  to  prefer  Particular  Credi- 
tors   1016 


CHAPTER  XXIII. 

Creditor's    Suit   to  correct    or    restrain  Corporate    Manage- 
ment.   Creditor's  Suit  against  Directors 1029 


CHAPTER  XXIV. 

Right  of  Corporate  Creditor  to  compel  Shareholder  to  pay  the 
Full  Par  Value  of  his  Stock.  Rights  of  Shareholders 
inter  sese  to  compel  such  payments 1038 


CHAPTER  XXV. 
Statutory  Liability  of  Stockholder  to  Creditor  of  Corporation, 

OVER   AND  above   STOCKHOLDER'S   LIABILITY  TO  PAY   IN   FuLL  THE 

Amount  subscribed  by  him  for  Stock 1087 


CHAPTER  XXVI. 

Power  of  Corporation  to  become  a  Member  of  a  Copartnership 
OR  Trust.  Corporation  formed  for  the  Purpose  of  establish- 
ing A  Monopoly 1096 


CHAPTER  XXVII. 
Power  of  Corporation  to  own  Shares  in  another  Corporation  1125 

CHAPTER  XXVIII. 
Power  of  Corporation  to  purchase  its  own  Shares 1137 

CHAPTER  XXIX. 

Modes  of  Dissolution  other  than  by  Forfeiture  or  by  Reserved 

Legislative  Power  of  Repeal      1153 

CHAPTER  XXX. 

Corporate  Receivership 1157 

Section     I.     Grounds  for  the  Appointment  of  a  Receiver     ....  1157 
Section  II.     Rights  and  Liabilities  of  Receivers 1178 

CHAPTER  XXXI. 
Foreign  Corporations 1202 


TABLE   OF  CONTENTS. 


IZ 


CHAPTER  XXXII. 


Paob 


Legislative  Control 1246 


Section 


Section      II. 


Section 
Section 


in. 

IV. 


How  far  Repeal,  Change  of  Charter,  or  Confiscation 
is  prohibited  by  the  tJ.  S.  Constitution,  or  by  State 
Constitutions 1246 

Extent  of  Police  Power,  where  Charter  does  not  con- 
tain any  Express  Reservation  of  Power     ....  1306 

Reserved  Power  in  Legislature  to  repeal  Charter       .  1331 

Reserved  Power  in  Legislature  to  alter  or  amend 
Charter 1363 


TABLE  OF  SELECTED  CASES. 


Paob 

Aberdeen  R.  R.  v.  Blaikie 386 

Ambrose  Lake,  &c.  Co.,  In  re 563 

American  Nat.  Bank  v.  American  Wood  Paper  Co 339 

American  Union  Telegraph  Co.  v.  Union  Pacific  R.  Co 826 

Andover,  Trustees  of  Free  Schools  in  v.  Flint 1088 

Andrews  Bros.  Co.  v.  Youngstown  Coke  Co 22 

Anonymous  (12  Modern,  559)  791 

Ashbury  Railway  &c.  Co.  v.  Riche 903 

Ashton  V.  Burbank 451 

Ashuelot  R.  R.  v.  Elliott 1391 

Aspen,  &c.  Co.  v.  City  of  Aspen 126 

Atchison,  &c.  R.  R.  v.  Campbell 1442 

Athol  Music  Hall  Co.  v.  Carey •     .     216 

Attorney  General  v.  Tudor  Ice  Co 709 

Attorney  General,  Ex  parte 999 

Atwool  V.  Merryweather 516 

Augusta,  Bank  of  v.  Earle 1202 

Aurora  &c.  Society  v.  Paddock 305 

Bacon  v.  Robertson 995 

Bahia  &  San  Francisco  R.  Co.,  In  re 640 

Baltimore,  &c.  Association  v.  Alderson 1198 

Baltimore,  Mayor  of  v.  B.  &  O.  R.  R 85 

Bank,  American  Nat.  v.  American  Wood  Paper  Co 339 

Bank,  California  Nat.  v.  Kennedy 1132 

Bank,  Continental  Nat.  v.  Eliot  Nat.  Bank 680 

Bank,  First  Nat.  of  Deadwood  v.  Gustin,  &c.  Mining  Co 1057 

Bank,  Monroe  Savings  v.  Rochester 81 

Bank,  Monument  Nat.  v.  Globe  Works 807 

Bank,  Narragansett  v.  Atlantic  Silk  Co 202 

Bank,  Nassau  v.  Jones 855 

Bank,  National,  of  JeflPerson  v.  Texas,  &c.  Co 126 

Bank,  Pacific  Nat.  v.  Eaton 230 

Bank,  Royal,  of  Liverpool  v.  Grand  Junction  R.  &  D.  Co 337 

Bank,  Stockton  Savings  v.  Staples 295 

Bank,  Union  v,  Jacobs 321 

Bank  of  Augusta  v.  Earle 1202 

Bank  of  Columbia  v.  Patterson 331 

Bank  of  Michigan  v.  Niles 851 


xii  TABLE   OF   SELECTED   CASES. 

FAea 

Bftnk  of  U.  S.  V.  Dandridge 329 

Bank  of  U.  S.  v.  Deveaux 94 

Baroness  Wenlock  v.  River  Dee  Co 928 

Bartholomew  v.  Derby,  &c.  Co 470 

Bateman  v.  Mid- Wales  R.  Co 318 

Bates  V.  Coronado  Beach  Co 1102 

Bath  Gas  Light  Co.  v.  Claffy 870 

Beatty  v.  N.  W.  Transportation  Co 437 

Beer  Co.,  Boston  v.  Massachusetts 1314 

Bent  V.  Priest 390 

Binghamton  Bridge 286 

Bissell  V.  Michigan,  &c.  R.  Cos 877 

Black  V.  Delaware,  &c.  Co 477 

Boatman's  Ins.  &  T.  Co.  v.  Able 618 

Bolander  v.  Stevens 9 

Booth  V.  Robinson 1125 

Boston  Beer  Co.  v.  Massachusetts 1314 

Boston  C.  &  M.  R.  R.  V.  Gilmore 970 

Boston  Glass  Manufactory  v.  Langdon 1153 

Boston  Music  Hall  Association  v.  Cory 663 

Boyce  v.  Trustees  of  Towsontown,  &c 210 

Boyd  I'.  Am.  Carbon  Black  Co 1104 

Bradbury  v.  Boston  Canoe  Club 317 

Bradley  v.  Reppell 191 

Brewer  v.  Boston  Theatre 514 

Bridge,  Charles  River  v.  Warren  Bridge 273 

Bridge,  The  Binghamton 286 

Bridge  Co.,  Chenango  v.  Binghamton  Bridge  Co 286 

Bridge  Co.,  Franklin  v.  Wood 103 

Bridge  Co.,  N.  Y.  &  L.  I.  v.  Smith 696 

Bright  V.  Lord 604 

Brightman  v.  Bates 434 

Broderip  v.  Salomon 131 

Brooklyn  Steam  Transit  Co.  v.  City  of  Brooklyn 694 

Brundred  v.  Rice 944 

Brunswick,  &c.  Co.  v.  United  &c.  Co 870 

Bryant's  Pond,  &c.  Co.  v.  Felt 219 

Buffalo  &  N.  Y.  C.  R.  Co.  v.  Dudley 1365 

Bundy  V.  Ophir  Iron  Co 42 

Burges  &  Stock's  Case 927 

Burrill  V.  Nahant  Bank 353 

Burt  V.  British  &c.  Association 558 

Bushnell  v.  Consolidated,  &c.  Co 177 

Button  V.  Hoffman 44 

California  Nat.  Bank  v.  Kennedy 1132 

Callender  v.  Painesville,  &c.  R.  R .208 

Catnden,  &c.  R.  R.  v.  Mays,  &c.  R.  R 806 

Campbell's  Case 403 

Carr  w.  Iglehart 1087 

Case  V.  Kelley 853 


TABLE   OF   SELECTED  CASES.  xiu 

Paob 

Cash  Register  Co.,  National  v.  Leland 955 

Catlin  V.  Eagle  Bank 1016 

Central  R.  R.  &  Banking  Co.  v.  Smith 778 

Central  Transportation  Co.  v.  Pullman  Car  Co 269 

Chadwick  t;.  Old  Colony  R.  R 312 

Charles  River  Bridge  v.  Warren  Bridge 273 

Chenango  Bridge  Co.  v.  Biughamton  Bridge  Co 286 

Cheraw  &  Chester  R.  Co.  v.  White 123 

Chestnut  Hill  &c.  Turnpike  Co.  v.  Rutter 738 

Chicago,  Burlington  &  Quincy  R.  R.  v.  Iowa 1316 

Chicago  City  R.  R.  v.  Allerton 355 

Childs  V.  Bank  of  State  of  Missouri 747 

Cincinnati,  &c.  Co.  v.  Hoffmeister 490 

City  of  Detroit  v.  Detroit  &  Howell  Plank  Road  Co 1414 

Clapp  V.  Peterson 1149 

Cleveland  City  Forge  Iron  Co.  v.  Taylor,  &c.  Co 1030 

Coit  V.  Gold  Amalgamating  Co 1061 

Columbia,  Bank  of  v.  Patterson 331 

Columbus  Ins.  Co.  v.  Walsh 1225 

Commonwealth  v.  Bringhurst 407 

Commonwealth  v.  Crompton 620 

Commonwealth  v.  Essex  Co 1368 

Commonwealth  v.  Smith 308 

Commonwealth  v.  Union,  &c.  Ins.  Co 698 

Compagnie,  &c.,  De  Bellegarde,  In  re 403 

Comstock,  In  re 1226 

Continental  Nat.  Bank  v.  Eliot  Nat.  Bank 680 

Cook  V.  City  of  Burlington 74 

Covington  Drawbridge  Co.  v.  Shepherd 973 

Cumberland  Coal  Co.  v.  Sherman 391 

Currie's  Case      .     .  1043 

Curtin  V.  Salmon  River  Co 394 

Dartmouth  College,  Trustees  of  v.  Woodward 1246 

Davenport  v.  Dows 523 

Davidson  College,  Trustees  of  v.  Chambers'  Executors 833 

Davis  V.  Old  Colony  R.  R 909 

Davis  V.  Smith  Amer.  Organ  Co 909 

Davis  V.  Stevens 156 

Davis  V.  U.  S.  Electric,  &c.  Co 1130,  1167 

De  Bellegarde,  In  re  Compagnie,  &c 403 

Deaderick  v.  Bank 1032 

Deadwood,  First  Nat.  Bank  of  v.  Gustin,  &c.  Mining  Co 1057 

Delaware  L.  &  W.  R.  R.  v.  Erie  R.  R 1170 

Denver  Fire  Ins.  Co.  v.  McClelland 912 

Detroit,  City  of  v.  Detroit  &  Howell  Plank  Road  Co 1414 

Distillery,  &c.  Feeding  Co.  v.  People 1117 

Dodge  V.  Woolsey 498 

Dovey  v.  Corey 378 

Dow  V.  Northern  R.  R 479, 1418 

Downing  v.  Mt.  Washington  R.  Co 262 


Xiy  TABLE  OF  SELECTED  CASES. 

Pass 

Dudley  v.  Kentucky  High  School 446 

Duncuft  V.  Albrecht i     .     .     .     .    612 

Dunphy  v.  Traveller,  &c.  Association 529 

Dupee  V.  Boston  Water  Power  Co 1137 

Durfee  v.  Old  Colony,  &c.  R.  R 1373 

Eagle  Ins.  Co.  v.  Ohio 1320 

East  Birmingham  Land  Co.  v.  Dennis 626 

Eastern  Counties  R.  Co.  v.  Broom 749 

Edwards  v.  Standard  R.  S.  Syndicate 1157 

Ellerman  v.  Chicago,  &c.  R.  R 348 

Ellis  V.  Marshall 114 

Elyton  Land  Co.  v.  Dowdell 466 

Empress  Engineering  Co.,  In  re 253 

Erie  &  North-East  R.  Co.  v.  Casey 1334 

Erlanger  v.  New  Sombrero,  &c.  Co 232 

Ewing  V.  Composite  Brake  Shoe  Co 1008 

Ex  parte  The  Attorney-General 999 

Ex  parte  Williamson 933 

Fairfield  County  Turnpike  v.  Thorp 64 

Falk  V.  Curtis  Pub.  Co 799 

Farmers'  Loan,  &c.  Co.  r.  N.  Y.  &  N.  R.  R 534 

Farrington  v.  Putnam 844 

Fayette  Land  Co.  v.  Louisville,  &c.  R.  R 816 

Finnegan  v.  Noerenberg       149 

First  Nat.  Bank  of  Deadwood  v.  Gustin,  &c.  Mining  Co 1057 

Fiske,  Estate  oi,  hi  re 838 

Fitzwater  v.  Bank  of  Seneca 521 

Ford  V.  Easthampton,  &c.  Co 588 

Forrest  v.  Manchester,  &c.  R.  Co 552 

Fort  Madison  Lumber  Co.  v.  Batavian  Bank 673 

Fosdick  V.  Schall 1194 

Foss  V.  Ilarbottle 507 

Foster  v.  Commissioners  Inland  Revenue 51 

Franklin  Bridge  Co.  v.  Wood 103 

Free  Schools  in  Andover,  Trustees  of  v.  Flint 1088 

Gallagher  v.  Germania  Brewing  Co 48 

Gashwiler  v.  Willis 344 

Giljbons  V.  Anderson 372 

Gifford  V.  Livingston 20 

Goodspeed  v.  East  Haddam  Bank 758 

Graham  v.  Boston  II.  &  E.  R.  R o 1220 

Gray  v.  Coffin 1095 

Great  Nortlicrn,  &c.  Coal  Co.,  In  re 1043 

Groat  Southern,  &c.  Hotel  Co.  v.  Jones 30 

Green  v.  London  General  Omnibus  Co 755 

Greenwood  v.  Leather,  &c.  Co 237 

Greenwood  v.  Union  Freight  Co 1343 

Guernaey  v.  Cook 444 


TABLE  OF  SELECTED  CASES.  XV 

Paob 

H.  &  M.  Tin  and  Copper  Mining  Co.,  In  re 1063 

Hanchett  v.  Blair 101 

Handley  v.  Stutz 1066 

Hartford  &  N.  H.  R.  Co.  v.  Croswell 452 

Harvey  v.  Linville  Co 423 

Hawes  v.  Oakland 524 

Heard  v.  Talbot 687 

Higginson  &  Dean,  In  re 999 

Hollins  V.  Brierfield,  &c.  Co 1159 

Home  V.  Ivy 328 

Hospes  u.  N.  &  M.  Co 1048 

Hotchkiss  and  Upson  Co.  v.  Union  Nat.  Bank 670 

Hoyt  V.  Thompson 349 

Huddersfield  Canal  Co.  v.  Buckley 1079 

Hun  V.  Cary        363 

Hurd  V.  City  of  Elizabeth 1199 

Hurd  V.  New  York,  &c.  Co 1006 

Hutchinson  v.  American  Palace  Car  Co 1172 

Hutchinson  v.  Green 354 

In  re.    [See  Re.'\ 

Indianapolis  C.  &  L.  R.  R.  v.  Jones 1011 

Indianapolis  Furnace  Co.  v.  Herkimer 162 

Ireland  v.  Palestine,  &c.  Turnpike  Co 1091 

Janney  v.  Minneapolis  &c.  Exposition 401 

Jefferson,  Nat.  Bank  of  v.  Texas  Investment  Co 126 

Jemison  v.  Citizens'  Saving  Bank 858 

Jesup  V.  Illinois  Central  R.  R 392 

Johnson  v.  Corser 165 

Johnson  v.  Goodyear  Mining  Co 1323 

Johnson  v.  Kessler 125 

Joint  Stock  Discount  Co.  v.  Brown 1129 

Jones  V.  Aspen,  &c.  Co 151 

Jones  j;.  Cincinnati  Type  Foundry  Co 204 

Journal  Printing  Co.  v.  MacLean 787 

Junkius  r.  Union  School  District 400 

Justices,  Opinion  of 1426 

Kelner  v.  Baxter 244 

Killen  v.  Barnes 1036 

King,  The,  i;.  Westwood Ill 

Lancaster  v.  Amsterdam  Improvement  Co 1213 

Lake  Shore,  &c.  R.  Co.  v.  Prentice 766 

Land,  &c.  Co.  v.  Mclntyre 506 

Land  Grant  Railway  v.  Com'rs  of  Coffey  County 1210 

Landman  v.  Entwistle 249 

Le  Roy  v.  Globe  Ins.  Co 584 

Leazure  v.  Hillegas 810 

Lincoln  Shoe  Mfg.  Co.  v.  Sheldon ,         .  220 


Sid  TABLE   OF   SELECTED   CASES. 

Pagb 

Liverpool  Ins.  Co.  v.  Massachusetts 1 

London  Trust  Co.  v.  Mackenzie 577 

Long  V.  Georgia  Pacific  R.  Co 814 

Louisville,  &c.  R.  R.  v.  Letson 97 

Love  ]Mfg.  Co.  V.  Queen  City  Mfg.  Co 1026 

Lowe  V.  Pioneer  Threshing  Co. 1139 

McArthur  v.  Times  Printing  Co 251 

McColgan  v.  Baltimore  Belt  R.  R 968 

McCutcheon  v.  Merz  Capsule  Co 861 

McDonald  v.  Williams 598 

McElheuny's  Appeal 242 

McGraw,  Estate  oi,  In  re 838 

McLennan  v.  Hopkins 156 

McNab  V.  McNab  &  Harlin  Mfg.  Co 591 

McNeil  V.  Tenth  Nat.  Bank 630 

Mack  V.  DeBardeleben  Coal  &  Iron  Co 410 

Madden  v.  Penn  E.  L.  Co 1241 

Marble  Co.  v.  Harvey 866 

Marsliall  v.  Baltimore  &  Ohio  R.  R.  Co 99 

Matthews  v.  Hoagland 622 

Maund  v.  Monmouthshire  Canal  Co 736 

Mayor,  &c.  of  Baltimore  u.  B.  &  O.  R.  R 85 

Mayor  of  Norwich  v.  Norfolk  R.  Co 338 

Melvin  v.  Lamar  Ins.  Co 1074 

Menier  v.  Hooper's  Telegraph  Works 531 

Mercantile  Trading  Co.,  In  re 593 

Mercantile  Trust  Co.  v.  M.  K.  &  T.  R.  R 1161 

Metropolitan,  &c.  Co.  v.  Hawkins 784 

Michigan,  Bank  of  v.  Niles 851 

Mill  V.  Hawker 949 

Miller  u.  Ewer 1219 

Minneapolis  Threshing,  &c.  Co.  v.  Davis 226 

Mobile  &  Ohio  R.  R.  Co.  v.  Nicholas 418 

Monroe  Savings  Bank  v.  Rochester 81 

Montgomery  v.  Forbes 158 

Monument  Nat.  Bank  v.  Globe  Works 807 

Moore  &  Handley  Hardware  Co.  v.  Towers  Hardware  Co 56 

Morisette  v.  Howard 306 

Morris  v.  Elyton  Land  Co 468 

Morrison  v.  Wilder  Gas  Co 332 

Morville  v.  Amer.  Tract  Society 939 

Mumma  v.  Potomac  Co 978 

Narragansett  Bank  v.  Atlantic  Silk  Co 202 

Nassau  Bank  v.  Jones ^     .     .     .  855 

National  Bank  of  Jefferson  v.  Texas  Investment  Co 126 

National  Huilding  Society,  In  re 933 

National  Casli  Rogiater  Co.  v.  Leland 955 

National  Home  &c.  Association  v.  Home  Savings  Bank 916 

Natusch  V.  Irving 448 


TABLE  OF  SELECTED  CASES.  XVU 

Pasb 

New  Bedford  R.  R.  v.  Old  Colony  R.  R 1009 

New  Orleans,  &c.  Association 966 

New  York  &  Long  Island  Bridge  Co.  v.  Smith 696 

New  York  &  New  Haven  R.  R.  v.  Schuyler 653 

Newcomb  v.  Reed 121 

NicoU  V.  New  York  &  Erie  R.  R 297 

Ninis  V.  Mount  Hermon  Boys'  School 773 

Norris  v.  Staps 327 

Northern  Pacific  R.  R.  v.  Townsend 316 

Northern  Pacific  R.  R.  v.  Washington  Territory 724 

Northwestern  Transportation  Co.  v.  Beatty 437 

Northwestern  Union  Packet  Co.  v.  Shaw 941 

Norwich,  Mayor  of  v.  Norfolk  R.  Co 338 

Oakland  R.  Co.  v.  Oakland,  Brooklyn,  &c.  R.  Co 693 

O'Herron  v.  Gray 636 

Ohio,  ex  rel.  v.  Neff 1428 

Ohio  &  Miss.  R.  R.  v.  Wheeler 1220 

Opinion  of  the  Justices 1426 

Oregon,  &c.  Co.  v.  Oregonian  R.  Co 270 

Ottumwa  Screen  Co.  v.  Stodghill 678 

Pacific  Nat.  Bank  v.  Eaton 230 

Palmer  v.  Lawrence 128 

Panhard,  &c..  La  Soci^t^,  &c.  v.  Panhard,  &c.  Motor  Co 945 

Parker  v.  Bethel  Hotel  Co 36 

Parrott  v.  Lawrence 291 

Parsons  v.  Hayes 569 

Parsons  r.  Joseph 560 

Parsons  v.  Tacoma,  &c.  Co 474 

Paul  V.  Virginia 1221 

Peabody  v.  Flint 502 

Pearson  v.  Concord  R.  R 1126 

Pender  v.  Lushington 441 

People  V.  Assessors  of  Watertown 18 

People  V.  Chambers     .     .     o 130 

People  V.  England 948 

People  V.  Globe  M.  L.  I.  Co 986 

People  V.  Kankakee  River  Impr.  Co 704 

People  V.  Montecito  Water  Co 118 

People  V.  New  York  Central  R.  R 713 

People  V.  North  River  Sugar  Refining  Co 1108 

People  t;.  O'Brien 1351 

People,  ex  rel.  Union  Trust  Co.  v.  Coleman 68 

Perun,  Society  v.  Cleveland 183 

Philadelphia,  &c.  B.  C.  R.  Co.'s  Appeal 975 

Philadelphia  W.  &  B.  R.  R.  v.  Quigley 753 

Phillips  V.  Providence,  &c.  Co 463 

Phoenix  Life  Assurance  Co.,  In  re 927 

Pittsburgh,  &c.  R.  R.  v.  Stickley 315 

Pond  V.  Framingham  &  Lowell  R.  R 1029 


xviii  TABLE   OF   SELECTED   CASES. 

Pagb 

Porter  v.  Sabin 1178 

Price  V.  Holcomb 443 

Proprietors  of  Charles  River  Bridge  v.  Proprietors  of  Warren  Bridge   .     .     273 
Proprietors  of  Stourbridge  Canal  v.  Wheeley 266 

Queen  v.  Birmingham  &  Gloucester  R.  R 791 

Queen  v.  Great  North  of  England  R.  R 794 

R.  R.,  Aberdeen  v.  Blaikie 386 

R.  R.,  Ashuelot  v.  Elliot 1391 

R.  R.,  Atchison,  &c.  v.  Campbell 1442 

R.  R.,  Bahia  &  San  Francisco,  In  re 640 

R.  R.,  Boston  C.  &  M.  v.  Gilmore 970 

R.  R.,  Buffalo,  &c.  v.  Dudley 1365 

R.  R.,  Camden  &c.  v.  Mays,  &c.  R.  R 806 

R.  R.,  Central,  and  Banking  Co.  v.  Smith 778 

R.  R.,  Cheraw  &  Chester  v.  White 123 

R.  R.,  Chicago,  Burlington  &  Quincy  v.  Iowa 1316 

R.  R.,  Chicago  City  v.  Allerton 355 

R.  R.,  Delaware  L.  &  W.  v.  Erie  R.  R 1170 

R.  R.,  Eastern  Counties  v.  Broom 749 

R.  R.,  Erie  &  North-East  v.  Casey 1334 

R.  R.,  Hartford  &  N.  H.  v.  Croswell 452 

R.  R.,  Indianapolis  C.  &  L.  r.  Jones 1011 

R.  R.,  Lake  Shore,  &c.  v.  Prentice 766 

R.  R.,  Louisville,  &c.  v.  Letson 97 

R.  R.,  Mobile  &  Ohio  v.  Nicholas 418 

R.  R.,  New  Bedford  v.  Old  Colony  R.  R 1009 

R.  R.,  New  York  &  New  Haven  u.  Schuyler 653 

R.  R.,  Northern  Pacific  v.  Townsend 316 

R.  R.,  Northern  Pacific  v.  Washington  Territory 724 

R.  R.,  Oakland  v.  Oakland,  Brooklyn,  &c.  R.  Co. 693 

R.  R.,  Ohio  &  Miss.  v.  Wheeler 1220 

R.  R.,  Philadelphia,  &c.  r.  Quigley 753 

R.  R.,  Philadelphia  &  B.  C,  Appeal 975 

R.  R.,  Pittsburgh,  &c.  v.  Stickley 315 

R.  R.,  St.  Louis,  &c.  V.  James 99 

R.  R.,  St.  Louis,  &c.  V.  Paul 1438 

R.  R.,  St.  Louis,  &c.  V.  Terre  Haute,  &c.  R.  R 829 

R.  R.,  Severn  &  Wye  and  Severn  Bridge,  In  re 581 

R.  R.,  Union  Pacific  v.  Hall 721 

R.  R.,  Union  Pacific  v.V.S 1400 

R.  R.,  Weatherford  v.  Granger 255 

R.  R.,  Wrexham,  In  re 936 

Railway  Land  Grant  v.  Com'rs  Coffey  County 1210 

Railway,  &c.  Co.,  Ashbury  v.  Riche »  903 

Railway,  &c.  Co.,  Oregon  v.  Oregonian  Railway  Co 270 

He  Ambrose  Lake,  &c.  Co <,     o     «     ....     c     ...     .  563 

He  Bahia  &  San  Francisco  R.  Co.      .     .     o     »     . 640 

Re  Conipagnie,  &c.  De  Bellegarde   .     »    .     o 403 

Re  Comstock      ....c..o« ..o..  1226 


TABLE  OF  SELECTED  CASES.  x« 

Paoi 

Re  Empress  Engineering  Co 253 

Re  Estate  of  Fiske 838 

Re  Estate  of  McGraw 838 

Re  Great  Northern,  &c.  Coal  Co 1043 

Re  H.  &  M.  Tin  &  Copper  Mining  Co 1063 

Re  Higginson'&  Dean 999 

Re  Mercantile  Trading  Co 593 

Re  National  Building  Society 933 

Re  Phcenix  Life  Assurance  Co 927 

Re  Severn  &  Wye  and  Severn  Bridge  R.  Co 581 

Re  Steinway's  Petition 483 

Re  Wrexham  R.  R 936 

Read  v.  Frankfort  Bank 1331 

Reg.  V.  Birmingham  &  Gloucester  R.  Co 791 

Reg.  V.  Great  North  of  England  R.  Co 794 

Rex  V.  Westwood Ill 

Roberts  v.  P.  A.  Deming  &c.  Co 336 

Rogers  V.  Simmons 1233 

Rosenbaum  v.  U.  S.  Credit  Co 990 

Ross  V.  Ross 34 

Rouse  V.  Merch£(nts'  Nat.  Bank 1021 

Royal  Bank  of  Liverpool  v.  Grand  Junction  R.  &  D.  Co 337 

Russell  V.  Temple "^    .     .     .     .       32 

Russell  V.  Wakefield  Waterworks  Co 539 

Rutherford  v.  Hill 173 

St.  Clair  u.  Cox 1234 

St.  Louis,  &c.  R.  Co.  V.  James 99 

St.  Louis,  &c.  R.  Co.  V.  Paul 1438 

St.  Louis,  &c.  R.  Co.  V.  Terre  Haute,  &c.  R.  Co 829 

Sabine  Tram  Co.  v.  Bancroft 1106 

Sager  Mfg.  Co.  v.  Smith , 1181 

Salomon  v.  Salomon  &  Co.,  Limited 131 

Sanford  v.  McArthur = 957 

Sawyer  v.  Hoag =     =. 1038 

Schufeldtv.  Smith 1023 

Scovill  V.  Thayer »     o     » 1044 

Scripture  v.  Francestown  Soapstone  Co 665 

Seaton  v.  Grant 555 

Seeberger  v.  McCormick 960 

Severn  and  Wye  and  Severn  Bridge  Co.,  In  re 581 

Seymour  v.  Spring  Association 405 

Shayne  v.  Evening  Post  Co 981 

Shelby  County  v.  Union,  &c.  Bank 86 

Shepaug  Voting  Trust  Cases 415 

Sherman  v.  Fitch 335 

Singer  Mfg.  Co.  v.  Heppenheimer 86 

Sinking-Fund  Case 1400 

Slocum  V.  Providence,  &c.  Co 198 

Slocum  V.  Warren 198 

Smith  V.  Hurd 494 


XX  TABLE  OF  SELECTED  CASES. 

Pa« 

Smith  V.  San  Francisco  &  N.  P.  R.  Co 426 

Snider's  Sons  Co.  v.  Troy 169 

Snyder  v.  Studebaker 180 

Soci^t^  Anonyme,  &c.  v.  Panhard,  &c.  Motor  Co 945 

Society  Perun  v.  Cleveland 183 

Spargo's  Case 1063 

Spering's  Appeal 358 

State  V.  Boogher 789 

State  V.  BuU 116 

State  V.  Commercial  State  Bank 994 

State  V.  Dawson 109 

State  V.  Fourth  N.  H.  Turnpike  Co 699 

State  V.  L.  &  W.  Turnpike  Co 1330 

State  V.  Oberlin,  &c.  Association 702 

State,  ex  rel.  Jackson  v.  Newman 1131 

Steacy  v.  Little  Rock,  &c.  R.  Co 1081 

Stearns  v.  Minnesota 1431 

Steinway's  Petition,  In  re 483 

Stewart  v.  Lehigh  Valley  R.  R 397 

Stevens  v.  Rutland,  &c.  R.  Co 455 

Stockton  Savings  Bank  v.  Staples 295 

Stokes  V.  Hoffman  House 1187 

Stourbridge  Canal  Co.  v.  Wheeley 266 

Stoutimore  i;.  Clark 206 

Stringer's  Case 593 

Swentzel  v.  Penn  Bank 368 

Taft  V.  Hartford,  &c.  R.  Co 607 

Telegram  Newspaper  Co.  v.  Commonwealth  • 802 

Thacher  v.  Dartmouth  Bridge  Co 782 

Thomas  v.  Dakin 4 

Thomas  v.  West  Jersey  R.  Co 822 

Thorpe  v.  Rutland,  &c.  R.  Co 1306 

Thrasher  v.  Pike  County 212 

Tisdale  v.  Harris 613 

Tomkinson  v.  Southeastern  R.  Co 548 

Tomlinson  v.  Jessup 1363 

Trenton  Potteries  Co.  v.  Oliphant 1119 

Trevor  v.  Whitworth 1140 

Trustees  of  Dartmouth  College  v.  Woodward 1246 

Trustees  of  Davidson  College  v.  Chambers'  Executors 833 

Trustees  of  Free  Schools  in  Andover  v.  Flint 1088 

U.  S.,  Bank  of  v.  Dandridge 329 

U.  S.,  Bank  of  v.  Deveaux 94 

U.  S.  V.  John  Kelso  Co 796 

U.  S.  V.  Wolters 91 

Union  Hank  v.  Jacobs 321 

Union  M.  L.  L  Co.  v.  McMillen 1225 

Union  Pacific  R.  R.  v.  Hall 721 

Union  Pacific  R.  R.  v.  United  States 1400 

Union  Trust  Co.,  People  ex  rel.  v.  Coleman 68 


TABLE  OF  SELECTED  CASES.  xxi 

Paob 

Van  Allen  v.  Assessors 77 

Vanderbilt  v.  Bennett 412 

Vilas  V.  Milwaukee,  &c.  R.  R 1012 

Voting  Trust  Cases,  Shepaug 415 

Wallamet,  &c.  Co.  v.  Kittridge 691 

Waring  v.  Catawba  Co .  50 

Warner  v.  Beers 9 

Warren  v.  Davenport  Fire  Ins.  Co 59 

Washburn  Mill  Co.  r.  Bartlett 874 

Washington  Ins.  Co.  v.  Price 66 

Weatherford,  &c.  R.  R.  v.  Granger 255 

Wenlock,  Baroness  v.  River  Dee  Co 928 

Wheeler  v.  Pullman  Iron  &  Steel  Co 706 

Whitaker  v.  Delaware  &  Hudson  Canal  Co 271 

White  V.  Howard 301 

White  V.  Salisbury 616 

Whitechurch  v.  Cavanaugh 648 

Whittenton  Mills  v.  Upton 1096 

Williams  v.  Nail 1449 

Williamson,  Ex  parte 933 

Williamson  v.  Smoot 34 

Willoughby  v.  Chicago  Junction,  &c.  Co 642 

Windsor,  &c.  Electric  Co.  v.  Tandy 214 

Winsor  v.  Bailey 559 

Wrexham  R.  R.,  Jn  re 936 

Yarborough  v.  Bank  of  England 733 

Yeaton  t;.  Bank  of  Old  Dominion 1446 

Zabriskie  v.  Hackensack  &  N.  Y.  R.  Co 1383 

Ziegler  v.  Lake  Street  El.  Co 530 


SELECT  CASES 


ON 


PRIVATE    CORPORATIONS. 


CHAPTER  I. 
DEFINITIOX   OF   CORPORATION. 


LIVERPOOL,   &c.   INSURANCE   CO.  v.  MASSACHUSETTS. 

1870.     10  Wallace,  U.  S.  566.1 

Error  to  the  Supreme  Court  of  Massachusetts.  Bill  in  equity  by 
State  of  Massachusetts  to  collect  a  tax,  and  to  restrain  company  from 
doing  further  business  till  the  tax  was  paid. 

One  question  raised  in  this  case  was,  whether  the  above  Insurance 
Company  is  a  corporation  within  the  meaning  of  the  Massachusetts 
Statute  imposing  upon  each  fire,  &c.  insurance  company  "  incorporated 
or  associated  under  the  laws  of  any  government  or  State  other  than 
one  of  the  United  States,  a  tax  of  4  per  cent  upon  all  premiums 
charged  or  received  on  contracts  made  in  this  Commonwealth  for 
insurance  of  property."  The  facts  as  to  the  nature  of  the  company 
are  sufRcientlj'  stated  in  the  opinion. 

The  Supreme  Court  of  Massachusetts  decided  that  the  company  was 
liable  to  the  tax.     100  Mass.  531  [_OJiv€r\.  Liverpool,  &c.  Ins.  Co.l. 

B.  R.  Curtis  and  J.  G.  Abbott,  for  insurance  company. 

Charles  Allen,  Attorne3--General  of  Massachusetts,  for  State. 

Mr.  Justice  Miller These  propositions  dispose  of  the 

case  before  us,  if  plaintiff  is  a  foreign  corporation,  and  was,  as  such, 
conducting  business  in  the  State  of  Massachusetts,  and  we  proceed 
to  inquire  into  its  character  in  this  regard. 

1  Statement  abridged.     Arguments  aud  part  of  opinion  omitted.  —  Ed 

1 


LIVERPOOL,   ETC.   INS.    CO.   V.    MASSACHUSETTS. 


r^:^ 


The  institution  now  known  as  the  Liverpool  and  London  Life  and 
Fire  Insurance  Company,  doing  an  immense  business  in  England  and 
in  this  country,  was  first  organized  at  Liverpool  by  what  is  there  called 
a  deed  of  settlement,  and  would  here  be  called  articles  of  association. 

It  will  be  seen  by  reference  to  the  powers  of  the  association,  as  or- 
ganized under  the  deed  of  settlement,  legalized  and  enlarged  by  the 
acts  of  Parliament,  that  it  possesses  many,  if  not  all,  the  attributes 
generally  found  in  corporations  for  pecuniary  profit,  which  are  deemed 
essential  to  their  corporate  character. 

1.  It  has  a  distinctive  and  artificial  name  by  which  it  can  make 
contracts. 

2.  It  has  a  statutory  provision  by  which  it  can  sue  and  be  sued  in 
the  name  of  one  of  its  oflScers  as  the  representative  of  the  whole  bod}-, 
.which  is  bound  by  the  judgment  rendered  in  such  suit. 

3.  It  has  provision  for  perpetual  succession  bj'  the  transfer  and  trans- 
'>  mission  of  the  shares  of  its  capital  stock,  whereby  new  members  are 

introduced  in  place  of  those  who  die  or  sell  out. 

4.  Its  existence  as  an  entity  apart  from  the  shareholders  is  recog- 
nized by  the  act  of  Parliament,  which  enables  it  to  sue  its  shareholders 
and  be  sued  by  them. 

\  The  subject  of  the  powers,  duties,  rights,  and  liabilities  of  corpora- 
tions, their  essential  nature  and  character,  and  their  relation  to  the 
business  transactions  of  the  community,  have  undergone  a  change  in 
this  country  within  the  last  half-century,  the  importance  of  which  can 
hardly  be  overestimated. 

They  have  entered  so  extensivel}'  into  the  business  of  the  country', 
the  most  important  part  of  which  is  carried  on  by  them,  as  banking 
companies,  railroad  companies,  express  companies,  telegraph  com- 
panies, insurance  companies,  &c.,  and  the  demand  for  the  use  of  cor- 
porate powers  in  combining  the  capital  and  the  energy  required  to 
conduct  these  large  operations  is  so  imperative,  that  both  b^'  statute, 
and  b}'  the  tendencj*  of  the  courts  to  meet  the  requirements  of  these 
public  necessities,  the  law  of  corporations  has  been  so  modified,  liberal- 
ized, and  enlarged,  as  to  constitute  a  branch  of  jurisprudence  with  a 
code  of  its  own,  due  mainly  to  very  recent  times.  To  attempt,  there- 
fore, to  define  a  corporation,  or  limit  its  powers  by  the  rules  which  pre- 
vailed  when  they  were  rarely  created  for  any  other  than  municipal 
purposes,  and  generally  by  royal  charter,  is  impossible  in  this  country 
and  at  this  time. 

Most  of  the  States  of  the  Union  have  general  laws  by  which  persons 
associating  themselves  together,  as  the  shareholders  in  this  company- 
have  done,  become  a  corporation. 

The  banking  business  of  the  States  of  the  Union  is  now  conducted 
chiefly  by  corporations  organized  under  a  general  law  of  Congress,  and 
it  is  believed  that  in  all  the  States  the  articles  of  association  of  this 
company  would,  if  adopted  with  the  usual  formalities,  constitute  it  a  cor- 
poration under  their  general  laws,  or  it  would  become  so  by  such  legis* 


LIVERPOOL,  ETC.   INS.   CO.    V.   MASSACHUSETTS.  3 

lative  ratification  as  is  given  by  the  acts  of  Parliament  we  liave 
mentioned. 

To  this  view  it  is  objected  that  the  association  is  nothing  but  a  part-  | 
nership,  because  its  members  are  liable  individually  for  the  debts  of  the  / 
company.  But  however  the  law  on  this  subject  may  be  held  in  Eng- 
land, it  is  quite  certain  that  the  principle  of  personal  liability  of  the 
shareholders  attaches  to  a  very  large  proportion  of  the  corporations 
of  this  countr}',  and  it  is  a  principle  which  Las  warm  advocates  for  its 
universal  application  when  the  organization  is  for  pecuniary  gain. 

So  also  it  is  said  that  the  fact  that  there  is  no  provision  either  in  the 
deed  of  settlement  or  the  act  of  Parliament  for  the  company  suing  or 
being  sued  in  its  artificial  name  forbids  the  corporate  idea.    But  we  see 
no  real  distinction  in  this  respect  between  an  act  of  Parliament,  which 
authorized  suits  in  the  name  of  the  Liverpool  and  London  Fire  and 
Life  Insurance  Compan}',  and  that  which  authorized  suit  against  that 
company  in  the  name  of  its  principal  officer.     If  it  can  contract  in  thef 
artificial  name  and  sue  and  be  sued  in  the  name  of  its  officers  on  those  | 
contracts,  it  is  in  effect  the  same,  for  process. would  have  to  be  served  I 
on  some  such  officer  even  if  the  suit  were  in  the  artificial  name.  ' 

It  is  also  urged  that  the  several  acts  of  Parliament  we  have  men- 
tioned expressly  declare  that  they  shall  not  be  held  to  constitute  the 
body  a  corporation. 

But  whatever  may  be  the  effect  of  such  a  declaration  in  the  courts 
of  that  country,  it  cannot  alter  the  essential  nature  of  a  corporation  or 
prevent  the  courts  of  another  jurisdiction  from  inquiring  into  its  true 
character,  whenever  that  may  come  in  issue.  It  appears  to  have  been 
the  polic}'  of  the  English  law  to  attach  certain  consequences  to  incor- 
porated bodies,  which  rendered  it  desirable  that  such  associations  as 
these  should  not  become  technically  corporations.  Among  these,  it 
would  seem  from  the  provisions  of  these  acts,  is  the  exemption  from 
individual  liability  of  the  shareholder  for  the  contracts  of  the  corpora- 
tion.  Such  local  policy  can  have  no  place  here  in  determining  whether 
jjL-association,  wliose  powers  are  ascertained,  and^  its  privileges  eon, 
ferred  b^lawj  ig  a.U  incorporated   body. 

The  question  before  us  is  whether  an  association,  such  as  the  one  we 
are  considering,  in  attempting  to  carry  on  its  business  in  a  manner 
which  requires  corporate  powers  under  legislative  sanction,  can  claim, 
in  a  jurisdiction  foreign  to  the  one  which  gave  those  powers,  that  it  is 
onl}'  a  partnership  of  individuals. 

We  have  no  hesitation  in  holding  that,  as  the  law  of  corporations  is 
understood  in  this  country,  the  association  is  a  corporation,  and  that 
the  law  of  Massachusetts,  which  only  permits  it  to  exercise  its  corpo- 
rate function  in  that  State  on  the  condition  of  payment  of  a  specific  tax, 
is  no  violation  of  the  Federal  Constitution  or  of  any  treaty  protected 
by  said  Constitution. 

Mr.  Justice  Bradley.  "Whilst  I  agree  in  the  result  which  the  court 
has  reached,  I  differ  from  it  on  the  question  whether  the  company  is  a 


4  THOMAS   V.   DAKIN. 

corporation.  I  think  it  is  one  of  those  special  partnerships  which  are 
called  joint-stock  companies,  well  known  in  England  for  nearly  a  cen- 
tury, and  cannot  maintain  an  action  or  be  sued  as  a  corporation  in  this 
countr}'  without  legislative  aid.  But  as  it  is  a  company  associated  un- 
der the  laws  of  a  foreign  countrj-,  it  comes  within  the  scope  of  the 
Massachusetts  statute,  and  cannot  claim  exemption  from  its  operation 
for  the  causes  alleged  in  that  behalf.  It  could  not  have  been  the  intent 
of  the  treaty  of  1815  to  prevent  the  States  from  imposing  taxes  or 
license  laws  upon  either  British  corporations  or  joint-stock  companies 
desiring  to  establish  banking  or  insurance  business  therein.  And  cer- 
tainly these  companies  cannot  be  exempted  from  such  laws  on  the 
ground  that  citizens  of  other  States  have  chosen  to  take  some  of 
their  shares.  Judgment  affirmed. 


THOMAS  V.  DAKIN. 

1839.     22  Wendell,  9.1 

N^  the  Supreme  Court  of  New  York.  Action  brought  by  plaintiff 
Thomas  as  president  of  Bank  of  Central  New  York,  an  association 
formed  under  the  General  Banking  Act  of  April  18,  1838,  to  recover 
several  demands  alleged  to  be  due  to  the  institution.  The  declaration 
alleged  the  indebtedness  to  be  to  the  bank,  and  the  promises  to  have 
been  made  to  the  bank ;  concluding  to  the  damage  of  the  bank  of 
$10,000  ;  and,  therefore,  the  said  plaintiff,  as  president  of  the  Bank 
of  Central  New  York,  brings  suit,  &c. 

Demurrer  to  declaration ;  assigning,  in  substance,  the  following 
special  causes :  — 

1.  Plaintiff  Thomas  has  no  cause  of  action. 

2.  No  authority  exists  in  law  for  plaintiff  to  sue  on  behalf  of  the 
bank,  or  upon  promises  made  to  the  bank. 

3.  No  association  of  persons  not  incorporated  are  entitled  by  law  to 
bring  an  action  in  the  name  of  their  president,  but  only  in  their  indi- 
vidual names. 

4.  The  General  Banking  Act  of  1838,  so  far  as  it  purports  to 
authorize  this  suit,  is  unconstitutional ;  and  also  is  void  because  it 
did  not  receive  the  assent  of  two-thirds  of  all  the  members  of  the 
legislature. 

The  Constitution  of  New  York,  article  7,  section  9,  is  as  follows : 
"  The  assent  of  two-thirds  of  the  members  elected  to  each  branch  of 
tlie  legislature  shall  be  requisite  to  every  bill  .  .  .  creating,  continuing, 
altering,  or  renewing  any  body  politic  or  corporate." 

*  Statement  abridged  from  facts  stated  by  reporter  and  from  facts  stated  in  the 
opinions.    The  arguments  arc  omitted  ;  also  the  greater  part  of  the  opinions.  — Ed 


THOMAS   V.   DAKIN.  5 

The  provisions  of  the  General  Banking  Act  of  1838  are  suflSciently 
stated  in  the  opinion  of  Nelson,  C.  J. 

C.  P.  ICirkland,  and  S.  A.  Foote^  for  plaintiffs. 

Ward  Hunt,  for  defendant. 

Nelson,  C.  J.  .  .  .  Are  these  associations  corporations?  In  order 
to  determine  this  question,  we  must  first  ascertain  the  properties  essen- 
tial to  constitute  a  corporate  body,  and  compare  them  with  those 
conferred  upon  the  associations  ;  for  if  they  exist  in  common,  or  sub- 
stantially correspond,  the  answer  will  be  in  the  affirmative.  A  corpo- 
rate body  is  known  to  the  law  b}'  the  powers  and  faculties  bestowed  upon 
it,  expressly  or  impliedly,  by  the  charter ;  the  use  of  the  term  corpo- 
ration in  its  creation  is  of  itself  unimportant,  except  as  it  will  imply  the 
possession  of  these.  They  may  be  expressl}^  conferred,  and  then  they 
denote  this  legal  being  as  unerringly  as  if  created  in  general  terms.  It 
has  been  well  said  by  learned  expounders  that  a  corporation  aggre- 
gate is  an  artificial  body  of  men,  composed  of  divers  individuals,  the 
ligaments  ofiohich  body  are  the  franchises  and  liberties  bestowed  upon 
it,  which  bind  and  unite  all  into  one,  and  in  which  consists  the  whole 
frame  and  essence  of  the  corporation.  The  "franchises  and  liberties," 
or,  in  more  modern  language,  and  as  more  strictly  applicable  to  private 
corporations,  the  powers  and  faculties,  which  are  usuall}*  specified  as 
creating  corporate  existence,  are  :  1.  The  capacity  of  perpetual  succes- 
sion ;  2.  The  power  to  sue  and  be  sued,  and  to  grant  and  receive  in 
its  corporate  name  ;  3.  To  purchase  and  hold  real  and  personal  estate ; 
4.  To  have  a  common  seal;  and  5.  To  make  b3'-laws.  These  indicia 
were  given  by  judges  and  elementar}''  writers  at  a  very  early  day :  since 
which  time  the  institutions  have  greatly  multiplied,  their  practical 
operation  and  use  have  been  thoroughly  tested,  and  their  peculiar  and 
essential  properties  much  better  understood.  Any  one  comprehending 
the  scope  and  purpose  of  them  at  this  da}'  will  not  fail  to  perceive 
that  some  of  the  powers  above  specified  are  of  trifling  importance,  while 
others  are  wholly  unessential.  For  instance,  the  power  to  purchase 
and  hold  real  estate  is  no  otherwise  essential  than  to  afford  a  place  of 
business ;  and  the  right  to  use  a  common  seal,  or  to  make  by-laws, 
may  be  dispensed  with  altogether.  For  as  to  the  one,  it  is  now  well 
settled  that  corporations  may  contract  by  resolution,  or  through  agents, 
without  seal ;  and  as  to  the  other,  the  power  is  unnecessar}-,  in  all 
cases  where  the  charter  sufficiently  provides  for  the  government  of  the 
body.  The  distinguishing  feature,  far  above  all  others,  is  the  capacity 
conferred,  by  which  a  perpetual  succession  of  different  persons  shall  be 
regarded  in  the  late  as  one  and  the  same  body^  and  may  at  all  tim,es 
act  in  fuJfilm.ent  of  tne  objects  of  the  association  as  a  single  individual. 
In  this  way  a  legal  existence,  a  body  corporate,  an  artificial  being,  is 
constituted ;  the  creation  of  wliich  enables  any  number  of  persons  to 
be  concerned  in  accomplishing  a  particular  object,  as  one  man.  "While 
the  aggregate  means  and  influence  of  all  are  wielded  in  affecting  it,  the 
operation  is  conducted  with  the  simplicit}' and  individualitj-  of  a  natural 


THOMAS   V.   DAKIN. 


person.  In  this  consists  the  essence  and  great  value  of  these  institu< 
tions.  Hence  it  is  apparent  that  the  only  properties  that  can  be  re-' 
garded  strictly  as  essential,  are  those  which  are  indispensable  to  mould 
tide  dilierent  persons  into  this  artificial  being,  and  thereby  enable  it  to 
act  in  the  way  above  stated.  When  once  constituted,  this  legal  being 
created,  the  powers  and  faculties  that  ina}^  be  conferred  are  various,  — 
limited  or  enlarged  at  the  discretion  of  the  legislature,  and  will  depend 
upon  the  nature  and  object  of  the  institution,  which  is  as  competent  as 
a  natural  person  to  receive  and  enjoy  them.  We  may,  in  short,  con- 
t  elude  by  saying,  with  the  most  approved  authorities  at  this  day,  that 
the  essence  of  a  corporation  consists  in  a  capacity :  1.  To  have  a  per- 
petual succession  under  a  special  name,  and  in  an  artificial  form  ;  2.  To 
take  and  grant  property,  contract  obligations,  sue  and  be  sued  by  its 
corporate  name  as  an  individual ;  and  3.  To  receive  and  enjoy  in  com- 
mon, grants  of  privileges  and  immunities. 

We  will  now  endeavor  to  ascertain  with  exactness  the  powers  and 
attributes  conferred  upon  these  associations  by  virtue  of  the  statute. 
The  first  fourteen  sections  (1  to  14)  prescribe  the  duties  of  the  comp- 
troller in  furnishing  notes  for  circulation,  taking  the  required  securities, 
&c.  The  15th  provides  that  an}'  number  of  persons  ma}'  associate  to 
establish  offices  of  discount,  deposit,  and  circulation.  The  16th,  that 
they  shall  make  and  file  a  certificate,  specifying :  1.  The  nmne  to  be 
used  in  the  business  ;  2.  The  place  where  the  business  shall  be  carried 
on ;  3.  The  amount  of  capital  stock,  and  number  of  shares  into  which 
divided  ;  4.  The  names  of  the  shareholders ;  5.  The  duration  of  the 
association.  The  18th  confers  upon  the  persons  thus  associating  the 
most  ample  powers  for  carrying  on  banking  operations,  together  with 
the  right  "  to  exercise  such  incidental  powers  as  shall  be  necessary  to 
carry  on  such  business ; "  also  to  choose  a  president,  vice-president, 
cashier,  and  such  other  oflficers  and  agents  as  may  be  necessary.  By 
the  21st  and  22d  sections,  contracts,  notes,  bills,  &c.,  shall  be  signed 
by  the  president  and  cashier;  and  all  suits,  actions,  &c.,  are  to  be 
brought  in  the  name  of,  and  also  against  the  president  for  the  time 
being ;  and  not  to  abate  by  his  death,  resignation,  or  removal,  but  to 
be  continued  in  the  name  of  the  successor.  24th  section :  The  associ- 
ation may  purchase  and  hold  real  estate,  &c.,  the  conveyance  to  be 
made  to  the  president,  or  such  other  officer  as  shall  be  designated,  who 
may  sell  and  convey  the  same  free  from  any  claim  against  share- 
holders. 19th  section :  The  shares  of  capital  stock  to  be  deemed  per- 
sonal property,  transferable  on  the  books  of  the  association  ;  and  every 
person  becoming  a  shareholder  by  such  transfer,  shall  succeed  to  all 
the  rights  and  liabilities  of  the  prior  holder.  23d  section :  No  share- 
holder to  be  personally  liable ;  and  the  association  is  not  to  be  dis- 
solved by  the  death  or  insanity  of  any  sliareholder. 

1.  Upon  a  perusal  of  these  provisions,  it  will  appear  that  the  associa- 
tion acquires  the  power  to  raise  and  hold  for  common  use  any  given 
nmount  of  capital  stock  for  l)ankitig  purposes,  whicli,  when  subscribed, 


THOMAS   V.   DAKIX.  7 

Is  made  personal  property,  and  the  several  shares  transferable  the 
same  and  with  like  eflfeet  as  in  case  of  corporate  stock ;  to  assume 
a  common  name  under  which  to  manage  all  the  affairs  of  the  associa- 
tion ;  to  choose  all  officers  and  agents  that  may  be  necessary  for  the 
purpose,  and  remove  and  appoint  them  at  pleasure.  It  will  hence  be 
seen,  that  although  the  association  may  be  composed  of  a  number  of 
diflferent  persons,  holding  an  interest  in  the  capital  stock,  its  operations 
are  so  arranged  that  they  do  not  appear  in  conducting  its  affairs ;  all 
are  so  bound  together,  so  moulded  into  one,  as  to  constitute  but  a 
single  body,  represented  by  a  common  name,  or  names  (the  knot  of  the 
combination),  and  in  which  all  the  business  of  the  institution  is  con- 
ducted by  common  agents.-  In  this  way  it  purchases  and  holds  real 
and  personal  property,  contracts  obligations,  discounts  bills,  notes, 
and  other  evidences  of  debt,  receives  deposits,  buys  gold  and  silver 
bullion,  bills  of  exchange,  &c.,  loans  money,  sues  and  is  sued,  &c.  It. 
is  true  some  portion  of  the  business  is  conducted  in  the  assumed  nameJ 
and  some  in  the  name  of  the  president  for  the  time  being ;  but  this  inl 
no  manner  changes  the  character  of  the  bod}'.  A  corporation  may  have 
more  than  one  name  ;  it  may  have  one  in  which  to  contract,  gi'ant,  &cv 
and  another  in  which  to  sue  and  be  sued  ;  so  it  ma}'  be  known  by  two 
different  names,  and  may  sue  and  be  sued  in  either ;  and  the  name  of_ 
the  president,  his  official  name,  or  any  other,  will  answer  every_Piir- 
pose.  2  Bacon's  Abr.  5;  2  Salk.  451;  2  Id.  237;  Ld.  Raym.  153, 
^fSUr  The  only  material  circumstance  is,  a  name,  or  names,  of  some 
kind,  in  which  all  the  affairs  of  the  company  may  be  conducted.  So 
much,  and  no  more,  is  essential  to  give  simplicity  and  effect  to  the 
operation.  An  artificial  being  is  thus  plainly  created,  capable  of 
receiving  all  the  ample  powers  and  privileges  conferred  upon  the  asso- 
ciations, and  of  managing  their  diversified  concerns  in  an  individual 
capacity.  All  business  is  to  be  conducted  in  a  common  or  proper 
name. 

2.  This  artificial  being  possesses  the  powers  of  perpetual  succession. 
Neither  sale  of  shares  or  death  of  shareholders  affect  it ;  if  one  should 
sell  his  interest,  or  die,  the  purchaser  or  representative,  by  operation  of 
law,  immediately  takes  his  place.  §  19.  Nor  can  the  insanity  of  a 
member  work  a  dissolution.  Id.  Officers  and  agents  for  conducting 
the  business  of  the  association  are  secured.  In  case  of  vacancy,  by 
death  or  otherwise,  the  place  may  at  once  be  filled.  §  18.  For  the 
entire  duration,  therefore,  of  the  association,  and  which  may  be  with- 
out limit,  §  16,  sub.  5,  the  whole  body  of  shareholders,  though  perpet- 
ually shifting,  constitute  the  same  uniform,  artificial  being  which  is  to 
be  engaged  through  the  instrumentality  of  officers  and  agents  in  con- 
ducting the  business  of  the  concern,  and  no  member  is  personally 
liable.  §  23.  Then,  as  to  the  powers  conferred,  without  again  specially 
recurring  to  them,  it  will  be  seen  at  once  that  the  associations  possess 
all  that  are  deemed  essential,  according  to  the  most  approved  author- 
ities, to  constitute  a  corporate  body.  They  have  a  capacity :  1.  To 
have  perpetual  succession  under  a  common  name,  and  in  an  artificial 


8  .  THOMAS   V.  DAKIN. 

form ;  2.  To  take  and  grant  property,  contract  obligations,  to  sue  and 
be  sued  by  its  corporate  name,  in  the  same  manner  as  an  individual ; 
3-  To  receive  grants  of  privileges  and  immunities,  and  to  enjoy  them 
in  common.  All  these  are  expressly  granted,  and  many  more,  besides 
the  general  sweeping  clause,  "  ^o  exercise  such  incidental  powers  as 
shall  be  necessary  to  carry  on  such  business  "  (meaning  the  business  of 
banking),  under  which  even  the  seal  and  right  to  make  by-laws  are 
clearly  embraced,  if  essential  in  conducting  the  affairs  of  the  institution. 

[After  considering  other  questions,  the  learned  judge  concludes  as 
follows :  — ] 

Upon  the  whole,  I  am  of  opinion:  1.  That  these  associations  are 
corporations ;  2.  That  the  legislature  possesses  no  power  to  pass  a 
general  law  like  the  one  under  consideration  by  a  majority  bill;  and 
3.  That  the}'  may  pass  it  by  two-thirds  of  the  members  elected. 

The  plaintiff  is  therefore  entitled  to  judgment  on  the  demurrer,  with 
leave  to  amend  on  the  usual  terms. 

[CowEN,  J.,  gave  an  elaborate  opinion,  concurring  with  Nelson, 
C.  J.,  on  points  1  and  2.  As  to  point  3,  he  inclined  to  agree  with 
Nelson,  C.  J.     His  opinion  concludes  as  follows :  — ] 

But  this  branch  of  the  argument  need  not  be  pursued ;  for  it  was 
agreed  on  both  sides,  at  the  bar,  that  we  must,  on  this  record,  pre- 
sume the  general  banking  law  to  have  been  passed  by  two-thirds  of 
all  the  members  elected  to  both  houses.  We  must  clearl}'  do  so  until 
the  fact  is  denied  bj'  plea.  The  requisite  constitutional  solemnities  in 
passing  an  act  which  has  been  published  in  the  statute  book,  must 
always  be  presumed  to  have  taken  place  until  the  contrary  shall  be 
clearly  shown.  Should  the  defendant  withdraw  his  demurrer,  and 
plead  specially  that  the  law  in  question  did  not  receive  the  assent  of 
two-thirds,  as  required  b}'  the  Constitution,  it  will  then  be  in  order  to 
pass  upon  the  validity  of  such  an  objection. 

Being  clear  that  the  plaintiffs  declaration  is  sufficient  in  substance, 
and  that  he  has  technically  and  aptly  set  forth  his  cause  of  action 
according  to  the  statute,  I  think  there  should  be  judgment  for  him 
with  leave  to  withdraw  the  demurrer,  and  plead  on  payment  of  costs. 

Bronson,  J.  I  concur  fully  in  the  opinions  expressed  by  my 
brethren,  that  associations  formed  under  the  general  banking  law  are 
corporations,  and  that  the  assent  of  two-thirds  of  all  the  members 
elected  to  each  branch  of  the  legislature  was  necessary  to  the  passing 
of  the  act.  But,  as  at  present  advised,  I  cannot  concur  in  the  opinion 
that  the  legislature  has  the  constitutional  power,  although  two-thirds 
may  assent,  to  provide  bj'  a  general  law  for  the  creation  of  an  indefinite 
number  of  corporations  at  the  pleasure  of  any  persons  who  may  associ- 
ate for  that  purpose. 

It  was  conceded  on  the  argument,  that  the  demurrer  does  not  rcacli 
the  objection  that  the  act  was  not  passed  by  a  two-thirds  vote  ;  and  1 
have  not,  therefore,  considered  the  question  whether  we  can  look 
beyond  the  statute  book.  A  plea  may  render  it  necessary  for  us  to 
pass  upon  that  question.  Judyment  for  'plaintiff. 


WARNER  V.   BEERS. 


WARNER  V.  BEERS,  President  of  the  North  American  Trust 

AND  Banking  Co. 
BOLANDER  v.  STEVENS,  President  of  the  Bank  of  Commerce 

IN  New  York. 

1840.     23  Wendell,  103.1 

In  the  Court  of  Errors  of  the  State  of  New  York.  Demurrers  to 
declarations,  raising  substantially  the  same  questions  as  in  Thomas  v. 
Dakin,  22  Wendell,  9  [ante,  p.  4].  The  Supreme  Court  gave  judg- 
ment in  both  cases  for  the  original  plaintiffs.  Beers  and  Stevens;  refer- 
ring for  reasons  to  the  opinions  delivered  in  Thomas  v.  Dakin.  Both 
causes  were  removed  by  writs  of  error  to  the  Court  for  the  Correction 
of  Errors. 

L.  Sanford  and  J.  A.  Spencer,  for  plaintiffs  in  error. 

W.  G.  Noyes  and  S.  A.  Foote,  for  Beers. 

W.  Kent  and  D.  B.  Ogden,  for  Stevens. 

[Opinions,  which  are  reported  in  full,  were  delivered  by  Bradish, 
President  of  the  Senate,  Walworth,  Chancellor,  Root,  Senator,  and 
Verplanck,  Senator.  "  A  brief  analysis"  of  these  opinions  may  be 
found  in  a  prefatory  note  by  the  reporter,  23  Wendell,  p.  103.  Por- 
tions of  the  opinion  of  Verplanck,  Senator,  are  as  follows]  :  — 

Verplanck,  Senator.  [The  learned  Senator  dissented  from  the 
view  of  the  Supreme  Court,  that  the  Court  were  bound,  until  the  fact  is 
denied  b}'  plea,  to  presume  that  the  General  Banking  Law  was  passed  by 
a  two-thirds  vote.  He  was  of  opinion  that  the  Court,  in  deciding  upon 
the  demurrer,  should  ascertain  whether  the  Act  received  a  two-thirds 
vote  ;  and  that,  if  it  were  found  that  the  Act  received  less  than  a  two- 
thirds  vote,  it  would  then  be  the  duty  of  the  Court  to  inquire  whether 
the  provisions  of  the  Act  were  such  in  themselves  as  to  bring  the  case 
within  the  constitutional  requirement.  After  some  discussion  of  other 
topics,  the  opinion  proceeds  as  follows]  :  — 

.  .  .  What,  then,  is  a  bod}'  corporate?  What  is  its  necessary  and 
essential  meaning?  "It  is  called  a  body  corporate,"  says  Lord  Coke, 
"  because  the  persons  composing  it  are  made  into  one  body."  "  It  is 
only  in  abstracto,  and  rests  only  in  contemplation  of  law."  10  R.  50. 
So  again,  he  says,  1  Inst.  202,  250,  "Persons  capable  of  purchasing 
are  of  two  sorts,  — jiersons  natural  created  of  God,  and  persons  created 
by  the  policy  of  man,  as  persons  incorporated  into  a  bod}'  politic."  If, 
leaving  the  quaint  scholastic  teaching  of  the  father  of  English  law,  we 
come  to  the  clearer  and  directer  sense  of  our  own  Marshall,  we  find  the 
same  prevailing  idea.  "  A  body  corporate  is  an  artificial  being,  cnvi^- 
tbte,  intangible,   existing  only  in  contemplation  of  law.      Bein^  the 

*  Statement  abridged.    Arguments  omitted ;  also  part  of  opinions.  —  Ed. 


10  WARNER   V.   BEERS. 

creature  of  law,  it  possesses  only  the  properties  conferred  upon  it  by  its 
cEarter.  Among  the  most  important  of  these  are  immortality,  and,  if 
the  expression  may  be  allowed,  individuality.'"  4  Wh.  R.  636  ;  1  Peters 
R.  46.  Again:  "It  is  precisely  what  the  act  of  incorporatior  makes 
it ;  derives  all  its  powers  from  that  act,  and  is  capable  of  exf  /ting  its 
faculties  only  in  the  manner  which  that  act  authorizes."  "  Within 
the  limits  of  the  properties  conferred  by  its  charter,  it  can,"  says  Black- 
stone,  "  do  all  acts  as  natural  persons  may,"  "  In  corporations,"  says 
Professor  Woodeson,  "  individuals  are  invested  b}-  the  law  with  a  politi- 
cal character  and  personality  wholly  distinct  from  their  natural  capa- 
cit}'."  "  A  corporation,"  saj's  Kyd  on  Corporations,  13,  "is  not  a 
mere  capacity,  but  a  political  person  in  which  many  capacities  reside." 
Thus,  then,  the  essential  legal  definition  that  covers  the  whole  ground, 
and  expresses  the  ver}^  essence  of  the  being  of  a  body  corporate,  is 
this :  "It  is  an  artificial  legal  person,  a  succession  of  individuals,  or 
an  aggregate  body  considered  by  the  law  as  a  single  continuous  per- 
son, limited  to  one  peculiar  mode  of  action,  and  having  power  only 
of  the  kind  and  degree  prescribed  by  the  law  which  confers  them." 
buch  is  the  established  notion  of  our  common  law.  .  .  . 

So  far  was  this  principle  of  corporate  personality  carried  in  our  old 
common  law,  that  reasons  were  expressl}'  assigned  why  a  corporation 
could  not  be  excommunicated  or  punished  for  crime.  "  Because  it  has 
no  soul,"  said  Lord  Coke,  which,  however  ludicrously  it  may  now  sound, 
was  but  saying  quaintly,  and  in  the  style  of  that  day,  what  in  modern 
times  would  be  expressed  by  saying  that  a  corporation,  being  an  arti- 
ficial and  not  a  moral  person,  must  be  incapable  of  guilt.  The  very 
able  argument  in  the  celebrated  historical  case  of  the  charter  of  Lon- 
don in  1G82  went  a  good  deal  into  these  refinements,  and  it  was  held 
on  one  side  that  a  political  person  had  a  mind  and  reason,  according 
to  Lord  Chief  Justice  Hobart,  and  that  its  reason  was  expressed  by  its 
b3'-laws ;  whilst  the  attorney-general,  whom  Bishop  Burnet  has  egre- 
giously  wronged  in  calling  him  "  a  hot,  dull  man,"  argued  most  acutely, 
as  well  as  very  learnedly,  in  support  of  the  capacity  of  a  corporation  to 
incur  political,  if  not  moral,  guilt  and  punishment. 

All  these,  it  is  true,  are  refinements  of  technical  reasoning,  in  a  taste 
and  fashion  of  thought  which  have  passed  away  ;  but  they  prove  con- 
clusively how  strong  and  undoubted  was  that  legal  principle  of  per- 
sonality upon  which  these  mere  inferences  and  nice  distinctions  were 
founded. 

In  order  to  continue  the  existence  of  such  an  artificial  oerson,  per- 
petual succession  is  ordinarily  necessary,  though  it  was  not  strictly 
essential,  for  it  may  be  confined  to  any  given  number  of  lives  in  being, 
holding  in  a  sort  of  corporate  joint  tenancy,  of  which  I  think  examples 
may  be  found.  As  a  legal  person,  it  has  only  the  powers  and  proper- 
ties specifically  conferred  upon  it ;  and  can  possess  and  exercise  no 
others,  except  such  as  are  absolutely  necessary  to  the  exercise  of  the 
powers  expressly  given.    This  is  the  enactment  of  our  revised  statutes, 


WARNER   V.    BEERS.  11 

which,  as  our  revisers  rightly  said  in  their  report  on  that  title  of  the 
law,  is  "  declaratory  of  a  principle  of  law  frequently  recognized  by 
our  courts,  and  which  it  was  deemed  useful  to  confirm  by  legislative 
authority."  To  these  are  added  certain  legal  incidents  by  the  common 
law,  also  declared  in  our  statute,  and  common  to  all  corporations,  as  to 
sue  and  be  sued,  hold  and  conve}'  real  and  personal  property,  to  appoint 
olficers  for  its  services,  and  to  make  by-laws  for  the  management  of  its 
affairs.  To  these  more  important  rights  the  law  adds  the  external  evi- 
dence of  a  name  and  a  common  seal.  This  last,  though  apparently  a 
matter  of  form,  is  not  without  effect,  any  more  than  the  legal  conse- 
quences of  seals  to  instruments  in  England  and  this  state,  so  widely 
different  from  those  of  other  legal  systems,  where  the  distinction  be- 
tween sealed  and  unsealed  instruments  is  unknown.  It  is  only  through 
a  common  seal  and  name  that  any  grant  of  lands,  or  covenant  touching 
them,  can  be  made  bj^  a  corporation. 

ihere  are  several  very  useful  and  beneficial  accessary  powers,  or 
attributes  very  often  accompanying  corporate  privileges,  especially  in 
moneyed  corporations,  which,  in  the  existing  state  of  our  law,  as  modi- 
fied b}'  statutes,  are  more  prominent  in  the  public  eye,  and  perhaps 
sometimes  in  the  view  of  our  courts  and  legislatures,  than  those  which 
are  essential  to  the  being  of  a  corporation.  Such  added  powers,  how- 
ever valuable,  are  merely  accessary-.  The}^  do  not  in  themselves  alone 
confer  a  corporate  character,  and  may  be  enjoyed  by  unincorporated 
individuals.  Such  a  power  is  the  transferabilUi/  of  shares,  whereby 
investments  ma}'  be  made,  without  the  owner  losing  the  future  control 
of  his  funds  under  changes  of  circumstances.  Such,  too,  is  the  limited 
responsibility  hy  which  the  stockholder,  having  once  fairl}'  paid  up  his 
share  of  the  capital,  is  exempted  from  further  personal  liabilit}'.  So, 
too,  the  convenie'nce  of  holding  real  estate  for  the  common  purposes,  ex» 
erupt  from  the  legal  inconveniences  of  joint  tenancy  or  tenancy  in  com- 
man.  Again :  there  is  the  continuance  of  the  joint  property  for  the 
benefit  and  preservation  of  the  common  fund,  indissoluble  by  the  death 
or  legal  disability  of  any  partner.  Every  one  of  these  attributes  or 
powers,  though  commonly  falling  within  our  notions  of  a  moneyed  cor- 
poration, is  quite  unessential  to  the  legality  of  a  corporation,  may  be 
found  where  there  is  no  pretence  of  a  body  corporate,  nor  will  they 
make  one  if  all  were  combined,  without  the  presence  of  the  essential 
quality  of  iCgal  individuality.  This  distinction  has  been  observed 
and  marked  by  Mr.  Kyd,  Kyd  on  Corporations,  13,  with  logical  acute- 
ness  and  precision  :  "  A  corporation  is  a  political  person,  capable,  like 
a  natural  person,  of  enjoying  a  variety  of  franchises.  It  is  to  a  fran- 
chise as  the  substance  to  its  attribute.  It  is  something  to  which 
many  attributes  belong,  but  it  is  itself  something  distinct  from  those 
attributes.'^ 

Thus,  the  transferability  of  shares  is  not  essential  to  a  corporation. 
For  instance,  it  does  not  enter  into  the  constitution  of  our  chartered 
colleges,  academies,  hospitals,  and  other  corporate  institutions  founded 


12  WARNER   V.   BEERS. 

b}-  public  endowment,  or  private  beneficence.  It  does  not  enter  into 
the  charters  of  incorporated  scientific  and  literary  societies  for  mutual 
benefit  or  charity,  in  the  funds  of  which  the  members  have  a  beneficial 
interest.  On  the  other  hand,  such  a  right  of  transfer  ma}'  be  incor- 
poi'ated  into  partnership  articles,  and  become  a  fundamental  condition 
of  them.  Tlie  general  rule,  in  absence  of  any  express  stipulation,  is 
indeed  the  reverse  of  this,  and  in  practice  it  is  comparative!}'  rare 
amongst  us.  Hence  it  has  become  common  to  consider  such  trans- 
ferabilit}'  as  a  clear  indication  of  a  corporate  character. 

[After  referring  to  the  joint  stock  companies  authorized  by  statutes 
in  England,  the  opinion  proceeds.]  But,  on  this  head  of  transfera- 
bility, we  need  not  rely  upon  English  authority  in  our  own  usages  and 
decisions. 

In  the  articles  of  the  Merchants'  Bank  Association,  before  our  re- 
straining act,  a  similar  transferability  of  shares  was  provided,  and 
these  articles  have  the  authority  of  Alexander  Hamilton  for  their 
validit}'.    I  shall  have  occasion  to  refer  to  them  more  full}'  hereafter. 

So  again,  in  the  case  of  the  Albany  Exchange,  before  it  received  its 
present  charter,  the  validity  of  the  partnership  or  joint  stock  company 
for  a  public  enterprise,  with  transferable  shares,  was  expressly  recog- 
nized. Jji/  tJie  Court.,  —  CowEN,  J.  "The  objection  taken  on  the 
argument,  that  this  association  was  illegal,  as  being  in  the  nature  of  a 
corporation,  issuing  scrip  and  providing  for  a  transfer  of  stock,  is  not 
well  founded.  The  act  of  associating  in  this  way  is,  we  think,  prop- 
erly characterized  by  the  exception  taken  at  the  trial.  It  constitutes  a 
partnership  valid,  as  being  formed  for  the  purposes  of  a  lawful,  honest 
enterprise."  Toxmsend  v.  Goeicey,  19  Wendell,  427.  The  learned 
judge  then  refers  to  and  adopts  the  authority  of  CoUyer  on  Partner- 
ships, p.  624,  and  the  cases  he  cites. 

Again,  this  transferability  may  be  found  in  many  sorts  of  trusts.  A 
well-known  instance  of  this  may  be  seen  in  the  Tontine  of  New  York, 
originally  built  for  the  purposes  of  a  Merchants'  Exchange.  It  is  a 
trust  of  real  estate,  with  transferable  shares  as  personal  property ;  it 
was  originally  settled  by  the  most  eminent  counsel  of  this  state,  and 
its  validity  has  been  attested  by  nearly  fifty  }ears'  experience,  during 
which  above  two  hundred  shares  have  passed  through  courts,  assign- 
ments, insolvencies,  bankrupt  commissions,  distributions  of  estates,  &c., 
without  their  legal  transferability  having  ever  been  impeached.  See 
printed  articles  of  the  Tontine,  N.  Y.,  1793. 

In  both  of  these  last  examples,  as  in  other  instances  of  trusts  and 
partnerships,  lands  were  held  exempt  by  operation  of  law  from  the  legal 
incidents  of  joint  tenancy,  or  tenancy  in  common,  and  the  estate  con- 
tinued for  the  common  purposes.  This  has  been  noted  as  a  mark  of 
corporate  character  ;  yet  most  corporations  arc  limited  in  the  extent  of 
its  exercise,  some  are  expressly  excluded  from  the  privilege,  and  very 
many  exist  legally  without  its  actual  exercise  or  enjoyment. 

The  non-dissolution  by  death  or  by  legal  disability  is  also  noted  in 


WARNER   V.   BEERS.  13 

the  opinion  of  the  supreme  court  in  these  cases  as  a  mark  of  a  corpo- 
rate bod}'.  But  that  also  may  be  found  in  the  trusts  just  mentioned, 
and  others  of  a  similar  nature,  and  it  may  be  adopted  as  an  article  of 
ordinarj'  partnership.  It  is  the  settled  law  of  England  that  it  may  be 
stipulated  that  death  shall  not  dissolve  the  partnership,  and  further, 
that  the  executors  of  the  deceased  shall  become  partners.  Collyer  on 
Part.,  p.  5,  648;  Pease  v.  Chamberlain,  2  Vesey  R.  33;  Saggerman 
V.  Spears^  7  Pick.  R.  235  ;    Wrexham  v.  Huddleton^  1  Swanst.  514. 

Again  :  a  common  name  has  been  regarded  as  a  corporate  criterion. 
To  this  Lord  Ellenl)orough  gives  a  full  answer  in  Rex  v.  Wehh.  "  As 
to  the  fourth  point,  that  the  subscribers  have  presumed  to  act  as  if  they 
■were  a  body  corporate,  —  how  is  this  made  out?  It  was  urged  that 
they  assumed  a  common  name,  that  they  have  a  committee,  &c.  But 
are  these  the  unequivocal  evidence  and  characteristics  of  a  corpora- 
tion? How  many  unincorporated  assurance  companies  and  other  de- 
scriptions of  persons  are  there  that  use  a  common  name,  and  have  their 
committees,  general  meetings,  and  by-laws?  Are  these  all  illegal?  or 
which  of  these  particulars  can  be  stated  as  being  of  itself  the  distinc- 
tive and  peculiar  criterion  of  a  corporation?"  Thence  he  infers  that 
''  these  subscribers  have  not  acted  peculiarly  as  a  body  corporate." 
Rex  v.  Wehh,  14  East's  R.  406. 

But  perhaps,  in  the  general  and  popular  understanding,  the  most 
familiar  distinction  between  corporate  bodies  and  common  partnerships, 
or  other  joint  undertakings,  is  the  exemption  of  the  associates  from 
personal  liability  beyond  the  actual  amount  of  their  respective  propor- 
tions of  the  capital.  The  regarding  this  very  frequent  and  important 
incident  of  a  corporation  as  an  essential  characteristic  seems  not  to  be 
confined  to  popular  opinion.  Judge  Cowen  says,  in  the  decision  of  the 
cases  now  before  us  :  "  Among  other  peculiar  privileges  conferred  on 
these  associations,  and  not  enjoyed  by  natural  persons,  I  allude  to  that 
of  the  exemption  of  members  from  personal  liability  for  debt.  This  is 
mentioned  by  Angell  &  Ames,  in  their  treatise,  as  peculiar  to  a  private 
corporation  ;  they  notice  it  as  a  striking  characteristic  between  a  cor- 
poration and  a  partnership."  Yet  our  own  statute  of  limited  partner-' 
ships  affords  sufficient  evidence  that  an  alteration  of  the  existing  law 
may  be  made  by  statute,  so  as  to  exempt  from  personal  liability  beyond 
the  stipulated  share  in  the  joint  funds,  for  the  debts  of  a  firm,  without 
the  remotest  thought  of  converting  such  firms  into  bodies  corporate. 
Besides,  the  right  of  making  a  contract,  wherel)y  those  who  tender  it 
stipulate  not  to  be  bound  beyond  the  amount  of  some  specific  pledged 
fund,  must  be  a  natural  right  growing  out  of  the  very  nature  of  con- 
tracts. If  a  company  or  association,  or  an  individual,  offers  to  contract 
to  make  certain  payments  only  to  the  amount  of  certain  specific  funds, 
and  others  choose  to  acce[)t  that  contract  on  those  conditions,  there 
can  be  nothing  to  prevent  the  validity  of  such  a  contract,  except  some 
positive  rule  of  law  founded  on  policy  or  an  arbitrary  enactment.  la 
the  absence  of  such  a  restriction,  it  is  and  must  be  good.     Such  a  limi» 


J'^^ 


14  WAENER   V.   BEERS. 

tation,  then,  must  be  binding  on  all  who  accept  the  conditions.  The 
policy  of  our  law  and  the  usages  of  business  have,  indeed,  rightly  fixed 
the  presumption  the  other  wa}',  so  that  the  stipulation  and  the  burden 
of  proof  of  the  limited  indebtedness  are  thrown  upon  those  who  ex- 
pect to  be  benefited  by  them.  This  right  has  been  substantially 
admitted  by  the  highest  tribunal  in  Great  Britain,  in  the  case  of 
Jlinnet  v.  WJiinnei'y^  3  Brown's  Pari.  Cas.,  323,  and  it  was  held  to 
be  good  b}'  Lord  EUenborough,  in  Alderson  v.  Clay,  1  Camp.  404. 
The  doctrine  has  been  received  as  settled  law  b}-  one  of  the  best  ele- 
mentary writers  of  the  day,  often  cited  by  our  own  supreme  court. 
"When  a  creditor,"  saj-s  Collyer  on  Partnership,  214,  "has  notice, 
that  by  an  arrangement  between  partners,  one  of  them,  though  appear^ 
ing  to  the  world  as  a  partner,  shall  not  participate  in  the  loss,  and  shall 
not  be  liable  for  it,  the  creditor  will  be  bound  by  the  arrangement." 

The  original  articles  of  the  Merchants*  Bank  in  the  city  of  New 
York,  as  an  unincorporated  association,  with  limited  llahiliti/,  as  well  as 
transferable  shares,  which  were  read  in  argument  by  Mr.  Kent,  have 
the  great  professional  authority  of  Alexander  Hamilton,  who  prepared 
them,  and  of  the  man}-  eminent  men  who  joined  in  them,  and  whose 
professional  distinction  gives  to  their  approbation  the  character  of  a 
sort  of  judicial  sanction ;  whilst  the  restraining  act  passed  soon  after 
proves,  as  was  unanswerably  argued,  that  the  legislature  and  its  legal 
advisers  considered  such  a  voluntar}'  association,  thus  restraining  its 
own  liability,  not  as  a  violation  of  common  law,  but  merel}'  as  contra- 
dicting the  financial  policy  of  the  State. 

A  similar  analysis  of  such  of  the  customary  accessary  powers  of 
specially  chartered  moneyed  corporations  as,  from  being  most  condu- 
cive to  ends  of  profit  or  convenience,  are  ordinaril}-  considered  as  the 
essential  qualities  constituting  corporations,  will  show,  that  all  such 
powers  or  incidents  are  merely  convenient  and  desirable  authorities  or 
modes  of  action,  added  to  and  engrafted  upon  the  creation  of  a  body 
politic ;  not  the  legal  attributes  absolutely  essential  to  a  corporation, 
and  denoting  its  existence  as  such. 

Amongst  us,  as  in  England,  bodies  politic  or  corporate  maj'  exist 
where  the  ultimate  personal  liability  is  still  retained.  The  personal 
liability  is  indeed  suspended  in  such  cases,  and  for  a  time  merged  in 
that  of  the  artificial  corporate  person  ;  but  there  may  be  an  ulterior  i-e- 
course  to  the  corporators  when  the  former  fails.  Many  corporate  banks 
in  other  states  are  so  constituted,  and  with  us  some  chartered  com- 
panies for  insurance,  &c.,  some  for  an  indefinite,  others  to  a  limited 
extent  beyond  the  capital.  Corporate  bodies  may  exist  also  without 
transferability  of  the  rights  of  the  corporators ;  for  a  large  mujorit}-  of 
our  literary  and  charitable,  as  well  as  all  our  municipal  corporations, 
are  so.  On  the  other  hand,  by  our  own  common  law  as  it  would 
exist  now,  independently  of  statutory  restrictions,  associations  might 
be  formed  and  trusts  created,  having  every  one  of  the  above  enumer- 
uted  characteristics,  which  have  been  insisted  upon  as  essential  to  a 


WARNEE   V.   BEERS.  15 

corporation,  except  that  personality  which  I  before  stated  as  forming 
its  strict  and  necessary  essential  legal  definition.  The  present  joint- 
stock  companies  of  England  afford  pregnant  examples,  showing  how 
many  of  these  attributes  ma}'  be  embodied  in  voluntary  associations 
which  are  confessedly  not  corporations. 

In  fact  the  line  may  be  ver}-  faint,  and  depending  wholly  upon  the 
purel}'  legal  and  technical  character  conferred,  whether  a  joint  stock 
association  or  a  trust,  freed  b}'  law  from  certain  positive  restraints  im- 
posed by  our  modern  statutes,  be  a  corporation  or  not.  The  Tontine 
trust,  before  mentioned,  is  managed  by  directors  annually  elected  by 
stockholders  ;  its  real  estate  is  held  by  trustees,  continuing  their  trust 
from  hand  to  hand  during  the  lives  of  the  original  nominees  and  the 
survivors  of  them,  with  transferable  shares,  and  wholly  without  per- 
sonal liability.  For  the  reasons  already  stated,  the  eminence  of  the 
counsel  (the  late  R.  Harrison)  who  prepared  the  trust,  and  the  fre- 
quency with  which  its  legal  character  must  have  passed  in  review  be- 
fore lawyers  and  courts,  and  always  without  objection,  it  ma}^  well  be 
regarded  as  sanctioned  judicially'.  It  is  a  valid  trust.  Add  to  it  a 
legislative  charter,  making  the  associates  a  body  corporate  and  no 
more,  what  then  is  the  effect?  Simply  to  give  a  different  technical 
character,  an  artificial  individuality,  in  Chief  Justice  Marshall's  phrase, 
a  different  mode  of  standing  in  courts. 

Such  was  the  actual  history  of  the  Albany'  Exchange.  It  was  a 
joint  stock  company,  formall}'  decided  to  be  valid.  19  Wendell's  R. 
427.  A  year  or  two  after  (1837)  it  appears  by  our  statute  book  to 
have  been  incorporated.  But  there  is  probably  but  little  difference, 
besides  the  greater  convenience  of  the  corporate  body,  between  the 
former  organization  and  the  present. 

The  trusts  speciallj'  permitted  b}'  an  act  of  last  year.  Statutes  of 
1839,  chap.  174,  for  the  benefit  of  that  singular  people  called  Shakers^ 
were  nothing  more  than  exemptions  from  the  recent  restrictions  of 
trusts.  They  were  authorized  to  continue,  enlarge  and  manage  their 
property,  by  trusts,  as  they  had  done  before  the  change  in  that  title  of 
our  law  effected  by  the  revised  statutes.  Had  the  law,  in  addition 
to  this,  made  every  Shakers'  United  Society  a  body  corporate,  without 
otherwise  varying  the  original  trust,  the  only  change  would  have  been 
the  conversion  of  a  trust  into  an  artificial  legal  person,  with  the  same 
effect  substantially  as  to  the  interests  of  those  beneficially  interested. 

Our  act  for  general  religious  incorporations  regulates  the  incorpora- 
tion of  churches  of  all  religious  denominations  (other  than  those  pro- 
vided for  in  the  first  and  second  sections)  by  trustees,  who  are  to  be  a 
body  corporate. 

Those  who  have  had  occasion  to  look  into  the  mode  in  which  dissent- 
ing religious  trusts  are  held  in  England,  as  I  presume  they  were,  in  the 
same  manner,  in  New  York,  when  a  colony,  will,  I  think,  perceive  that 
our  statute  adds  little  more  than  a  convenient  corporate  character  to 
powers  elsewhere,  and  formerly  here,  exercised  under  trusts. 


16  WARNER   V.   BEERS. 

All  these  considerations  lead  me  to  the  conviction  that,  for  the  pur- 
pose of  constitutional  interpretation,  we  must  look  to  the  strict  legal 
meaning  of  the  phrase  body  politic  or  corporate,  and  not  to  those  cir- 
cumstances or  adjuncts  which  amount  only  to  descriptions  of  the  man- 
ner in  whicii  such  bodies  are  very  frequently  constituted  when  used  for 
purposes  of  profit.  If  this  be  regarded  as  a  very  strict  rule  of  inter- 
pretation, let  it  also  be  remembered  that  it  is  applied  where  such 
strictness  is  most  appropriate,  in  the  interpretation  of  a  provision 
restraining  the  general  sovereign  power  of  the  state  expressing  the 
public  will  through  a  majority  of  the  people's  representatives.   .   .  . 

The  most  peculiar,  and  the  strictl}^  essential  characteristic  of  a  cor- 
porate body,  which  makes  it  to  be  such,  and  not  some  other  thing  in 
legal  contemplation,  is  the  merging  of  the  individuals  composing  the 
aggregate  body  into  one  distinct,  artificial  individual  existence.  Now 
this  is  not  found  in  the  associations  under  the  act.  A  corporation  can 
sue  and  be  sued  only  by  its  corporate  name.  It  can  act  only  according 
to  the  letter  of  the  law  creating  it.  "  It  derives  all  its  powers  from 
that  act,"  says  Chief  Justice  Marshall,  "  and  is  capable  of  exercising 
its  faculties  only  in  the  manner  which  that  act  authorizes."  It  has  no 
natural  powers  which,  in  its  discretion,  it  may  exercise  or  not.  It  can 
exercise  none  of  those  other  powers,  and  possesses  none  of  those  other 
rights  which  the  individuals  composing  it  could  possess  and  exercise, 
were  it  a  mere  society  or  partnership.  Not  so  as  to  these  associations. 
Bv  this  act,  suits  on  behalf  of  such  associations  may  be  brought  in  tlie 
name  of  tlie  president.  Persons  having  claims  against  the  company 
'may  maintain  tlieir  actions  against  the  president.  But  there  is  no  rea- 
son, except  that  of  mere  convenience,  why  the  association  may  not  also 
sue  and  be  sued  under  their  several  real  names,  as  other  partners  may. 
This  reason  of  convenience,  it  is  obvious,  would  not  apply  where  the 
company  was  composed  of  a  few  persons,  as  if,  for  example,  one  of  our 
great  banking  firms  were  to  come  under  the  law. 

It  was  indeed  argued  that  the  teclinical  construction  which  gives  to 
may  the  meaning  of  must  or  shall,  applies  here.  But  that  construction 
holds  only  when  there  is  a  previous  dut}',  to  which  the  statute  adds 
some  new  power  or  authorit}-,  as  in  the  case  of  a  public  officer ;  or 
where  from  other  reasons  it  is  manifest  tliat  (to  use  Judge  Story's 
words)  "  tlie  legislature  meant  to  impose  an  absolute  dut}-,  not  to  give 
a  discretionary  power;"  otherwise,  as  he  says,  "the  ordinar}'  use  of 
language  must  be  presumed  to  be  intended,  unless  it  would  defeat  the 
tlie  provisions  of  the  act."  1  Peters  R.  64.  The  ordinary  popular 
discretionary  sense  of  the  word  may  is  also  the  ordinary  legal  one. 
The  other  is  the  exception.  In  our  revised  statutes  the  words  may  and 
^laill  are  so  used  and  distinguished.  So  they  are  in  our  annual  legis- 
lation, as  when  it  is  said  of  a  company  that  it  may  hold  real  estate, 
m^ay  take  a  certain  rate  of  tolls,  may  borrow  money. 

Moreover,  here  the  right  to  sue  and  be  sued,  as  other  partners,  is  « 
common-law   right,  and  cannot  Ije   taken  away  by  me*"**  implication. 


WARXEE   V.   BEERS.  17 

»' A  statute  made  in  the  affirmative,  witliout  negative  words,"  say  the 
highest  authorities,  *'  does  not  take  away  the  common  law."  2  Inst. 
200.  See  also  Dwarris  on  Statutes,  637,  and  the  authorities  there 
referred  to.  .   .  . 

Again  :  these  associations  do  not  act  by  a  corporate  name  and  seal, 
but  by  another  mode  familiar  to  our  law.  They  can  contract  tlirough 
their  president,  as  a  limited  partnership  must  through  its  general  part- 
ner. They  are  authorized  to  sue  and  be  sued  through  him  ;  as  Judge 
Co  WEN  observes,  "  The  power  of  the  legislature  to  give  a  right  of  action 
to  one  man  in  his  own  name  for  a  debt  due  to  another  has  always  l)een 
exercised  from  our  earliest  legal  history,  and  it  is  now  too  late  to  call 
it  in  question."  I  refer  to  the  several  legislative  and  judicial  authori- 
ties wliich  he  has  collected  in  his  opinion  on  these  cases.  They  can- 
not hold  real  estate  as  a  corporation  does,  or  contract  concerning  it 
by  their  own  name  and  common  seal ;  but,  like  partnerships,  they 
can  have  an  equitable  and  beneficial  interest  in  land.  Collyer,  70, 
76.  Their  president  takes  as  a  trustee,  and  the  associates  are  but 
beneficiaries.  .  .  . 

How  then  are  these  associations  to  be  regarded  in  legal  contem- 
plation ? 

I  assent  fully  to  the  conclusive  reasoning  of  the  counsel,  who  chiefly 
pressed  this  part  of  the  argument  (Mr.  Kent),  that  they  are  copartner- 
ships relieved  from  the  inhibitions  of  the  restraining  act,  and  thus 
allowed  to  carry  on  banking  business  under  certain  conditions.  The 
polic}'  of  the  state  has  prohibited  its  citizens  from  issuing  paper  for 
circulation  as  money,  or  from  associating  together  for  certain  banking 
purposes.  1  R.  S.  711.  It  reserved  those  privileges  for  corporate 
banks.  The  act  to  authorize  the  business  of  banking  repealed  that 
prohibition  jrro  tanto,  as  to  all  individuals  or  companies  who  would 
comply  with  its  conditions.  The  associations  in  question  are  partner- 
ships complying  with  those  conditions,  and  thus  exempted,  as  an}'  other 
citizens  may  be  on  the  same  terms,  from  the  operation  of  a  statutory  re- 
straint of  general  right,  which  is  still  binding  on  all  who  will  not  com- 
ply with  the  conditions.  This  is  so  far  in  close  analogy  to  the  law  of 
special  partnership,  where  exemption  from  the  general  liabilit}'  imposed 
by  the  law  is  tendered  to  all  who  comply  strictly  with  the  provisions  of 
the  statute.  The  articles  and  certificate  in  this  act  correspond  to  the 
certificate  setting  forth  the  names  of  partners,  amount  of  capital,  time 
of  termination  and  nature  of  business,  required  b}-  tlie  title  of  "  Limited 
Partnerships,"  1  R.  S.  764,  and  with  the  articles  which  every  such  co- 
partnership must  have.  The  general  partner  there  is  authorized  to 
transact  business  and  contract  for  the  rest ;  so,  though  with  less  author- 
ity, is  the  president  here.  The  mode  of  suing  and  being  sued  is  pre- 
cisely the  same  in  both  cases.   ... 

On  the  question  being  put.  Shall  these  judgments  be  reversed?  all 
»ce  members  of  the  court,  with  but  a  single  exception  {tv:enty-three 


18  PEOPLE   V.   ASSESSORS   OF  WATERTOWN. 

being  present),  voted  in  the  negative.  Whereupon  the  judgments  of 
the  supreme  court  were  affirmed.  The  court  thereupon  adopted  the 
following  resolutions :  — 

1.  "  Resolved,  That  the  law  entitled  '  An  act  to  authorize  the  busi- 
ness of  banking,'  passed  18th  April,  1838,  is  valid,  and  was  con- 
stitutionally enacted,  although  it  raa}'  not  have  received  the  assent 
of  two-thirds  of  the  members  elected  to  each  branch  of  the  legisla- 
ture."    This  resolution  was  adopted  by  a  vote  of  23  to  1. 

2,  "  Resolved,  That  the  associations  organized  in  conformity  with 
the  provisions  of  the  act  entitled  '  An  act  to  authorize  the  business  of 
banking,'  passed  April  1st,  1838,  are  not  bodies  politic  or  corporate, 
within  the  spirit  and  meaning  of  the  constitution."  This  resolution 
was  adopted  by  a  vote  of  22  to  3.^ 


Bronson,  J.,  IN  PEOPLE  v.  ASSESSORS  OF  WATERTOWN. 

1841.     1  Hill,  New  York,  620-623. 

/      A  CORPORATION  aggregate  is  a  collection  of  individuals  united  in  one 
/  body,  under  such  a  grant  of  privileges  as  secures  a  succession  of  mem- 
I   bers  without  changing  the  identity  of  the  bod}-,  and  constitutes  the 
I    members  for  the  time  being  one  artificial  person,  or  legal  being,  capa- 
ble of  transacting  some  kind  of  business   like   a  natural  person.     It 
*   does  not  occur  to  my  mind  that  anything  else  can  be  essential  to  the 
definition.     Such  a  union  as  I  have  mentioned  can  only  be  efi'ected 
under  a  grant  of  privileges  from  the  sovereign  power  of  the  state.     A 
corporation  is  therefore  said  to  be  a  legal  being,  or  the  mere  creature 
of  law.     It  is  convenient,  though  not  absolutely  necessary,  that  thig 
artificial  person,  like  a  natural  one,  should  have  a  name  b}-  which  it 
may  be  known  and  designated  in  the  transaction  of  business.     And 
when  the  doctrine  was  that  a  corporation  could  only  contract  by  its 
seal,  a  seal  was  said  to  be  an  indispensable  requisite.     So  immortality 
was  once  thought  to  be  an  attribute  of  all  corporations  ;  but  that  now 
means   no  more   than  a  continued    succession   of  members  for   such 
period,  whether  long  or  short,  as  ma}'  be  allotted  to  this  legal  entity 
by  its  creator. 

Now,  a  banking  association,  formed  under  the  law  of  1838,  not  only 
may,  but  it  must  have  a  name  ;  and  a  seal,  though  far  from  being 
essential  to  the  existence  of  a  corporation,  is  nevertheless  an  incident 
to  the  grant  of  corporate  privileges,  though  not  mentioned  in  the  grant 
This  is  not  only  so  at  the  common  law,  but  by  the  statute  also.     1  R.  S. 

1  Ab  to  the  reasons  for  adopting  these  "  resolutions,"  and  as  to  the  effect  of  th« 
lame,  see  the  elaborate  exi)laiiation  of  Wai,woi{th,  Chancellor,  iu  2  Deuio,  pp.  382  U 
886.     But  compare  Bkonson,  J.,  in  1  Hill,  i)p.  618  to  620.  —  Ei.'. 


PEOPLE   V.   ASSESSORS   OF  WATERTOWN.  19 

599,  §  1.  The  right  to  sue  and  be  sued  is  expressly  conferred  on  these 
associations  ;  and  whether  the  suit  is  brought  in  the  name  by  which  the 
company  transacts  its  other  business,  or  with  the  addition  of  the  name 
of  its  president,  cannot  be  material.  A  corporation  may  have  one  name 
for  one  purpose,  and  another  name  for  another  purpose.  And  besides, 
ihe  general  banking  law  only  prnvidftH  that  antions  may  —  not  that- 
tiiev  s/iau  —  be.  brou°:ht  in  the  name  of,  or  against  the  presidentj^^  and 
The  right  to  sue  and  be  sued,  like  that  of  having  a  common  seal,  is  not 
onl}'  a  common-law  incident  to  the  grant  of  corporate  powers,  but  the 
legislature  has  expressly  provided  that  this  power  shall  vest  in  every 
corporation,  although  not  specified  in  the  act  under  which  it  shall  be 
incorporated.  1  R.  S.  599,  §§  1,  2.  We  have  already  held,  more  than 
once,  that  these  associations  maj'  sue  or  be  sued  in  the  same  corporate 
name  by  which  their  other  business  is  transacted. 

The  individuals  composing  these  associations  are  united  in  one  bod}', 
and  the  members  lost  in  the  corporate  existence.  It  is  not  the  indi- 
vidual members,  but  the  legal  being  which  acts  and  transacts  business. 
A  continued  succession  of  members,  without  changing  the  identit}'  of 
the  body,  is  also  as  completely  secured  to  these  institutions  as  it  ever 
was  to  an}'  other  corporation.  As  to  the  period  or  duration  of  this  con- 
tinued succession,  the}'  surely  have  scope  and  verge  enough.  I  observe 
from  the  articles  on  file,  that  one  of  these  associations  has  agreed  to 
live  about  five  thousand  years,  and  there  is  nothing  in  the  general  bank 
law  to  prevent  the  associates  from  writing  eternity,  instead  of  time,  as 
the  period  of  corporate  existence.  It  is  true  that  the  association  may 
come  to  an  end  somewhat  short  of  the  mark,  and  the  one  to  which  I 
allude  has,  I  believe,  alreadj'  expired,  but  that  was  no  fault  of  the 
charter. 

What  I  had  specially  in  view  in  adding  anything  to  what  has  already 
been  said  upon  this  question,  was  to  bring  the  matter  to  a  single  and 
very  plain  test.  Take  one  of  these  associations  when  formed  pursu- 
ant to  law,  —  say  the  Bank  of  Commerce  in  the  city  of  New  York,  — 
and  compare  it  with  its  neighbor,  the  Bank  of  America,  which  has  a 
special  charter  from  the  legislature  ;  and  then  I  have  yet  to  learn  what 
corporate  capacity  the  one  wants  which  the  other  has.  No  man  can, 
I  think,  point  out  a  substantial  difference  in  the  nature  or  essential 
attributes  of  the  two  institutions.  The  individual  members  are  as  com- 
pletely merged  in  the  legal  body,  and  a  succession  of  members  is  as 
effectually  secured  in  the  one  case  as  in  the  other.  In  both  cases  it  is 
the  body,  by  means  of  its  officers  and  agents,  and  not  the  individual 
members,  which  acts  and  transacts  business.  If  the  one  is  not  a  cor- 
poration, the  other  is  not  a  corporation. 

We  must  not  examine  the  charter  of  these  associations  in  detached 
parcels,  and  say  that  neither  this  power  nor  that  makes  a  corporation. 
It  is  quite  easy  when  the  parts  of  a  time-piece  have  been  separated,  to 
place  the  finger  upon  each  wheel  in  succession  and  say.  This  is  not  a 
ft  clock ;  but  let  the  parts  be  again  combined,  and  the  machine  be  set 


20 


GIFFORD   V.   LIVINGSTON. 


r 


y 


in  motion,  and  it  will  then  require  some  hardiliood  to  deny  tliat  it  is  a 
clock.  We  must  look  at  these  associations  as  they  appear  when  formed 
and  in  action,  and  then  they  fall  nothing  short  of  that  legal  entity 
which  has  hitherto  been  called  a  corporation.  Others  may  doubt  this. 
I  cannot. 

The  principal  difference  between  a  safety  fund  and  a  free  bank  con- 
sists in  the  fact  tliat  the  latter  has  larger  privileges  than  the  former. 
But  whether  a  corporation  or  not,  does  not  depend  upon  the  number  or 
magnitude  of  its  powers,  nor  the  manner  in  which  the}'  were  conferred. 
An  association  under  our  general  laws  for  a  village  library-,  or  to  tan 
hides,  possesses  all  the  essential  attributes  of  a  corporation  in  as  great 
perfection  as  the  Bank  of  England  or  the  East  India  Company.  Nor 
is  it  important  in  what  mode,  or  by  what  name  or  particular  agency, 
this  artificial  being  transacts  its  business.  It  is  enough  that  it  has  a 
capacity  to  act  in  some  form  as  a  legal  being. 

It  may  be  true,  as  has  been  argued,  that  the  legislature  intended  to 
make  a  legal  being,  and  give  it  all  the  essential  attributes  of  a  corporate 
body,  and  yet  that  it  should  not  be  a  corporation.  That,  the  legislature 
could  not  do.  I  do  not  refer  to  any  written  constitution.  The  con- 
stitutiou  of  things  —  the  order  of  nature —  forbids  it.  Human  powers 
are  jifSt  equal  to  the  task  of  changing  a  thing  by  merely  changing  its 


Hand,  Senator,  in  GIFFORD  v.  LIVINGSTON. 

V        \|  1845.     2  Z)e7j/o,  iVew  ro?i-,  395-398. 

.  "iTAcoupoRATiON,  according  to  my  understanding,  is  a  franchise  granted 
^J^hy  goveiiimcnt,  by  which  the  members  merge  their  individual  charae- 
acters  into  one  artificial  legal  existence.  It  seems  to  mp  t|]i!vt  but  two 
reouisites.  are  necessary,  —  that  it  should  be  authorized  l)y  govern- 
ment,  and  that""£Tie'lTiembers  should  be  combinecl  into  n.n  nrltifi£hil-Umty. 
AVe  are  sometimes  told  that  corporations  must  liave  perpetual  succes- 
sion, a  riglit  to  sue  and  be  sued  and  to  liold  property  ;  that  they  must 
have  a  common  seal  and  power  to  make  by-laws.  Blackstone  says 
these  are  inseparably  incident  to  corporations ;  and  our  statute  is  to 
tlie  same  effect.  1  Bl.  Com.  475  ;  1  R.  S.  599.  But  these  attributes 
are  merely  incidental  to  a  corporation  as  such.  It  is  not  essential  to 
the  existence  of  a  corporation  that  it  sliould  possess  tliem  all.  Even 
as  to  succession,  why  would  not  an  authority  to  particular  individuals 
named  in  the  act  to  assume  a  corporate  name  and  act  as  a  corporation 
in  certain  business  during  their  joint  lives,  be  a  corporation?  As  to 
the  right  to  sue  and  be  sued,  have  a  seal,  and  make  by-laws,  it  was 
decided  more  than  two  centuries  ago  that  these,  if  in  the  charter,  were 


GIFFORD   V.   LIVINGSTON.  21 

merely  declaratory,  and  were  not  necessary  to  create  a  corporation. 
10  Rep.  32  ;  1  Roll.  Abr.  513,  b.  10  ;  3  Rep.  73  ;  JSforris  v.  Sinps, 
Hob.  211  ;  Damnaut  v.  Hurdis,  Moor,  564  ;  2  Bac.  Abr.  Corp.  D. ; 
1  Bl.  Com.  475.  Clearly  no  particular  form  of  words  is  necessary  to 
create  a  corporation,  10  Rep.  32;  3  Id.  73;  2  Danv.  Abr.  214; 
1  Roll.  Abr.  513,  b.  10.  The  case  in  10  Rep.  30b,  31a,  certainly 
seems  to  decide  that  a  corporation  may  exist  without  all  of  theee  inci- 
dents. See  also  Allen  v.  jSewall,  2  Wend.  327  ;  6  Id.  348,  s.  c.  in 
error,  per  Walworth,  Chan.  I  suppose  that  at  the  present  day  there 
can  be  no  dispute  in  this  country  but  that  the  grant  of  a  franchise 
must  emanate  from  the  government.  Blackstone  says  that  among  the 
Romans  a  corporation  could  be  formed  by  voluntary  association  ;  but 
this  is  denied  in  1  Brown's  Civil  Law,  99.  However  this  may  be,  it  is 
now  settled  that  all  voluntary  associations  are  no  more  than  partner- 
ships. Our  law  knows  but  two  classes  of  such  associations  ;  corpora- 
tions' and  partnerships.  Even  authorized  joint  stock  companies  in 
England  are  nothing  more  than  partnerships.  The  King  v.  Dodd, 
9  East,  516  ;  3  Ves.  &  B.  180  ;  Wordsworth  on  Joint  Stock  Co.  110; 
9  Barn.  &  Cress.  401  ;  1  Id.  74 ;  Keasley  v.  Codd,  2  Carr.  &  P.  408, 
note ;  Mcmdslan  v.  Le  Blanc,  Id.  409,  note  ;  Coll.  on  Part.  626,  651 ; 
McCullock's  Com.  Die.  Companies. 

I  have  no  doubt  but  that  a  corporation  may  be  shorn  of  some  of  the 
incidents,  by  the  power  giving  it  existence.    Indeed,  we  have  made  the 
members  of  manufacturing  corporations  personall}'  liable  to  a  certain 
extent.     And  on  the  other  hand,  in  England  at  least,  powers  can  be 
given  to  partnerships  which  are  similar  to  some  of  those  said  to  be  inci- 
dental to  corporations.     Steward  v.  Greaves,  10  Mees.  &  Welsb.  711; 
Beech  v.  Eyre.,  5  Mann.    &  Gr.  415.     The  criterion  is  not,  whether 
there  are  not  certain  powers  and  rights  that  are  common  to  both  :  but     *\ 
the  great  distinctive  feature  of  a  corporaj,ion  is.  that  it  is  aiiihorlzed  b^'  - 
a  law  or  grant  to  act  as  an  artificial  being,  the  sevei'al  members  qL. 
which  constitute  one  person  in  law,  ami  have  but  a  single  wjll. 

Having  discussed  the  nature  of  eorporalions,  we  are  led  next  to, 
inquire  whether  associations  under  the  general  banking  law  are  cor 
poration^^^^^his  court  has  at  least  once,  and  the  supreme  court  has 
repeatedlu  declared  that  they  are  ;  and  even  the  case  of  Warner  v. 
Beers  doei  not  decide  the  contrary.  Indeed,  I  understand  that  the 
learned  chancellor  could  not  in  tliat  case  vote  for  the  second  resolution 
as  first  proposed,  because  it  declared  unqualifiedh'  that  they  were  not 
corporations.  Do  they  possess  the  attributes  of  corporations  within  the 
settled  definitions  of  that  term  ?  To  determine  tliis  requires  an  examina- 
tion of  the  nature  and  powers  of  these  institutions.  Tliey  have  their  ex- 
istence by  an  act  of  the  government ;  the  members  are  so  combined  as  to 
lose  their  individual  character,  and  the}-  act  solel}-  as  an  artificial  being ; 
they  have  power  to  sue  and  be  sued  by  an  artificial  name,  and  ma}-  use 
a  common  seal ;  they  may  appoint  and  remove  officers,  and  can  only 
act  by  those  officers.     The  individuals  cannot,  as  such,  do  any  act  to 


22 


ANDREWS   BROS.   CO.  V.    YOUNGSTOWN  COKE   CO. 


bind  the  association.  A  member  may  be  sued  at  law  by  the  associa- 
tion :  the  individual  members  are  not  liable  for  the  debts  of  the 
association,  and  they  hold  their  interest  by  transferable  shares.  There 
is  perpetual  succession,  and  immortality,  by  which  I  understand  that 
the  association  is  not  affected  by  a  change  of  members  or  the  death  of 
any  number  of  them  less  than  the  whole.  In  short,  every  quality  and 
power,  express  and  incidental,  that  has  ever  been  attributed  to  corpora- 
tions, appear  to  be  given  by  the  legislature  to  these  associations.  One 
or  two  of  these  powers  are  not  expressly  mentioned  in  the  statute,  but 
we  have  seen  that  they  are  always  implied.  If,  then,  they  come  into 
existence  as  corporations  do,  and  have  all  the  powers  and  qualities  of 
corporations,  can  they  be  denied  that  character  because  the  legislature 
has  not  called  them  corporations  ?  The  act  does  not  declare  that  they 
shall  not  be  corporations ;  and  if  it  had,  the  essence  of  the  thing  could 
not  be  altered  by  an  arbitrary  change  of  name. 


EWS  BEOS.  CO.  V.  YOUNGSTfpJfN  COKE  CO.,  Limited. 

1898.     58  U.  S.  Appeals,  UiS 

Error  to  the  U.  S.  Circuit  Court  for  the  Eastern  Division  of  the 
orthern  District  of  Ohio. 
-.Before  Taft  and  LuRT0^^,  Circuit  Judges,  and  Clark,  District 

Action  by  Youngstown  Coke  Co.,  Limited,  against  Andrews  Bros. 

0.,  an  Ohio  corporation.    Judgment  below  for  the  original  plaintiffs. 

Thomas  W.  Sanderson,  for  plaintiff  in  error. 

Johyi  G.  White  {Homer  E.  Stewart,  James  W.  Stewart,  and  White, 
Jfihnson,  McCaslin  &  Cannon  were  on  the  brief),  for  defendant  in 
or. 

jLuRTON,  Circuit  Judge.  The  first  and  principal  question  is  whether 
the  circuit  court  had  jurisdiction.  The  plaintiff  is  described  in  its 
original  petition  as  "  a  limited  partnership  association,  duly  organized 
and  existing  under  and  by  virtue  of  the  laws  of  the  state  of  Pennsyl- 
vania, of  which  state  it  is  a  citizen."  This  was  perhaps  an  insufficient 
statement  of  its  corporate  character,  under  Chapman  v.  Barney,  129 
U.  S.  677,  9  Sup.  Ct.  42G,  and  Carnegie,  Phipps  &  Co.  v.  Hulhert,  3  C. 
C.  A.  391,  53  Fed.  10.  To  meet  tliis  difficulty,  an  amended  petition 
was  filed,  in  which  it  was  averred  that  the  plaintiff  was  a  corporation 
under  the  laws  of  Pennsylvania  and  a  citizen  of  that  state.  The  de- 
fendant in  an  amended  answer,  and  by  way  of  abatement,  admits  that 
the  plaintiff  company  was  created  and  organized  under  the  Pennsyl- 
vania act  of  June  2,  1874,  but  denies  that  it  thereby  became  either  a 


1  Statement  abridged.    Portions  of  opinion  omitted.    So  much  uf  tliu  opiuiou  as  is  given 
ig  reprinted  from  80  Federal  Reporter,  586  tt  seg.  —  Ed. 


¥ 


ANDREWS   BKO^  CO.  "v. "  YOXmOSTOWN  VOKE 

corporation  or  a  citizen  of  said  statp,  within  the  meaning  and  effegfef^ 

of  the  statutes  of  the  United  States,  requiring  diversity  of  citizenship 

to  give  jurisdiction  to  a  United  States  court.  ^  .       ^. 

The  act  of  June  2,  1874  [as  amended],  under  which  the  defendant' . 
in  error  was  organized,  is  in  17  sections.  The  first  provides  that 
three  or  more  persons  desiring  to  organize  under  the  act  may  do  so 
by  preparing,  signing,  and  acknowledging  a  statement  in  writing 
which  shall  set  forth  the  amount  of  capital  subscribed  for  by  each ; 
the  total  amount  of  capital,  and  when  and  how  to  be  paid ;  the  char- 
acter of  the  business  and  location  of  same ;  the  name  of  the  associa- 
tion, with  the  word  "  Limited  "  added  thereto  as  part  of  same  ;  the 
duration  of  the  association,  which  shall  not  exceed  20  years ;  and  the 
names  of  the  officers  selected  in  conformity  with  the  act.  The  second 
section  provides  that  the  members  of  the  association  shall  not  be  lia- 
ble for  the  debts  or  engagements  of  the  company  beyond  their  unpaid 
subscriptions  to  the  capital.  The  fourth  section  provides  that  inter- 
ests in  such  associations  shall  be  personal  estates,  and  may  be  trans- 
ferred, given,  bequeathed,  distributed,  sold,  or  assigned  under  such 
rules  and  regulations  as  shall  be  adopted  from  time  to  time  —  "  by 
a  vote  of  a  majority  of  the  members  in  number  and  value  of  their 
interests ;  and  in  the  absence  of  such  rules  and  regulations  the  trans- 
feree of  any  interest  in  any  such  association  shall  not  be  entitled  to 
any  participation  in  the  subsequent  business  of  such  association, 
unless  elected  to  membership  therein,  by  a  vote  of  a  majority  of  the 
members  in  number  and  value  of  their  interests.  And  any  change  of 
ownership,  whether  by  sale,  death,  bankruptcy  or  otherwise,  which 
occurs  in  the  absence  of  any  rules  and  regulations  of  such  association 
regulating  such  transfer,  and  which  is  not  followed  by  election  to  mem- 
bership in  such  associations,  shall  entitle  the  owner  or  transferee  only 
to  the  value  of  the  interest  so  acquired  at  the  date  of  acquiring  such 
interest,  at  a  price  and  upon  terms  to  be  mutually  agreed  upon,  and 
in  default  of  such  agreement,  at  a  price  and  upon  terms  to  be  fixed  by 
an  appraiser  to  be  appointed  by  the  court  of  common  pleas  of  the 
proper  county,  on  the  petition  of  either  party,  which  appraisement 
shall  be  subject  to  the  approval  of  said  court.'* 

The  fifth  section  provides  for  a  board  of  managers,  who  shall  be 
not  less  than  three  nor  more  than  five,  one  of  whom  shall  be  chair- 
man, one  the  treasurer,  and  one  the  secretary.  This  section  also  pro- 
vides that  "  No  debt  shall  be  contracted  or  liability  incurred  for  such 
association,  except  by  one  or  more  of  the  managers,  and  no  liability 
greater  than  five  hundred  dollars,  except  against  the  person  incurring 
it,  shall  bind  the  association,  unless  reduced  to  writing  and  signed  by 
at  least  two  managers." 

The  sixth  and  seventh  sections  provide  for  distribution  of  profits 
through  dividends,  such  dividends  not  to  impair  capital,  and  that  it 
shall  be  unlawful  to  lend  its  credit,  name,  or  capital  to  any  member, 


24 


ANDREWS   BROS.   CO.   V.  YOUNGSTOWN   COKE   CO, 


or  to  any  other  person,  without  consent  of  a  majority  in  number  and 
value  of  members  in  writing.  The  eight,  ninth,  and  tenth  sections 
provide  how  such  companies  may  be  dissolved,  and  how  the  property 
shall  be  distributed.  The  remaining  parts  of  the  act  provide  —  First, 
that  the  association  may  sue  and  be  sued  in  its  associate  name,  ser- 
vice of  process  to  be  made  upon  one  of  its  officers,  or  on  any  agent, 
clerk,  or  manager  in  counties  where  it  may  maintain  an  office  ;  second, 
that  such  associations  may  acquire,  hold,  and  convey  real  estate  in  its 
associated  name. 

This  act  does  not  declare  these  associations  to  be  "  corporations," 
nor  are  they  styled  "  corporations."  They  are  called  "  partnership 
associations."  Neither  does  the  act  disclaim  a  purpose  to  create  corpo- 
rations, as  was  the  case  under  the  English  and  New  York  joint-stock 
acts  mentioned  and  construed  in  Liverpool  Ins.  Co.  v.  Massachusetts, 
10  Wall.  566,  and  People  v.  Coleman,  133  N.  Y.  279,  31  N.  E.  96.  But 
the  fact  of  corporation  or  no  corporation  must  depend  upon  the  exist- 
ence or  nonexistence  of  those  faculties  which  are  of  the  essence  of 
corporate  existence.  We  need  not  be  too  attentive  to  mere  names. 
The  inquiry  must  go  deeper,  and  a  solution  be  reached  upon  principle. 
[The  learned  judge  here  quoted  from  the  opinions  in  Thomas  v. 
DaJcln,  22  Wendell,  9,  70, 103,  and  Liverpool  Ins.  Co.  v.  Massachusetts, 
10  Wallace,  566,  576.] 

Definitions  are  dangerous.  They  are  most  often  too  narrow,  but 
not  infrequently  too  broad.  Many  definitions  of  a  corporation  have 
been  attempted.  Most  of  them  include  one  or  more  faculties  which 
in  this  country  are  clearly  not  essential,  or  are  included  within  more 
general  powers  already  catalogued. 


,  It  is  not  essential  to  the  idea  of  a  corporation  that  it  shall  have 
perpetual  existence,  for  limited  corporations  are  a  matter  of  most 
common  occurrence,  whether  organized  under  special  or  general  laws. 
Neither  is  it  essential  that  it  shall  have  capacity  to  sue  and  be  sued 
under  its  corporate  name,  for  it  may  be  authorized  only  to  sue  in  the 
name  oi  one  of  its  officers,  as  was  the  case  under  the  New  York  bank- 
ing law.  That  it  shall  have  capacity  to  sue  and  be  sued  under  some 
name  standing  for  the  collective  body  is  all  that  is  necessary.  Thomas 
V.  Dakin,  22  Wend.  9 ;  Liverpool  Ins.  Co.  v.  3Iassachu.setts,  10  Wall. 
566.  In  the  la"St  analysis,  the  only  absolutely  essential  attribute  of  a 
corporation  is  the  capacity  to  exist  and  act  within  the  powers  granted, 
as  a  legal  entity,  apart  from  the  individual  or  individuals  who  consti- 
tute its  members. 

But  these  associations  authorized  by  the  Pennsylvania  act  of  1874 
possess  every  attribute  deemed  essential  to  the  existence  of  a  corpora- 
tion under  any  authoritative  definition  of  a  corporation.  They  come 
into  being  only  by  the  creative  power  of  the  sovereign  will,  as  ex- 
pressed in  the  statute  which  authorizes  their  organization.     That  act 


ANDREWS   BROS.   CO.  V.   YOUNGSTOWN   COKE   CO. 


25 


constitutes  at  once  the  authority  for  their  existence  and  the  measure 
of  their  powers.  When  organized,  they  constitute  a  new  artificial 
person,  endowed  with  the  power  of  suing  and  being  sued,  and  of  ac- 
quiring, holding,  and  conveying  property  in  its  artificial  character. 
Created  by  compliance  with  the  constating  law,  they  can  be  dissolved 
only  in  the  way  pointed  out  by  that  law.  Individual  liability  for  cor- 
porate debts,  beyond  unpaid  subscription  to  the  capital  stock,  does 
not  exist.'  Coal  Co.  v.  Rogers,  108  Pa.  St.  147-150 ;  Stevens  v.  Ball 
Club,  142  Pa.  St.  52-61,  21  Atl.  797.  The  members  do  not  act  as  in- 
dividuals, or  as  partners,  but  titironpfh  n.nd  in  f.lip  na^iiP  nf  the  collective 
or  corporate  bod^y.  Hill  v.  Stetler,  127  Pa.  St.  145-162,  13  Atl.  306, 
and  17  Atl.  887.  The  members  are  not  liable  individually  for  the 
torts  of  the  association,  unless  they  personally  participate.  Whitneij 
v.  Backus,  149  Pa.  St.  29,  24  Atl.  51.  In  all  these  respects  it  would 
be  difficult  to  distinguish  these  companies  from  the  ordinary  business 
corporations  authorized  under  general  acts  in  most,  if  not  all,  of  the 
states  of  the  Union.  In  other  respects  they  are  somewhat  peculiar, 
and  it  is  these  peculiar  features  which  distinguish  them  from  the 
ordinary  business  corporations  provided  for  by  other  Pennsylvania 
legislation,  and  which  have  led  to  some  confusion  in  defining  their 
character.  Thus,  the  managers  alone  may  create  a  debt,  and  no  lia- 
bility in  excess  of  $500  is  valid,  unless  the  contract  be  in  writing, 
and  signed  by  two,  at  least,  of  the  managers.  This  is  a  mere  limita4 
tion  upon  the  usual  powers  of  officers  and  agents  to  bind  the  artificial] 
body,  and  in  no  way  affects  the  corporate  character  of  that  bodyJ 
But  the  most  marked  peculiarity  is  found  in  the  provisions  of  tha 
fourth  section  of  the  constituting  act,  whereby,  in  the  absence  or 
some  other  regulation,  adopted  by  the  members,  the  assignee  of  the 
interest  of  a  member  in  the  capital  stock,  by  operation  of  law  or 
otherwise,  does  not  become  a  member  until  elected.  In  default  of 
election,  the  association  must  pay  the  value  of  the  interest  as  ascer- 
tained by  agreement,  or,  in  default  thereof,  by  an  appraiser,  provided 
for  in  the  statute.  This  dUectus  j^ersonai'um  is  a  most  inviting  in- 
ducement to  the  formation  of  small  business  corporations,  where  the 
personnel  of  the  members  is  a  matter  of  some  importance,  and  is  the 
only  feature  which  particularly  distinguishes  these  associations  from 
ordinary  corporations.  This  power  of  selection  is  similar  to  that  be-  _ 
longing  to  ordinary  co-partne.rships>.  A  member  may  sell  his  interest, 
but  such  sale  dissolves  the  partnership.  If  the  remaining  members 
assent  to  the  admission  of  the  new  member,  the  legal  result  is  a  new 
firm.  Under  this  provision  of  the  act  of  1874,  the  sale  of  an  inter- 
est does  not  operate  as  a  dissolution,  but  requires  that  the  company 
shall  buy  the  interest  unless  the  transferee  is  acceptable.  The  prin- 
ciple is  not  new  in  partnerships  where  the  partners  give  a  preference 
to  the  firm  or  its  members  by  contract  in  event  of  sale  or  other  devo- 
lution of  title. 

[After  stating,  and  quoting  from,  Carter  v.  Producers'  Oil  Co.,  Lim- 
ited, 182  Pa.  State,  551.] 


,.fc 


26  ANDREWS   BROS.   CO.   V.  YOUNGSTOWN   COKE   CO. 

The  most  that  can  loe  said  of  this  decision  is  that  the  court  de- 
clined to  classify  these  companies  with  ordinary  corporations,  and 
contented  itself  with  giving  it  its  statutory  designation.  We  have 
already  seen  by  the  Pennsylvania  cases  cited  that  that  court  had  time 
and  again  held  these  companies  to  have  the  very  attributes  which 
enable  us  to  distinguish  a  corporation  from  a  mere  partnership.  The 
fact  that  these  companies  were  not  called  corporations  in  the  act  of 
1874,  and  that  they  possessed  this  dilectus  2>&i'so7iarum,  has  led  to 
some  confusion  of  terminology  in  the  effort  to  describe  them. 

[After  quoting  from  various  Pennsylvania  decisions.] 

These  decisions  are  not  overruled  or  criticised  in  Carter  v.  Oil  Co., 
heretofore  cited.  We  do  not  therefore  agree  with  counsel  for  plain- 
tiff in  error  that  the  Supreme  Court  of  Pennsylvania  has  determined 
that  such  associations  are  not  corporations  ;  on  the  contrary,  the  cor- 
porate character  of  the  organization  is  most  distinctly  recognized, 
though  distinguished  from  the  ordinary  corporation  provided  for  by 
other  general  statutes.  "  A  new  artificial  person,"  organized  under  a 
statute,  and  empowered  thereby  to  contract,  hold,  and  convey  pro- 
perty, sue  and  be  sued,  as  such,  is  a  corporation,  and  can  be  nothing 
else.  In  addition  to  the  recognition  of  these  associations  as  corpora- 
tions of  a  peculiar  character  by  the  Pennsylvania  court,  we  may  add 
the  pregnant  circumstance  that  section  13  of  article  16  of  the  state 
constitution  provides  as  follows  :  — 

"  The  term  '  corporations,'  as  used  in  this  article,  shall  be  construed 
to  include  all  joint-stock  companies  or  associations  having  any  of  the 
powers  or  privileges  of  corporations  not  possessed  by  individuals  or 
partnerships." 

Article  16  is  devoted  to  the  subject  of  private  corporations  and 
their  regulation. 

But  does  the  existence  of  the  dilectus  personarum  take  from  the 
body  possessing  it  the  character  of  a  corporation,  if  it  possesses  those 
attributes  which,  by  general  consent,  distinguish  a  corporation  from  a 
mere  voluntary  association  ?  The  general  and  well-settled  rule  is 
that,  in  the  absence  of  statutory  authority,  a  corporation  may  not 
make  the  transfer  of  shares  dependent  upon  the  discretion  of  the 
corporation,  its  officers  or  agents.  They  may  by  reasonable  rule  regu- 
late such  transfer,  but  they  cannot  prohibit.  Mor.  Priv.  Corp.  §§  164, 
165.  But  that  this  power  may  be  conferred  by  the  charter  is  equally 
well  settled.  Id.,  and  authorities  cited ;  Lowell,  Stocks,  §  31.  This 
privilege  of  the  dilectus  personarum,  while  unusual  in  corporations 
for  profit,  is  a  very  common  provision  in  the  charters  of  companies 
not  for  profits,  such  as  clubs,  boards  of  trade,  fraternal  societies,  edu- 
cational and  charitable  associations.  Joint-stock  companies  have  no 
invariable  character.  Sometimes  they  are  incorporated,  and  some- 
times they  are  not.  The  test  is  the  attributes  conferred  by  the  stat- 
ute under  which  they  are  organized.  Mor.  Priv.  Corp.  §  6.  Certain 
express  companies,  widely  known  in  this  country  as  joint-stock  com- 


ANDKEWS   BROS.   CO.   V.   YOUNGSTOWN   COKE   CO.  27 

panies,  have  been  held  not  to  be  corporations,  within  the  meaning  of 
local  taxing  laws. 

The  case  of  People  v.  Coleman,  133  N".  Y.  279,  31  N.  E.  96,  is  inter- 
esting as  showing  the  history  and  legislative  origin  of  certain  of  these 
companies.  The  case  only  involved  the  question  as  to  whether  there 
was  a  legislative  or  practical  distinction  between  joint-stock  associ- 
ations and  corporations  organized  under  the  law  of  New  York,  and 
whether  the  capital  of  a  joint-stock  company  was  taxable  under  a 
New  York  statute,  taxing  the  capital  stock  of  corporations.  The 
court  refers  to  Feoj^le  v.  Wemjjle,  111  N.  Y.  136,  22  N.  E.  1046, 
and  says  that  case  "  shows  very  forcibly  how  almost  the  full  measure 
of  corporate  attributes  has,  by  legislative  enactment,  been  bestowed 
upon  joint-stock  associations  until  the  difference,  if  there  be  one,  is  ob- 
scure, elusive,  and  difficult  to  see  and  describe J^     (The  italics  are  ours.) 

In  endeavoring  to  discover  whether  any  difference  remained,  the 
New  York  court,  speaking  through  Finch,  J.,  said  :  — 

"  But  I  think  there  was  an  original  and  inherent  difference  between 
the  corporate  and  joint-stock  companies  known  to  our  law  which  legis- 
lation has  somewhat  obscured,  but  has  not  destroyed,  and  that  differ- 
ence is  the  one  pointed  out  by  the  learned  counsel  for  the  respondent 
and  which  impresses  me  as  logical  and  well  supported  by  authority 
It  is  that  the  creation  of  the  corporation  merges  in  the  artificial  body 
and  drowns  in  it  the  individual  rights  and  liabilities  of  the  members 
while  the  organization  of  a  joint-stock  company  leaves  the  individual 
rights  and  liabilities  unimpaired  and  in  full  force.  The  idea  was  ex 
pressed  in  Supervisors  of  Niagara  v.  People,  7  Hill,  512,  and  in  Gif 
ford  V.  Livingston,  2  Denio,  380,  by  the  statement  that  the  corpora- 
tors lost  their  individuality,  and  merged  their  individual  characters 
into  one  artificial  existence  ;  and  upon  these  authorities  a  corporation 
is  defined  on  behalf  of  the  respondents  to  be  an  '  artificial  person, 
created  by  the  sovereign  from  natural  persons,  and  in  which  artificial 
person  the  natural  persons  of  which  it  is  composed  become  merged 
and  nonexistent.'  I  am  conscious  that  legal  definitions  invite  an(r 
provoke  criticism,  because  the  instances  are  rare  in  which  they  prove 
to  be  perfectly  accurate ;  and  yet  this  one  offered  to  us  may^De  ac- 
cepted if  it  successfully  bears  some  sufficient  test.  In  putting  it  on 
trial,  we  may  take  the  nature  of  the  individual  liability  of  the  cor- 
porators on  the  one  hand,  and  of  the  associates  on  the  other,  for  the 
debts  contracted  by  their  respective  organizations,  as  a  sufficient  test 
of  the  difference  between  them,  and  contrast  their  nature  and  char- 
acter. It  is  an  essential  and  inherent  characteristic  of  a  corporation 
that  it  alone  is  primarily  liable  for  its  debts,  because  it  alone  contracts 
them,  except  as  that  natural  and  necessary  consequence  of  its  crea- 
tion is  modified  in  the  act  of  its  creation  by  some  explicit  command  of 
the  statute  which  either  imposes  an  express  liability  upon  the  corpo- 
rators in  the  nature  of  a  penalty,  or  affirmatively  retains  and  pre- 
serves what  would  have  been  the  common-law  liability  of  the  mem- 


28  ANDREWS   BKOS.   CO.   V.   YOUNGSTOWN   COKE   CO. 

bers  from  the  destruction  involved  in  the  corporate  creation.  In 
other  words,  the  individual  liability  of  the  members,  as  it  would  have 
existed  at  common  law,  is  lost  by  their  creation  into  a  corporation, 
and  exists  thereafter  only  by  force  of  the  statute,  upon  some  new  and 
modifying  conditions,  to  some  partial  or  changed  extent,  and  so  far 
I'jreventing,  by  the  intervention  of  an  express  command,  the  total  dc: 
struction  of  individual  liabilities  which  otherwise  would  flow  from 
ithe  inherent  effect  of  the  corporate  creation.  .  .  .  Exactl3^  the  oppo- 
site is  true  of  joint-stock  companies.  Their  formation  destroys  no 
part  or  portion  of  their  common-law  liability  for  the  debts  contracted. 
Permission  to  sue  their  president  or  treasurer  is  only  a  convenient 
Imode  of  enforcing  that  liability,  but  in  no  manner  creates  or  saves  it. 
I  .  .  We  may  thus  see  upon  what  the  legislative  intent  to  preserve 
them  as  separate  and  distinct  is  founded,  and  what  distinguishing 
characteristics  remain.  The  formation  of  the  one  involves  the  merg- 
ing and  destruction  of  the  common-law  liability  of  the  members  for 
the  debts,  and  requires  the  substitution  of  a  new  or  retention  of  the 
old  liability  by  an  affirmative  enactment,  which  avoids  the  inherent 
effect  of  the  corporate  creation.  In  the  other  the  common-law  liabil- 
ity remains  unchanged  and  unimpaired,  and  needing  no  statutory 
intervention  to  preserve  or  restore  it.  The  debt  of  the  corporation 
is  its_debt,  and  not  that  of  its  members.  The  debt  of  the  joint-stock 
company  is  the  debt  of  the  associates,  however  enforced.  Tlie  crea^ 
tfen  of  the'^orporatioirmerges  and  drowns  tne  liability  of  its  corpora- 
tors. The  creation  of  the  stock  company  leaves  unharmed  and  un- 
changed the  liability  of  the  associates.  The  one  derives  its  existence 
from  the  contract  of  individuals ;  the  o'Elier  from  the  sovereignty  of 
tlie  state.  Ine  two  are  alike,  but  not  the  same.  More  or  less,  they 
crowd  upon  and  overlap  each  other,  but  Avithout  losing  their  identity  ; 
and  so,  while  we  cannot  say  that  the  joint-stock  company  is  a  corpo- 
ration, we  can  say,  as  we  did  say  in  Van  Aermayi  v.  Bleistein,  102  N. 
Y.  3G0,  7  N.  E.  537,  that  a  joint-stock  company  is  a  partnership,  with 
some  of  the  powers  of  a  corporation.  Beyond  that  we  do  not  think 
it  is  our  duty  to  go." 

If  the  nonliability  of  the  members  for  the  collection  of  debts  be  in 
fact  a  test  of  a  corporation,  then  these  Pennsylvania  companies  are 
clearly  corporations  under  this  authority.  But  we  cannot  be  sup- 
posed to  concede  this.  In  Liverpool  Ins.  Co.  v.  Massachusetts,  10 
Wall.  566-575,  the  fact  of  the  liability  for  company  debts  of  the 
members  of  the  Liverpool  Insurance  Company  was  held  to  be  no  suffi- 
cient test  of  the  corporate  character  of  that  joint-stock  association. 
Justice  Miller,  as  to  this,  said : 

"  To  this  view  it  is  objected  that  the  association  is  nothing  but  a 
partnership,  because  its  members  are  liable  individually  for  the  debts 
of  the  company.  But,  however  the  law  on  this  subject  may  be  in 
England,  it  is  quite  certain  that  the  principle  of  personal  liability  of 
the  shareholders  attaches  to  a  very  large  proportion  of  the  corpora- 


ANDKEWS   BROS.   CO.   V.   YOUNGSTOWN   COKE   CO.  29 

tions  of  this  country,  and  it  is  a  principle  which  has  warm  advocates 
for  its  universal  application  when  the  organization  is  for  pecuniary 
gain." 

The  Massachusetts  court  is  cited  as  holding  that  these  Pennsylva- 
nia associations  are  not  corporations,  and  could  not,  therefore,  be  sued 
in  Massachusetts  as  such.  Edivards  v.  Gasoline  Works,  168  INIass.  564, 
47  N.  E.  502.  The  case  does  so  hold.  But  the  decision  is  expressly 
rested  upon  the  earlier  Massachusetts  cases  holding  that  joint-stock 
companies  organized  under  the  law  of  that  State  were  mere  partner- 
ships. Tappan  v.  Bailey,  4  Mete.  (INIass.)  529  ;  Tyrrell  v.  Washburn, 
6  Allen,  466.  "  If,"  says  Lathrop,  J.,  delivering  the  opinion  of  the 
court,  "  the  question  were  an  open  one  in  this  commonwealth,  it 
might  well  be  held  that  such  an  association  could  be  considered  to 
have  so  many  of  the  characteristics  of  a  corporation  that  it  might 
be  treated  as  one."  The  court  in  that  case  express  their  unwilling- 
ness to  adopt  the  views  of  the  Supreme  Court  of  the  United  States 
in  Liverpool  Lis.  Co.  v.  Massachusetts,  10  Wall.  bQ>Q>,  and  say  that  their 
own  decision,  reported  in  Oliver  v.  Insurance  Co.,  100  Mass.  531,  and 
affirmed  in  that  opinion,  was  rested  upon  the  ground  stated  by  Jus- 
tice Bradley  in  his  dissenting  opinion.  "VVe  have  neither  the  disposi- 
tion nor  the  freedom  of  the  Massachusetts  court  in  respect  to  the 
opinion  of  the  Supreme  Court  in  Liverpool  Ins.  Co.  v.  Massachusetts. 
The  Youngstown  Coke  Company  presents  many  more  of  the  charac-f  C 
teristic  features  of  a  corporation  than  did  the  Liverpool  Insurancel  ^ 
Company,  and  that  case  is  an  authority  most  strongly  supporting  our 
conclusion  that  it  is  a  corporation.  The  same  conclusion  was  reached] 
in  regard  to  another  one  of  these  Pennsylvania  associations  by  Judge 
Lacombe,  in  Bushnell  v.  Park  Bros.  &  Co.,  46  Fed.  209.  That  case 
was  subsequently  affirmed  by  the  Court  of  Appeals,  in  9  C.  C.  A.  138, 
60  Fed.  583,  though  this  question  seems  to  have  been  abandoned  by 
the  plaintiff  in  error,  against  whose  protest  the  case  had  been  re- 
moved from  the  state  court.  Our  conclusion,  therefore,  is  that  the 
Youngstown  Coke  Company  is  a  corporation  and  a  citizen  of  Pennsyl- 
vania, within  the  meaning  of  the  jurisdictional  requirement  in  respect 
to  diversity  of  citizenship. 


Judgment  affirmed. 


^' 


30      GREAT  SOUTHERN  FIRE  PROOF  HOTEL  CO.  V.   JONES. 

GREAT  SOUTHERN  FIRE  PROOF  HOTEL  CO.  v.   JONES. 

1900.    177  U.  S.  449.1 

Jones  &  Co.  brought  a  bill  in  the  U.  S.  Circuit  Court  for  Ohio, 
against  an  Ohio  corporation  and  various  other  defendants.  The  bill 
describes  the  plaintiffs  as  "  members  of  the  limited  partnership  associa- 
tion doing  business  under  the  firm  name  and  style  of  Jones  &  Laugh- 
lins,  Limited,  which  said  association  is  a  limited  partnership  associa- 
tion, organized  under  an  act  of  the  General  Assembly  of  Pennsylvania, 
,  approved  June  23d  [2d],  1874,  entitled  '  An  act  authorizing  the  for- 
^  ^  ^,-^  /  mation  of  partnership  associations  in  which  the  capital  subscribed  shall 
alone  be  responsible  for  the  debts  of  the  association,  except  under 
(  certain  circumstances,' "...  and  which  association  is  "  a  citizen  of 
i  the  State  of  Pennsylvania." 

The  claim  of  Jones  &  Co.  was  founded  on  the  mechanics'  lien  statute 
of  Ohio.  The  Hotel  Company  demurred  to  the  bill ;  contending  that 
the  said  statute  was  unconstitutional.  After  a  decision  in  favor  of 
Jones  &  Co.  in  the  U.  S.  Circuit  Court  of  Appeals,  the  Hotel  Com- 
pany brought  the  case  to  the  U.  S.  Supreme  Court  on  a  writ  of  certiorari. 

Upon  the  argument  in  the  Supreme  Court,  that  court  suggested 
the  question  (not  raised  by  counsel,  nor  argued  in  the  court  below), 
whether  the  case  as  presented  by  the  record  was  one  of  which  the  U. 
S.  Circuit  Court  could  take  cognizance  by  reason  of  diversity  of  citi- 
zenship. 

(Tohii  E.  Sater  and  D.  F.  Pngh,  for  petitioner. 

Talfourd  P.  Linn  and  Louis  G.  Addison,  for  respondents. 

Harlan,  J.  .  .  .  We  are  of  opinion  that  the  plaintiff  as  a 
limited  partnership  association  was  not  entitled  to  invoke  the  juris- 
diction of  the  Circuit  Court.  It  was  not  alleged  to  be,  nor  could  it 
have  alleged  that  it  was,  a  corporation  in  virtue  of  the  statute  ot 
Pennsylvania  under  which,  according  to  the  averments  of  the  bill,  it 
was  organized. 

It  has  been  suggested  that  the  plaintiffs  are  entitled  to  sue,  and  may 
be  sued,  by  their  association  name.  .  .  .  But  the  capacity  to  sue  and 
be  sued  by  the  name  of  the  association  does  not  make  the  plaintiffs  a 
corporation  within  the  rule  that  a  suit  by  or  against  a  corporation  in 
its  corporate  name  in  a  court  of  the  United  States  is  conclusively  pre- 
sumed to  be  one  by  or  against  citizens  of  the  State  creating  the  cor- 
poration. 

[As  to  Const.  Pa.  Art.  XVI.  Sect.  13.]    The  only  effect  of  that  clause 
is  to  place  the  joint-stock  companies  or  associations  referred  to  under 
1  Statement  abridged.     Portions  of  opinion  omitted.  —  Ed. 


GREAT  SOUTHERN  FIRE  PROOF  HOTEL  CO.  V.   JONES.      31 

the  restrictions  imposed  by  that  article  upon  corporations ;  and  not  to 
invest  them  with  all  the  attributes  of  corporations. 

We  have  not  been  referred  to  any  case  in  the  Supreme  Court  of 
Pennsylvania  which  distinctly  places  limited  partnership  associations, 
created  under  the  statutes  of  that  State,  on  the  basis  of  corporations. 

That  a  limited  partnership  association  created  under  the  Pennsyl- 
vania statute  may  be  described  as  a  "  quasi  corporation,"  having  some 
of  the  characteristics  of  a  corporation,  or  as  a  "  new  artificial  person," 
is  not  a  sufficient  reason  for  regarding  it  as  a  corporation  within  the 
jurisdictional  rule  heretofore  adverted  to.  That  rule  must  not  be 
extended.  We  are  unwilling  to  extend  it  so  as  to  embrace  partnership 
associations. 

We  have  not  overlooked  the  case  of  Andrews  Bros.  Co.  v.  Touiiffstotvn 
Coke  Co.,  58  U.  S.  App.  444,  in  which  the  Circuit  Court  of  Appeals 
for  the  Sixth  Circuit,  speaking  by  Judge  Lurton,  held  that  limited 
partnership  associations  organized  under  the  Pennsylvania  statute 
were  corporations  within  the  jurisdictional  requirement  of  diverse 
citizenship.  For  the  reasons  stated,  we  are  unable  to  concur  in  the 
view  taken  by  that  court. 

We  therefore  adjudge  that  ...  it  was  necessary  to  set  out  the 
citizenship  of  the  individual  members  of  the  partnership  association 
of  Jones  &  Laughlins,  Limited,  which  brought  this  suit. 

Without  considering  the  merits  of  the  case,  we  are  constrained  to 
reverse  the  judgments  of  the  Circuit  Court  of  Appeals  and  of  the 
Circuit  Court,  and  remand  the  cause  for  further  proceedings  consistent 
with  this  opinion.  Under  the  circumstances,  the  plaintiffs  should  be 
allowed,  upon  application,  to  amend  the  bill  upon  the  subject  of  the 
citizenship  of  the  parties. 


32 


RUSSELL   V,   TEMPLE. 


CHAPTER  II. 

DISTINCTION  BETWEEN  CORPOKATION  AND  STOCK- 

HOLDERS.i 


SECTION  I. 

/\,y\  The  Distinction  applied  Generally. 

USSELL  ET  ALS.,  Appellants  v.  TEMPLE  et  al.,  Appellees. 

1798.     Supreme  Court  of  Massachusetts.     3  Dane's  Abridgment,  108. 

[Probate  Appeal.]     In  this  case  the  heirs  of  Thomas  Russell  con- 

ded  that  his  shares  in  Maiden,  Charles-river,  Haverhill,  Andover, 

nd  Merrimack  bridges,  in  Middlesex  canal,  &c.,  ought  to  be  considered 

as  real  estate,  and  his  widow,  afterwards  married  to  Temple,  ought  to 

have  only  her  dower  for  life  in  them.     On  the  other  hand.  Temple  and 

«jsyife  contended  they  were  personal  estate,  and  ought  to  be  distributed 

asvsuch,  and  she  have  one-third  part  forever.      The  strongest  case 

'ong  these,  in  favor  of  real  estate,  was  the  Middlesex  canal,  in  which 
fhe  corporation  had  a  fee  simple  estate,  or  an  estate  forever,  and  a  per- 
petual toll.  By  the  statutes  passed  respecting  this  canal  and  real  estate, 
the  property  therein  was  divided  into  800  shares,  and  the  shares  in  the 
canal,  including  the  towing  paths  and  wharves  thereon,  were  made 
transferable  and  taxable  as  personal  estate.  This  corporation  also 
had  power  to  hold  real  estate  to  the  amount  of  £30,000,  over  and  above 
the  canal  itself,  and  this  appendant  real  estate  was  made  taxable  as  real 
estate  of  the  corporation  in  the  several  towns  in  which  it  la}'. 

It  was  argued  (for  the  widow)  that  these  shares  were  personal  estate 
for  two  reasons  :  — 

1st.  Because  these  estates  can  only  exist  in  the  corporation,  which 
alone  can  acquire  it,  alone  be  seized  or  possessed  of  it,  alone  pass  it 
away,  manage  or  repair  it,  and  so  must  hold  it  entire  ;  and  that  the 
corporation  is  a  moral  person  to  all  the  purposes  of  propert}'.  Its 
tenure  is  to  their  successors,  or  to  their  successors  and  assigns ; 
these  estates  never  can  vest  in  or  be  divided  among  the  individual 
members,  to  hold  as  tenants  in  common  &c.,  in  their  private  capacities. 
Only  the  corporation  can  forfeit  the  estate,  and  that  onl^'  by  forfeiting 


1  The  distinction  is  also  (liscu8se<l  in  various  cases  which  are  given  innler  special 
topics  treated  of  in  subsequent  chapters.  —  Ed. 


KUSSELL   V.   TEMPLE.  33 

their  charter;  and  only  the  corporation  can  be  taxed  for  it  on  common 
law  principles  ;  and  on  these  can  it  alone  be  taken  in  execution  for  the 
debts  of  the  corporation  ;  and  on  a  dissolution  of  the  corporation,  "  its 
lands  revert  to  the  grantor,  or  his  heirs,  and  the  debts  due  to  or  from 
it  are  totally  extinguished  ;  so  that  the  members  of  it  cannot  recover  or 
be  charged  with  tliem  in  their  natural  capacities."  And  a  grant  to  a 
corporation  can  only  be  for  its  life  or  continuance.  2  Bl.  Com.  484  ; 
1  Lev.  239  ;  1  Bac.  Abr.  510.  The  case  of  the  Eoyal  Exchange  Lv- 
%urance  Company  v.  Vaughan,  1  Burr.  155,  and  Cowper,  79  to  86, 
Gardnen's  Case. 

Second.  Because  the  share  is  personal  estate,  though  the  corporation 
hold  real  estate  ;  for  the  individual  member  has  no  estate,  but  only  a 
ri^ht  to  such  dividends  as  the  corporation,  from  time  to  time,  assign  to 
him.  He  is  unknown  on  the  grants  made  to  it,  and  he  cannot  grant 
any  part  of  the  estate  ;  nor  can  he  be  taxed  for  it  but  by  statute  law  ; 
nor  can  any  private  member  of  a  corporation  be  distrained  for  a  public 
concern  of  it ;  his  only  remedy  for  his  dividend  is  case  in  assumpsit,  or 
an  action  on  the  case  for  a  wrongful  refusal  or  neglect  to  pay  or  allow 
him  his  part  of  the  profits.  4  AVood's  Con.  489,  &c. ;  Cowp.  85  ;  Im- 
pey's  Modern  Pleader,  83;  1  Vent.  351,  Dutch  \.  Warren;  1  Stra. 
406  ;  same  case,  2  Burr.  1011.  So  lands  may  be  real  estate  in  one,  yet 
the  trees  or  corn  growing  on  them  may  be  personal  estate  in  another. 
LifforcVsCase,  6  Co.  46  to  50 ;  Imp.  M.  P.  167. 

For  the  heirs  it  was  urged  that  these  shares  were  real  estate,  because 
it  was  said  the  estates  were  real  in  the  corporations  ;  annexed  to  the 
soil ;  and  that  if  these  estates  in  the  corporations  were  real,  the  estates 
of  the  individual  members  in  them  followed  their  nature,  and  were  real ; 
and  that  the  frequent  declarations  of  the  legislature  declaring  such 
shares  personal  estate,  at  least  shew  a  doubt :  that  when  one  has  a  right 
to  receive  rent,  he  has  onl}-  a  right  to  receive  a  sum  of  money ;  yet  it 
does  not  follow  that  his  estate  is  not  real  estate,  out  of  which  his  rent 
issues. 

The  judgment  of  the  court  was,  that  these  shares  were  personal 
estate,  and  distribution  was  ordered  accordinglj-.  The  principal  reason 
of  the  decision  appears  to  be,  because  the  court  considered  that  the  indi- 
vidual member,  or  shareholder,  had  only  a  right  of  action  for  a  sum  of 
monej',  his  part  of  the  net  profits,  or  dividends.  And  so  the  law  iiaa 
been  held  to  be  since  this  decision  was  made. 


4- 
V 


J 


ROSS. 


M- 


WILLIAMSON  V.  SMOOT. 

1819.     7  Martin,  Louisiana,  31. 

'PEAL  from  the  court  of  the  first  district. 


^'j^'Vi^.t  ._ _._ 

^^      i/'  vl  v^  Matthews,  J.,  delivered  the  opinion  of  the  court.     The  plaintiff 

A^      i         iP     having  caused  an  attachment  to  be  levied  on  the  steamboat  Alabama, 
*r       K     \  ^^®  ^^"  Stephens  Steamboat  Company  intervened  in  their  corporate 

capacity,  and  claimed  her  as  their  propert}'.     The  intervening  party  are 
.a  bod}'  politic,  created  by  an  act  of  the  legislature  of  the  territor}^  of 
Alabama,  the  capital  stock  of  which  is  divided  into  shares  of  a  certain 
,.  /*^  g/^      amount,  and  Smoot  the  defendant  owns  ten  of  them,  subscribed  for  by 

^he  questions  to  be  decided  are:  1.  Is  it  proper  for  our  courts  of 
I  iu^tice  to  recognize,  in  their  judicial  proceedings,  the  company  as  a  cor- 
(i^r^orate  body?  2.  Can  the  shares  or  stock  of  any  individual  stock- 
\J!t     holder  be  legally  attached?^ 

II.  The  existence  of  the  claimants  being  recognized  as  a  body 
corporate,  and  it  being  admitted  that  the  boat  attached  belongs  to 
them  as  a  part  of  their  common  stock,  it  is  clear  that  Smoot  does 
not  possess  such  certain  and  distinct  individual  property  in  it,  as  to 
make  his  interest  attachable.  The  estate  and  rights  of  a  corpora- 
tion belong  so  completely  to  the  body,  that  none  of  the  individuals  who 
compose  it  has  any  right  of  ownership  in  them,  nor  can  dispose  of  an}' 
part  of  them.     Civ.  Code,  88,  art.  11. 

The  court  is  of  opinion  that  the  district  court  erred  in  disallowing 
the  claim  of  the  companv. 

It  is  therefore,  ordered,  adjudged  and  decreed  that  the  judgment  be 
annulled,  avoided  and  reversed,  and  that  the  attachment  of  the  plain- 
tiff and  appellant  be  quashed,  so  far  as  it  relates  to  the  said  steamboat 
the  Alabama,  and  that  she  be  released  therefrom. 

Livingston,  for  the  plaintiffs. 

Duncan^  for  the  claimants. 


EOSS  V.  ROSS. 

1858.    25  Georgia,  297.2 

Martha  B.  Ross  sued  W.  W.  and  F.  D.  Ross  in  a  note.  On  this 
attachment  was  issued ;  a  summons  of  garnishment,  directed  to  the 
Eatonton  Railroad ;  the  summons  being  served  on  the  President.  He 
answered  that  W.  W.  R.  was  the  holder  of  50  shares  of  stock  in  said 
Road,  and  F.  D.  R.  of  48  shares  therein;  and  that,  in  other  respects, 
if  in  this,  the  said  road  did  not  owe  and  had  not  owed  either  of  them, 
or  had  any  effects  of  either  of  them. 
1  The  opinion  relating  to  Point  I.  is  omitted.  —Ed.  s  Statement  abridged.  —  Ed. 


Jif- 


^ 


Motion  to  dismiss  attachment.     Motion  denied.    Bill  of  exceptfi^re.    VV 

Davis  &  Lauson,  for  plaintiff  in  error. 

Hudson,  contra. 

Bexxixg,  J.     Was  the  Court  right  in  overruling  the  motion  to 
miss  the  attachment  ? 

One  of  the  grounds  of  the  motion  was,  that  stock  in  this  railroad  i 
not  subject  to  garnishment  by  creditors  of  the  stockholders.    Was  this 
a  good  ground  ? 

The  answer  to  this  question  depends  on  the  import  of  the  act  of 
1856,  "to  authorize  the  issuing  of  attachments  and  garnishments,". 
&c. ;  for,  the  5oth  section  of  that  act  repeals  "  all  acts,  and  parts  ot^}^ 
acts,  upon  the  subject  of  attachments  and  garnishments."     Acts  ofr 
1856,  38. 

By  the  13th  section  of  this  act  the  summons  of  garnishment  is  to  be 
"directed  to  any  person  who  may  be  indebted  to,  or  have  property  or'l 
effects  of,  the  defendant,  in  their  hands." 

By  this  section,  then,  it  would  seem  that  all  of  the  debts,  property, 
and  effects  of  the  debtor  are  subject  to  garnishment. 

But  the  16th  section  says,  "where  the  garnishee  appears  and 
answers  that  he  is  indebted,  or  has  property,  or  effects  in  his  hands, 
belonging  to  the  defendant  in  attachment,  judgment  shall  be  rendered 
against  him,  in  favor  of  the  plaintiff,  for  such  acknowledged  indebted- 
ness, and  the  property  and  effects,  whatever  they  may  be,  shall  be 
delivered  into  the  hands  of  the  Sheriff,"  &c. 

Where  the  answer  is,  that  he  is  "indebted,"  judgment  is  to  be 
entered  against  him,  "  for  such  acknowledged  indebtedness." 

Is  stock  in  this  railroad  such  a  debt  ("'  indebtedness  ")  of  the  rail- 
road to  the  stockholder  that  a  garnishing  creditor  of  the  stockholder 
can  enter  up  judgment  for  it,  against  the  railroad  ?  It  is  not ;  it  is  a 
debt  which  the  railroad  dares  not  pay  even  to  the  stockholder  him- 
self ;  the  road  may  pay  him  dividends  on  it,  but  that  is  all.  See 
charter,  section  3,  Acts  of  1850,  240 ;  and  charter  of  Central  Railroad 
Rule  7  (Pr.  Dig.  330). 

The  debt  which  a  corporation  owes  to  one  of  its  stockholders  for  his 
stock  is  a  debt  of  a  peculiar  nature.  It  is  a  debt  not  to  be  paid  until 
the  corporation  comes  to  wind  itself  up.  When  the  corporation  winds 
itself  up,  then  it  pays  back  to  its  stockholders  the  money  it  received  from 
them  for  its  stock  ;  during  its  existence  it  may  pay  them  profits  which 
it  makes  on  their  money,  but  anything  beyond  the  said  profits  it  dare 
not  pay  them.  This  is  generally  true.  It  is  true  in  the  case  of  this 
corporation. 

When  will  this  corporation  wind  itself  up  ?  It  may  never  do  so. 
Its  charter  sets  no  limits  to  the  time  of  its  existence.     Pr.  Dig.  333. 

It  follows  that  the  time  may  never  come  when  this  corporation  will 
be  bound  to  pay  back  to  the  Rosses  the  money  it  received  from  them 
for  their  stock.  If  so,  of  course,  no  judgment  can  be  got  against  the 
fiorporation,  requiring  it  to  pay  that  money  at  any  particular  time ; 


86 


PARKER   y.   BETHEL   HOTEL   CO. 


consequently  no  judgment  can  be  got  against  the  corporation  under 
the  said  16th  section  of  the  act,  for  the  judgment  it  contemplates  is 
one  requiring  immediate  payment. 

There  is  no  other  part  of  the  act  under  which  such  a  judgment  can 
be  got. 

We  may  conclude,  therefore,  that  although  the  language  of  the  13th 
section  of  the  act  is  broad  enough  to  include  all  debts,  yet  that  the 
16th  section  of  the  act  is  such  as  to  require  this  language  to  be  so 
restricted  that  it  shall  not  include  such  a  debt  as  this  ;  a  debt  which 
a  corporation  owes  to  one  of  its  stockholders  for  the  money  received 
from  him  for  his  stock. 

If  dividends  were  due  to  the  E-osses  the  case  would  be  different. 
Dividends,  there  is  little  doubt,  stand  on  the  same  footing  as  ordinary 
debts  due  from  the  corporation  to  its  stockholders. 

The  judgment  that  is  needed  in  such  a  case  as  the  present  is  a  judg- 
ment authorizing  a  sale  of  the  stock.  There  is  no  law  authorizing  such 
a  judgment  in  attachments  or  garnishments.  16  Ga.  437.  There  is  a 
law  making  "  bank  and  other  stock  subject  to  execution."  Cobb,  Dig. 
511.     But  this  law  does  not  reach  the  present  case. 

We  think,  then,  that  this  stock  of  the  Rosses  was  not  subject  to 
this  garnishment,  and,  therefore,  that  the  Court  erred  in  not  dismiss- 
ing the  attachment. 

It  becomes  useless  to  consider  the  other  grounds  of  the  motion. 

Judgment  reversed.^ 


PARKER  ET  ALS.  V.  BETHEL  HOTEL  CO.  et  als. 

1896.     Supreme  Court  of  Tennessee^ 

Appeal  from  Chancery  Court  of  Maury  County. 

The  Bethel  Hotel  Co.  was  incorporated,  in  1880,  under  the  general 
corporations  act  of  1875  ;  and  erected  a  building  used  partly  for  a  hotel 
and  partly  for  other  purposes.  Sept.  1,  1885,  the  Bethel  Hotel  Co.  and 
Lucius  Frierson  conveyed  to  Mayes  &  Dodson  the  "  hotel  proper  part " 
of  the  building,  by  deed  signed  "  Bethel  Hotel  Company,  W.  D.  Bethel, 
President ;  Lucius  Frierson,  Secretary  and  Treasurer ;  and  Lucius  Frier- 
son."  This  conveyance  was  authorized  by  a  vote  of  the  stockholders 
at  the  last  meeting  ever  held  by  them.  No  business  seems  to  have  been 
transacted  by  the  corporation  after  this  time.  On  or  about  Aug.  28, 
1886,  Frierson  became  the  owner  of  all  the  stock  of  the  company  ;  but, 
both  before  and  after  that  date,  he  pledged  various  shares  as  security 
for  debts  of  his  which  are  still  outstanding.     The  stock  so  pledged  was 

1  In  almost  all  States  there  are  now  statutes  providing  methods  whereby  a  creditor  may 
attach,  or  levy  on,  shares  of  corporate  stock  owned  by  his  d('l)tor.  —  Ed. 

2  The  statement  of  facts  is  abridged  from  the  opinion,  contained  in  advance  sheets  fur- 
nished by  the  State  Reporter.    Portions  of  the  opinion  arc  omitted.  —  Ed. 


PARKER 


of  the  compahy.     Hb  usea  the  reinaind^     (J,-^  < 


notjxansfei'red  on  the^books  of  the_compahy.     He  usea  the  remaindei      (J^ 
of  the  building  as  his  own  up  to  Jan.  12, 1892,  when  he  executed  a  deedy 
in  his  own  name,  purporting  to  convey  to  Webster,  in  trust,  the  real  es 
tate  owned  by  the  Bethel  Hotel  Company  and  certain  stock  in  that  co 
pany.     The  purpose  of  this  deed  was  to  secure  the  payment  of  certai 
debts  owing  by  Frierson,  preferring  one  creditor  and  providing  for^>/-*^^  -^ 
rata  payment  of  the  others.    Most  of  the  creditors  of  Frierson  who  had\   -^ 
loaned  him  money  on  the  stock  of  the  Bethel  Hotel  Co.  were  not  proC^      ,^ 
vided  for  in  the  deed  of  trust.    Parker  et  als.,  creditors  of  Frierson  andj^T' 


pledgees  of  said  stock,  filed  a  bill  in  equity,  praying  (^mter  alia)  to  annul       W^     jw^  ' 
the  trust  deed  to  "Webster.    The  cause  was  heard  before  the  Chancellor ,^r'^''''''^  A^ 

c£  3Iarks,  and  John  T.   Williamson^  for  Parker.  iN        f\\     r         'v 


"^  J^\  -^ 

G.  T.  Hughes,  Fussell  <jc  Wilkes,  W.  S.  Fleming,  Jr.,  Granhery,  J^f^ 


the  trust  deed  to  Webster.     Ihe  cause  was  heard  before  the  Chancellory      ^     mW 

of  Maury  County,  and  afterwards  before  the  Court  of  Chancery  Ap-  •  ^^^r^    V^^  tl  ^r 

peals,  from  which  the  case  was  taken  to  the  Supreme  Court.  i'^"\\  A  0      ^     ^ 


Figuers  &  Padgett,  E.  II.  Hatcher,  and  W.  J.  Webster,  for  Hotel  Cox^  ^j^    .    ^^ 

J.  C.  Bradford,  Sp.  J.     [After  fully  stating  the  facts  and  plead-^      .i        fp        U^ 
ings.]     It  may  be  regarded  as  settled,  therefore,  that  the  legal  title  td       \^    |    ^ 
.the  property  conveyed  to  defendant,  Webster,  was,  at  the  date  of  thafr  >  \J^'^^'^ 0  V 

instrument,  in  the  Bethel  Hotel  Company,  where  it  had  been,  unques-l        ]  ^   JL^^^ 
tioned  and  undisturbed,  since  1880,  the  year  of  its  incornoration  anfti-    .       «_   ft 


tioned  and  undisturbed,  since  1880,  the  year  of  its  incorporation  an6l>    ,      V   1\ 
organization.     Defendants  insist  that,  although  Frierson  ma}'  not  have  Vj^^  i  Ay*  "^    (^J? 
been  invested  with  the  legal  title,  he,  nevertheless,  had  such  an  equi-i^^  AV        '^^ 
table  estate  and  interest  as  entitled  him  to  sell  and  dispose  of  the  propvr  '^     Ojy'^    f^ 
erty.     In  other  words,  that  he  was  the  real  owner  of  the  property,  and,4/l>75      >-  1^  •  l^^ 
as  such,  had  the  absolute  right  to  use  or  dispose  of  it.  I'!^    ')  (^   •  *    I 

This  alleged  equitable  estate  was  not  the  creation  of  any  deed  0X\\  y^  ^        \ 

written  contract,  executed  by  the  Bethel  Hotel  Compan}',  or  of  anyV^     j'^^   ^)}f^^ 
corporate  act  or  resolution   adopted  by  the  stockholders  or  directors,)  a  6^*"^^       i^ 
which  in  terms  referred  to  or  defined  it,  but  is  rather  the  result  and-j      i    ""^  t\  y 
consequence  of  certain  facts  and  conditions,  the  existence  of  which  ia  #-  Kr 

affirmed  by  the  defendants.  >         /jJK^  ■ 

It  is  said  that  the  Bethel  Hotel  Company,  by  the  alienation  of  that.^,  '^^     i  ?  "^-^.o^  ' 
part  of  its  property  built  for  and  adapted  to  the  uses  and  purposes  ofi       i^^  v 

a  hotel,  deprived  itself  of  the  means  of  conducting  a  hotel  businesSjV^^     IlA^      dj 
and  that,  since  1885,  the  date  of  the  sale  to  Ma3'es  &  Dodson,  it  hadij^^  *^^*^ 

ceased  to  exercise  its  corporate  franchises;  that  the  stockholders,  at^    /t/0^'i    C  a) 
the  meeting  held  in  September,  1885,  passed  a  resolution,  or  agreedyViA  H 

among  themselves,  that  the  corporation  should  go  into  liquidation,  ^^^.-^ujJ     (I  rtx/^  > 
tliat  Lucius  Frierson,  being  then  the  owner  of  all  the  capital  stock  0^^-'%^  a     Ar\   ^y, 
the  corporation,  became,  in  consequence,  the  equitable  owner  of  all  ^^^-jJiLm/         liy        ^ 
property,  with  full  power  to  use  it  or  dispose  of  it  in  such  manner  asr      -a  ""^^     dxr'^  > 
he  might  choose  to  do.     The  position  of  the  defendants  seems  to  ba^  o^    «  v^v^ 
that  all  rights  of  the  corporation  in  the  property  were  extinguished,      -  C*"^         ^ 
that  it  had  ceased  to  be  affected  with  any  corporate  uses,  and  that  if-  Jj^^'"'^^ 

belonged  absolutely  to  Frierson.  'WC^  ^ 

The  facts  affirmed  by  defendants  are  not  all  of  them  exactl}'  as'     ^      ^^"^  lAt-^ 
found  by  the  Court  of  Chancery  Appeals.     It  is  true  that  the  corporjfc^  ^       ^     i 


58  PARKER   V.   BETHEL   HOTEL   CO. 

tion  sold  and  convej-ed  the  hotel  part  of  its  building  to  Mayes  & 
Dodson,  retaining  only  the  stores  and  opera  house,  and  never  after- 
wards engaged  in  the  business  of  owning  and  operating  a  hotel. 
Lucius  Frierson  was  not  the  sole  stockholder  in  1885,  when  the  hotel 
was  sold,  and  did  not  become  such  until  August  28,  1886,  when  he 
purchased  the  Bethel  stock.  His  stock,  or  a  large  part  of  it,  at  that 
time  and  subsequently,  was  held  as  collateral  security  by  other  parties. 
It  is  not  true  that  a  resolution  was  ever  adopted  by  the  stockholders 
directing  the  liquidation  or  winding  up  of  the  afifairs  of  the  corporation, 
or  that  they  were  ever  wound  up.  The  facts,  as  found  by  the  Court  of 
Chancery  Appeals  on  this  point,  are  stated  in  its  opinion  in  the  follow- 
ing words  :  "It  maybe  fairly  inferred,  though  it  does  not  distinctl}' 
appear  in  terms  in  the  proof,  that  when  the  deed  was  made  to  Mayes  &, 
Dodson  it  was  then  understood  between  W.  D.  Bethel  and  Lucius 
Frierson,  they  then  owning  practically  all,  or  nearly  all,  of  the  stock, 
that  Bethel  should  take  the  proceeds  of  the  sale  to  Mayes  &  Dodson, 
amounting  to  $22,500,  and  a  sufficient  amount,  in  addition,  from  Lu- 
cius Frierson,  personally,  to  make  $30,000,  and  for  this  he  would 
transfer  his  stock,  $61,000,  to  Frierson,  and  that  this  arrangement 
was  consummated,  so  far  as  it  could  be  done  without  direct  corporate 
action  of  the  corporation  itself,  by  the  paper  of  August  28,  1886,  made 
by  Bethel  to  Frierson,  and  this  is  what  they  understood  by  the  resolu- 
tion to  go  into  liquidation,  there  being  no  debts  due  by  the  corporation, 
and,  following  out  this  idea,  from  the  date  of  the  sale  to  Mayes  & 
Dodson,  Lucius  Frierson  proceeded  to  treat  the  property  as  his  own, 
on  the  idea  that  he  himself  constituted  the  corporation.  We  do  not 
think  that  he  entertained  the  idea  that  the  corporation  was  defunct, 
but  simply  that  he  was,  himself,  the  corporation,  and  could  do  what  he 
wished  with  the  assets." 

In  considering  the  position  of  the  defendants,  that  Frierson  became 
the  equitable  owner  of  the  assets  of  the  corporation,  we  must,  there- 
fore, leave  out  of  view  the  idea  that  there  was  an}'  corporate  action 
looking  to  a  dissolution  of  the  corporation  and  winding  up  of  its  affairs. 
Frierson's  estate  or  interest  in  the  property,  if  he  had  any,  rests  on 
the  postulate  that,  in  consequence  of  the  nonuser  of  its  franchises  and 
his  sole  proprietorship  of  all  its  capital  stock,  the  corporation  was  dis- 
solved, and  he  became  the  equitable  owner  of  all  its  propert3\ 

A  corporation  can  be  dissolved,  and  its  existence  wholly  terminated, 
only  by  the  extinguishment  of  the  corporate  franchises  conferred  by 
the  Slate.  An  ordinary  business  corporation,  where  its  charter  speci- 
fies no  definite  time  for  its  continuance,  may  sell  its  property  and  wind 
up  its  affairs  whenever  a  majority  of  the  stockholders  va^y  deem  it  ad- 
visable {Treadv:ell  v.  Salisbury  Mfcj.  Co.^  7  Gray,  393;  Black  v. 
Delaxonre  &  C.  Canal  Co.,  22  N.  J.  Eq.,  416)  ;  but  the  franchises 
conferred  upon  the  stockholders  by  the  State  are  not  extinguished  by 
>he  cessation  from  business  thus  brought  about.  2  Morawetz  on  Corp., 
§  1004. 


PARKER   V.   BETHEL   HOTEL   CO.  39 

It  is  claimed  by  the  defendants  that  the  dissolution  of  the  corpora-  k 
tion  was  effected  by  the  fact  that  Lucius  Frierson  became  the  sole 
owner  of  all  its  capital  stock.  Admitting  it  to  be  true  that  he  was  the 
owner  of  all  the  stock  of  the  corporation,  it  by  no  means  follows  that 
the  corporation  was  thereby  dissolved  and  forfeited  its  franchises.  On 
this  question  the  latest  text  writer  on  corporation  law  has  this  to  say, 
viz.  :  "Contrary  to  early  opinion,  it  is  now  generally  held  that  the 
fact  that  all  the  shares  in  a  joint  stock  company  have  passed  into  the 
hands  of  two  members,  or  even  into  the  hands  of  a  single  person,  does 
not,  ijysofacto^  work  a  dissolution  of  the  corporation,  since  such  sole 
owner  may  so  dispose  of  the  shares,  as,  by  the  election  of  the  neces- 
sary directors  and  officers,  to  continue  the  corporate  existence."  5 
Thompson's  Commentaries  on  the  Law  of  Corporations,  Sec.  6653. 
And,  in  2  Morawetz  on  Corporations,  Sec.  1009,  it  is  said:  "It  is 
well  settled  that  all  the  shares  of  a  corporation  may  be  held  by  a 
single  person,  and  yet  the  corporation  continue  to  exist,  and,  if  the 
charter  or  by-laws  should  require  certain  acts  to  be  done  by  more  than 
one  shareholder,  the  sole  owner  may  transfer  a  portion  of  his  shares  to 
other  persons,  so  as  to  conform  to  the  letter  of  the  rule."  It  has  been 
held  that  a  corporation  which  has  sold  all  its  assets,  with  the  intention 
of  putting  an  end  to  its  business,  whose  officers  had  all  resigned,  and 
whose  stockholders  had  all  transferred  their  shares  to  a  single  person, 
was,  nevertheless,  not  dissolved,  and  that  its  existence  could  be  ter- 
minated only  by  judgment  of  forfeiture  or  by  surrender  accepted  by  the 
State.  Russell  \.  McLellan,  14  Pick.  (Mass.),  69,  70;  Newton  Mfg. 
Co.  v.  White,  42  Ga.,  148  ;  Bahhoin  v.  Canjield,  26  Minn.,  43. 
/The  dissolution  of  a  pecuniary  or  business  corporation  is  effected  in 

^ne  of  the  following  ways,  viz.  :'(1)  bj'  the  expiration  of  its  charter; 

^  (2)  b}-  Act  of  the  Legislature,  where  power  is  reserved  for  that  pur- 
pose,  or  there  is  no  constitutional  inhibition V  (3)    by   sui'render  of 
charter  which  is    accepted  r  (4)   by  forfeiture  of   the  franchises  and 
judgment  of  dissolution  pronounced  b}^  a   Court  having  jurisdiction. 
2  Morawetz,  Sec.  1004 ;  Taylor  on  Private  Corporations,  Sec.  430.    It 
is  not  pretended   that  the  Bethel  Hotel  Conipau}'  was  dissolved  in 
either  of  the  wa3-s  indicated.     The  charter  of  the  corporation  has  not 
expired,  neither  has  it  been  repealed  bj'  the  Legislature,  or  been  sur- 
rendered to  the  State  by  its  members  or  stockholders.     It  maj'  be  true 
that   there  was  a  nonuser  of  its  franchises  by  the  corporation  for  a 
period  of  seven  A'ears  or  more,   occasioned   b}-  the  sale  of  the  only 
propert}'   it  owned  which  could  have  been   used  for  hotel    purposes.l 
Undoubtedly  the  nonuser  of  its  franchises  b}'  a  corporation  is  ground! 
for  dissolution  and  forfeiture  of  its  charter,  at  the  instance  of  the  State  ;  | 
but  until  sentence  of  dissolution   has   been  pronounced  by  a  Court/ 
of  competent  jurisdiction,   in   a  proper  proceeding  instituted  for  the/ 
purpose,  the  corporation  will  continue  to  exist,   notwithstanding  itsj 
failure  to  use  its  franchises.     And  forfeiture  can  only  be  decreed  in  a 
proceeding  directl}-  instituted  for  the  purpose,  by  the  State  granting  it. 
Code  (M.  &  v.)  §  1712;  State  v.   Butler,  15  Lea,  104,  110;  Jersey 


t 


40  PAEKER  V.    BETHEL  HOTEL  CO. 

City  Gaslight  Co.  v.  Consumers^  Gas  Co.,  40  N.  J.  Eq.^  427;  Broad* 
tcellx.  Merritt,  87  Mo.  95.  UntiRlissolution  has  been  thus  judicjallj^ 
pronounced,  neither  the  existence  of  the  corporation  or  its  jitle  to  its 

"We  are  bound  to  conclude,  therefore,  that  the  Bethel  Hotel  Company 
was  not  dissolved,  or  its  franchises  extinguished  for  any  of  the  reasons 
alleoed  by  the  defendants,  and  that  it  is  now  a  corporation  endued 
with  life,  with  authority'  to  own  property  and  exercise  all  the  powers 
conferred  on  it  by  its  charter. 

Defendants  insist  that  the  alleged  equitable  estate  of  Lucius  Frier- 
son  in  the  property  of  the  Bethel  Hotel  Company,  did  not  depend 
alone  upon  the  dissolution  of  the  corporation,  but  resulted  also  from 
the  fact  that  he  was  the  sole  owner  of  all  its  capital  stock.  The  pro- 
position is,  that  if  one  person  owns  all  the  shares  of  stock  of  a  corpo- 
ration which  owes  no  debts,  he,  in  virtue  of  such  ownership,  becomes  the 
equitable  owner  of  all  its  property,  or,  at  least,  may  sell  and  dispose 
of  it  by  deed,  if  he  choose  to  do  so.  This  proposition  is  argued  by 
counsel  for  defendant  with  force  and  ability,  and  is  supported  by  some 
authority.  It  has  found  favor  with  the  Supreme  Court  of  Mar^'land 
{Swift  V.  Smith,  65  Md.,  428,  433);  but  the  decision  of  that  learned 
Court  is  opposed  b}'  the  current  of  authority,  and  seems  to  us  to  over- 
look and  ignore  certain  principles  that  are  fundamental. 

A  corporation  and  its  shareholders  are  distinct  legal  entities.  In 
Keith  V.  Clark,  4  Lea,  718,  this  Court  held  that,  notwithstanding  the 
State  owned  all  the  stock  in  the  Bank  of  Tennessee,  "the  bank  and 
the  State  are  entirel}'  different  legal  entities,"  and,  in  Lillard  v.  Porter, 
2  Head,  175,  it  was  said,  "  stockholders  are  totally  distinct  from  the  cor- 
poration." Important  consequences  result  from_tbis  thIp^,  ^\\^  share- 
holders  are  neitlier  responsible  for  the  debts .  nor  for  the  torts  of  th 


corporation.  Tnthe  absence  of  special  circumstances,  the  shareholders 
cannot  be  parties,  either  plaintiffs  or  defendants,  in  actions  respecting 
corporate  rights,  nor  have  the}'  an}-  title  or  direct  interest  in  the  prop- 
<irty  of  the  corporation. 

"Shareholders,"  says  Thompson,  "are  not  joint  tenants  or  in  any 
other  sense  co  owners  of  the  corporate  property,  either  before  or  after 
its  dissolution.  The  title  to  it  rests  exclusively  in  the  legal  entity 
called  the  corporation.  A  share  of  the  capital  stock  merely  gives  the 
right  to  partake,  according  to  the  amount  put  into  the  fund,  of  the 
surplus  profits  of  the  corporation,  and  ultimately,  on  the  dissolution  of 
it,  of  so  nuich  of  the  fund  thus  created  as  remains  unimpaired  and  is 
not  ha1)le  for  debts  of  the  corporation."  Commentaries  on  the  Law  of 
Corporations,  Sec.  1071.  As  the  shareholders  have  no  direct  interest 
in  the  corporate  property,  they  cannot  convey  the  real  estate  of  the 
cor{)or.'itioi),  though  all  join  in  the  deed. 

Jn  W/icelock  v.  Moulton,  15  Vt.  519,  Kedfield,  J.,  stated  the  reasons 
for  the  rule  in  his  usual  clear  and  accurate  style.  In  that  case,  Moul- 
ton  and  Ilutciiinson,  sole  proprietors  and  owners  of  all  the  stock  of  a 
corporation,  conveyed  its  real  estate,  in  mortgage,  to  secure  the  repay- 


PAKKEiv  V.   KKTHEL  HOTEL  Cd.  41 

ment  of  monej'  borrowed  of  the  plaintiff,  Wheelock.  He  brought  suit 
to  enforce  his  mortgage.  Judge  Redfield  said :  "  The  fact  that  the 
signers  of  this  deed  owned  the  whole  of  the  shares  will  make  no  differ- 
ence in  regard  to  the  necessity  of  a  vote  of  the  corporation,  in  order 
to  convey  the  land.  The  title  to  the  land  was  in  the  corporation,  not 
in  the  individual  shareholders.  The  deed  of  one,  or  of  an}'  number  of 
the  stockholders,  will  not  affect  the  title  to  the  land.  The  share  owners 
are  not  tenants  in  common  of  the  land.  They  have  no  title  whatever 
to  any  of  the  propert}'  of  the  corporation.  It  is  true  that  one  who 
owned  all  the  shares  might  control  the  corporation,  and  so  he  could  if 
he  owned  a  majority  of  the  shares  ;  but  he  could,  in  either  case,  do  it 
onl}'  b}'  a  vote  of  the  corporation,  at  a  meeting  held  in  strict  accord- 
ance with  the  statutes  of  the  corporation." 

And  in  Humphreys  v.  McKissick^  140  U.  S.  304,  Mr.  Justice  Field, 
discussing  the  same  question,  said  :  "The  property  of  a  corporation  is 
not  subject  to  the  control  of  individual  members,  whether  acting  sep- 
aratel}'  or  jointh'.  They  can  neither  incumber  nor  transfer  that  prop- 
ert}', nor  authorize  others  to  do  so.  The  corporation  —  the  artificial 
being  created  —  holds  the  propert}',  and  alone  can  mortgage  or  trans- 
fer it,  and  the  corporation  acts  only  through  its  officers,  subject  to  the! 
conditions  prescribed  by  law." 

A  very  instructive  case  on  this  question  is  Baldwin  v.  Canfield,  26 
Minn.,  43.  The  facts  of  that  case  were  very  similar  to  those  of  this 
case,  and  the  direct  question  now  under  consideration  was  passed  upon. 
The  opinion  of  the  court  was  in  accord  with  the  cases  above  cited. 
See  also  Button  v.  Hoffman.,  61  Wis.,  20. 

We  are  thus  led,  both  by  reason  and  authority,  to  the  conclusion 
that  Lucius  Friersou,  as  sole  stockholder  of  the  Bethel  Hotel  Com- 
pany, had  no  title,  legal  or  equitable,  to  its  property.  The  title  to  the 
property  was  in  the  Bethel  Hotel  Company,  and  could  only  be  con- 
veyed by  it.  The  conveyance  of  its  real  estate  is  one  of  the__most 
solemnjicts  of  a  corporation,  and  it  can  only  be  done  in  pursuance  of  "^^  IfK 
a  vote  of  the  corporation,  and  by  deed  executed  in  the  form  and  mode  '^ 
pre"scribed  bv"law~  Thompson's  Commentaries  on  the  Law  of  Cor- 
porations, Sec.  5096.  At  common  law  a  corporation  could  not  exe- 
cute a  deed  to  realty  except  under  seal ;  and  the  general  corporations 
Act  of  1875,  under  which  the  Bethel  Hotel  Company  was  organized, 
provides  that,  if  the  corporation  have  no  seal,  it  shall  be  bound  by  the 
signature  of  its  name  by  a  duly  authorized  officer. 

To  have  made  a  valid  couA'eyance  of  the  real  estate  of  the  company, 
it  was  necessary,  therefore,  that  the  deed  should  have  been  executed 
in  the  name  of  the  corporation,  under  seal,  if  it  had  one,  and,  if  not, 
its  name  should  have  been  signed  by  an  agent  duly  authorized  by  its 
governing  agency,  its  board  of  directors.  Garrett  v.  Belmont  Land 
Co..,  94  Tenn.,  460.  As  we  have  seen,  nothing  of  this  kind  was  done. 
The  deed  to  defendant,  Webster,  was  executed  by  Lucius  Frierson,  in 
his  own  name  and  under  his  own  signature.  The  Bethel  Hotel  Com- 
pany, although  it  owned  the  property,  was  in  no  sense  a  party  to  it 


42 


PARKER   V.   BETHEL   HOTEL   CO. 


For  this  and  other  reasons  given,  the  deed  of  Lucius  Frierson,  oonvey- 
ino-  the  real  estate  of  the  Bethel  Hotel  Company  to  defendant,  W.  J. 
Webster,  was  void,  and  convej-ed  to  him  no  title  or  interest  therein. 

We  have  assumed  as  a  fact,  in  the  preceding  discussion,  that  Lucius 
Frierson  was,  in  truth,  the  sole  owner  of  all  the  shares  of  stock  of  the 
Bethel  Hotel  Company  at  the  date  he  executed  the  deed  to  Webster. 
But  was  he? 

[The  Court  then  held  that  the  pledgees  of  the  stock  acquired  title 
thereto,  even  though  they  took  with  notice  of  a  by-law  of  the  company 
that  no  trans^^jt^hoilld  be  effectual  unless  made  on  the  books  of  the 
company.)    Q,  ^  \J^ 


■j> 


>y^ 


BUNDY  V,   OPHIR  IRON   CO. 

1882.     38  Ohio  State,  300.1 

HE  Ophir  Iron  Company  was  a  corporation  consisting  of  ten  stock- 

Iders,  including  the  plaintiff,  Bundy. 

Bundy  indorsed  notes  of  the  Company  upon  an  agreement  that  he 
should  be  protected  by  a  mortgage  upon  the  Company's  real  estate. 

The  mortgage,  instead  of  being  executed  in  the  name  of  the  Com- 
pany as  grantor,  was,  b^'  mistake,  executedj,n  the  name  of  the  other 
nine  stockholders,  thus  :  — 

"  Know  all  men  by  these  presents,  that  Robert  Hoop"  [and  eight 
others  then  named],  "the  grantors  in  this  instrument,  and  who  together 
with  H.  S.  Bundy  are  the  sole  members  and  stockholders  in  the  Ophir 
Iron  Compan}',  a  corporation  duly  organized,  ...  in  consideration  of 
ten  thousand  dollars  paid  by  said  H.  S.  Bundy  to  said  Ophir  Iron 
Company,  ...  do  hereby  grant  ...  to  the  said  H.  S.  Bund}',  .  .  . 
all  the  right,  title,  interest  and  estate,  legal  and  equitable,  of  the  afore- 
said grantors  in  and  to  the  following  lands  and  tenements  of  the  said 
Ophir  Iron  Compan}',   .  .  ." 

-  [Then  follows  the  condition  that  the  deed  shall  be  void  if  the  Com- 
pany shall  pa}'  the  notes  indorsed  by  Bundy,  and  shall  save  Bundy 
harmless,] 

This  mortgage  deed  is  signed  with  the  individual  names  and  sealed 
with  the  individual  seals  of  the  nine  persons  named  as  grantors,  by 
whom,  as  grantors,  it  is  also  acknowledged  as  their  voluntary  act  and 
deed.     It  was  recorded  Dec.  5,  1874. 

On  April  17,  1875,  a  second  mortgage,  on  the  same  premises,  was 
duly  executed  by  the  corporatj[,on.  through  its  president,  to  secure  all 
its  creditors  except  Bundy.  The  latter  mortgage  recites  that  it  is  made 
"  subject,  however,  to  a  mortgage  in  favor  of  Hezekiah  S.  Bimdy,  for 
the  sum  of  §10,000,  of  record  in  said  County,"  &c. 


*  Statement  abridged.     Arguments  and  part  of  opinion  omitted,   -  Ed. 


/V, 


us  creditors  of  thcf-corpomtion  (^who  were  alkfC)       \  y- 

obtained  judgments  against  it;^P*    L^\    \^    '    I) 
s  described  in  the  mortgages.  ^      V      »,       —J      , 


',  4S75,-Tar 


.r 


In  May,  -TSys,  'v'anoil 
mortgagees  in   tlie  second  mortgage 
which  took  effect  as  liens  upon  the  land 

In  August,   1875,   Bund}-,    having   paid   the   notes   which   he   ha 
indorsed,  commenced   an   action   to   foreclose   his  mortgage,  making, 
various  creditors  of  the  corporation  parties.     The  District  Court  foun^  W 
that  the  mortgage  of  Bundy  was  invalid  as  against  the  subsequetir 
creditors  of  the  Company. 

Bundy  brought  error. 

W.    W.   Johnson,   with   whom    were   Jo/m  T.  Moore,    Porter 
Hadicay^  and  J.  B.  Forctker^  for  plaintiff  in  error, 

Wilby  &  Wall,  and  C.  A.  Atkinson,  for  certain  creditors.  ^  J~    r 

White,  J.     The  controversy  in  this  case  is  between  Bund}',  claiming     (^ 
as  first  mortgagee,  subsequent  judgment  creditors,  and  creditors  claim- 
ing under  the  second  mortgage.  ^ 

Two  questions  arise  for  consideration :  (1)    Whether  the  executio\^       i 
and  record  of  the  mortgage  of  December  5,  1874,  to  Bund}-,  give  him  U^ ' 
priority'?  and,  (2)  If  not,  does  the  recognition  of  the  first  mortgage,^        *^ 
the  second,  of  April  17,  1875,  have  that  effect?  f\9^-oA^4 

As  to   the   first   question :    The   consideration   upon   which  Bundy      v\    *M^^^^^ 
indorsed  the  notes  as  surety  of  the  corporation,  was  that  the  lattsVft^h  ^  \ 
should  give  him  a  mortgage  upon  its  property,  conditioned  that  it  would^  vjJ' 
pay  the  notes  at  maturity,  and  save  him   harmless  on  account  of  his  \     V  *•^ 
indorsements.     The  execution  b}'  the  stockholders  of  the  first  mort-AM.\*     r     ^ 
gage  was  the  attempted  fulfilment  of  the  agreement  on  the  part  of  the\         ^  "^iK 
corporation.  \}^\V'  V^ 

The  Ophir  Iron  Company  was  incorporated  under  the  act  of  April  I'WM^    t  ^       ^{ 
1858,  providing  for  the  creation  and  regulation  of  manufacturing  coob'  ' ,  .    i^Oi  ^ 
panics.     S.  &  C.  301,  304o     Under  that  act  the  directors  of  the  com/Pp  T.     |k      [Jq. 
pan}' are  required  to  be  stockholders;  and  while  it  is  declared  "  th^      k^^  \\t^ 
directors  shall  have  the  general  management  of  the  affairs  of  the  comjl'V<       ' 


.1. 


pany,"  yet  they  are  made  "  subject  always  to  the  control  of  the  stock-  ^jff^    JLji    -     fT 
holders "  in  reference  to  such  management.  iy\  A^.L,  i^     v 

The  mortgage  to  Bundy  now  in  question,  not  being  made  in  the  namef{jp^  /J^^l    ) 
of  the  corporation,  cannot,  as  against  it,  be  regarded  as  a  legal  mor^^    \^\     \     ^"^ 
gage;  but  it  is  a  good,  equitable  mortgage  against  the  corporatioii^     vf~jr^        "/^^ 
And  if  such  direction  were  necessary,  it  might  be  considered  as  equivaTC^  ^v     *H>1<^     ,y^ 
lent  to  a  direction  by  the  stockholders  to  the  proper  officers  to  make  H    .  SL^  ^' 

mortgage  in  the  name  of  the  corporation  to  Bundy.     But  such  direc^jC*"      <v\' 
tion  was  not  necessary  from  the  stockholders.     The   directors,  undei*  '^ 

the  agreement  by  which  they  obtained  Bundy's  indorsements  of  t 
notes  of  the  corporation,  were  bound  to  secure  him  by  jhe  mortgage  of 
the  corporation.  This  they  tailed  to  do,  by  sheer  mistake,  in  the  form 
of  executing  the  mortgage,  which  it  was  competent  for  a  court  of 
equity  to  correct;  and  which  it  was  their  duty  to  correct  without  the 
Hction  of  the  court     Clayton  v.  Freet,  10  Ohio  St.  544. 

If  it  were  not  for  our  statute  on  the  subject  of  mortgages,  this  equl 


/ 


44 


BUTTON   V.   HOFFMAN. 


table  mortgage  woiikl  prevail  over  all  lien-holders  and  other  claimants, 
except  bona  fide  purchasers,  for  value.  But  it  has  been  held,  in  a  long 
series  of  decisions,  that  a  mortgage  has  no  effect,  under  the  statute, 
either  in  law  or  equity,  as  against  subsequently  acquired  liens,  until  its 
execution  according  to  the  statute,  and  its  delivery  to  the  recorder  of 
the  proper  county  for  record.  Strang  v.  Beach,  11  Ohio  St.  283; 
Bercaw  v.  Cocl-erUJ,  20  Id.  1G3. 

But  such  execution  and  delivery  for  record  are  not  required  as 
between  the  original  parties  or  their  heirs.  Bloom  v.  Noggle,  4  Ohio 
St.  45  ;  Sidle  v.  Maxxcell,  Id.  236. 

The  second  question  is :  Does  the  recognition  of  the  first  mortgage 
in  the  second  have  the  effect  to  give  it  priority  ? 

We  think  this  question  must  be  answered  in  the  affirmative.  The 
second  mortgage  was  executed  in  due  form  by  the  corporation,  and 
was  made  expressl}'  subject  to  the  mortgage  to  Bundy.  Hence,  all 
subsequentl}'  acquired  liens  that  are  subject  to  the  second  mortgage  are 
necessarily  also  subject  to  the  first.  Coe  v.  Railroad  Co.,  10  Ohio  St. 
374  ;  Bercaw  v.  Cockerill,  20  Id.  166. 

It  is,  however,  claimed  on  behalf  of  some  of  the  judgment  creditors 
that  the  second  mortgage  was  not  accepted  b}'  the  mortgagees. 

[After  overruling  this  objection,  the  opinion  proceeds  as  follows]  : 

Whether  Bundy  does  not  stand  in  such  relation  to  the  second  mort- 
gage, as  to  entitle  him  to  insist  upon  it,  both  as  against  the  corporation 
and  the  subsequent  judgment  creditors,  without  reference  to  its  accept- 
ance, may  admit  of  question.  But  it  is  a  question  that  need  not  now 
be  considered.  Upon  the  case  as  made  in  the  record,  the  court  erred 
in  denying  to  Bundy  the  priorit}-  to  which  he  was  entitled.  The  judg- 
ment must  therefore  be  reversed  :  and  the  cause  is  remanded  for  further 


proceedings. 


Judgment  accordingly. 


% 


v^ 


Vx^r. 


BUTTON  V.    HOFFMAN. 

V,  1884.     61  Wkcon^in,  20. 

^PPEAL  from  tlie  Circuit  Court  for  Jackson  County. 
Replevin.     The   facts   sufficiently   appear   from    the   opinion.     Tiie 
defendant  appealed  from  a  judgment  in  favor  of  the  plaintiff. 
^        C.  J.  Ainsioorth  and  S.  U.  Pinneg,  for  ap[)ellant. 
Carl  C.  Pope,  for  respondent. 

Okton,  J.     This  is  an  action  of  replevin  in  which  the  title  of  the 
plaintiff  to  the  property  was  put  in  issue  by  the  answer. 

In  his  instructions  to  the  jury  the  learned  judge  of  the  Circuit  Court 
^ejiid:  "  I  think  the  testimony  is  that  the  plaintiff  had  the  title  to  the 
-property."     The  evidence  of  the  plaintiff's  title  was  that  the  property 


vP 


BUTTON   V.iHOFfMANi     /f^/^J     ^\ 
)^\\  as /'The  Hay  den  & 


belonged  to  a  corporation  known  as/*  The  Hayden  &  Smith  Manufac- 
turing Company,"  and  that  he  purchased  and  became  the  sole  owner  of 
all  of  the  capital  stock  of  said  corporation.  As  the  plaintiff  in  his 
testimony  expressed  it,  "I  bought  all  tlie  stock.  I  own  all  the  stock 
now.  I  became  the  absolute  owner  of  the  mill.  It  belonged  at  that 
time  to  the  company,  and  I  am  the  company."  There  was  no  other 
evidence  of  the  condition  of  the  corporation  at  the  time.  Is  this  suf- 
ficient evidence  of  the  plaintiffs  title  ?  We  think  not.  The  learned 
counsel  of  the  respondent  in  his  brief  says:  "The  property*  had  for- 
merly belonged  to  the  Hayden  &  Smith  Manufacturing  Company,  but 
the  respondent  had  purchased  and  become  the  owner  of  all  the  stock  of 
the  compan}-,  and  thus  became  its  sole  owner." 

From  the  ver}'  nature  of  a  private  business  corporation,  or  indeed  of 
any  corporation,  the  stockholders  are  not  the  private  and  joint  owners 
of  its  propert}'.  The  corporation  is  the  real  though  artificial  person 
substituted  for  the  natural  persons  who  procured  its  creation  and  have 
pecuniar}-  interests  in  it,  in  which  all  its  property  is  vested,  and  by 
which  it  is  controlled,  managed  and  disposed  of.  It  must  purchase, 
hold,  grant,  sell  and  convey  the  corporate  property',  and  do  business, 
sue  and  be  sued,  plead  and  be  impleaded,  for  corporate  purposes,  b^' 
its  corporate  name.  The  corporation  must  do  its  business  in  a  certain 
wa}',  and  b}'  its  regularl}-  appointed  officers  and  agents,  whose  acts  are 
those  of  the  corporation  only  as  they  are  within  the  powers  and  pur- 
poses of  the  corporation.  In  an  ordinar}-  copartnership  the  members 
of  it  act  as  natural  persons  and  as  agents  for  each  other,  and  with  un- 
limited liabilit}'.  But  not  so  with  a  corporation  ;  its  members,  as  natural 
persons,  are  merged  in  the  corporate  identity.  Ang.  &  A.  Corp. 
§§  40,  46,  100,  591,  595.  A  share  of  the  capital  stock  of  a  corpora- 
tion is  defined  to  be  a  right  to  partake,  according  to  the  amount  sub- 
scribed, of  the  surplus  profits  obtained  from  the  use  and  disposal  of  the 
capital  stock  of  the  company  to  those  purposes  for  which  the  company 
is  constituted.  Ang.  «&  A.  Corp.  §  557.  The  corporation  is  the  trustee 
for  the  management  of  the  property',  and  the_stockholders  are  the  mere 
cestui  que  trusts'  Gray  v.  Portland  Bank,  3  Mass.  365  ;  Eidman  v. 
iJoiniian,  58  Ills^  444  ;  s.  c.  11  Am.  Rep.  90;  4  Am.  Corp.  Cas.  350. 
The  right  of  alienation  or  assignment  of  the  propertj*  is  in  the  corpora- 
tion alone,  and  this  right  is  not  affected  by  making  the  stockholders  indi- 
vidually liable  for  the  corporate  debts.  Ang.  &  A.  Corp.  §  191  ;  Po2oe 
V.  Brandon,  2  Stew.  (Ala.)  401  ;  Whlticell  v.  Warner,  20  Vt.  444.  The 
propert}'  of  the  corporation  is  the  mere  instrument  whereb}-  the  stock 
is  made  to  produce  the  profits,  which  are  the  dividends  to  be  declared 
from  time  to  time  by  corporate  authority  for  the  benefit  of  the  stock- 
holders, while  the  property  itself,  which  produces  them,  continues  to 
belong  to  the  corporation.  Bradley  v.  Holds ir or t/i,  3  M.  &  "W.  422  ; 
Waltham  Bank  v.  Waltham,  10  Met.  334  ;  Tippets  v.  Walker,  4  Mass. 
595.  The  corporation  holds  its  property  onh-  for  the  purposes  for 
which  it  was  permitted  to  acquire  it,  and  even  the  corporation  cannot 


■A 


46  BUTTON   V.   HOFFMAN. 

diverb  it  from  sucli  use,  and  a  shareholder  has  no  legal  right  to  it,  or 
the  profits  arising  therefrom,  until  a  lawful  division  is  made  by  the 
directors  or  other  proper  officers  of  the  corporation,  or  by  judicial 
determination.  Aug.  &  A.  Corp.  §§  160,  190,  557;  Hyatt  \.  Allen, 
56  N.  Y.  553  ;  s.  c.  15  Am.  Rep.  449  ;  4  Am.  Corp.  Cas.  624.  A 
conveyance  of  all  the  capital  stock  to  a  purchaser  givesjto_such  pur- 
ohasei'  Qnh^an  equitable  interest  in  the  property  to  carry  on  business 
under  the  act  of  incorporation  and  in  the  corporate  name,  and  the  cor- 
poration  is  still  the  legal  owner  of  the  same.  Wilde  v.  Jenkins^ 
^Paige,  481.  A  legal  distribution  of  the  property  after  a  dissolution 
of  the  corporation  anS  settlement  of  its  affairs  is  the  inception  of  any 
title  of  a  stockholder  to  it,  although  he  be  the  sole  stockholder. 
Ang.  &  A.  CorpTXTT^n:        ~     ' 

These  general  principles  sufficiently  establish  the  doctrine  that  the 
owner  of  all  the  capital  stock  of  a  corporation  does  not  therefore  own 
its  property,  or  anj-  of  it,  and  does  not  himself  become  the  corporation, 
as  a  natural  person,  to  own  its  property  and  do  its  business  in  his  own 
name.  While  the  corporation  exists  he  is  a  mere  stockholder  of  it, 
and  nothing  else.  The  consequences  of  a  violation  of  these  prin- 
ciples would  be  that  the  stockholders  would  be  the  private  and  joint- 
owners  of  the  corporate  property-,  and  the}-  could  assume  the  powers  of 
the  corporation,  and  supersede  its  functions  in  its  use  and  disposition 
for  their  own  benefit  without  personal  liability,  and  thus  destro}-  the 
corporation,  terminate  the  business  and  defraud  its  creditors.  The 
stockholders  would  be  the  owners  of  tlie  propertjs  and  at  the  same 
time  it  would  belong  to  the  corporation.  One  stockholder  owning  the 
whole  capital  stock  could  of  course  do  what  several  stockholders  could 
lawfully  do.  It  is  said  in  Utim  w  Churchill,  33  N.  Y.  161,  "the 
interest  of  a  stockholder  is  of  a  collateral  nature,  and  is  not  the  interest 
of  an  owner  ; "  and  in  Hyatt  v.  Allen,  sujyra,  that  "  a  shareholder  in  a 
corporation  has  no  legal  title  to  its  property  or  profits  until  a  division 
is  made."  In  Winona,  <&c.  R.  Co.  v.  St.  P.,  &c.  R.  Co.,  23  Minn. 
359,  it  is  held  that  the  corporation  is  still  the  absolute  owner,  and 
vested  with  the  legal  title  of  the  property,  and  the  real  pnrtj'  in  interest, 
although  another  party  has  become  the  owner  of  the  sole  beneficial 
interest  in  its  rights,  property  and  immunities.  In  Baldwin  v.  Can- 
field,  26  Minn.  43,  it  was  held  that  the  sole  owner  of  the  stock  did  not 
own  the  land  of  the  corporation  so  as  to  convey  the  same.  In  Bartlett 
V.  Brickett,  14  Allen,  62,  an  action  of  replevin  was  brought  by  A.,  B. 
and  C,  as  the  "Trustees  of  the  Ministerial  Fund  in  the  North  Parish 
in  Haverhill,"  which  was  the  corporate  name.  In  portions  of  the  writ 
tl)e  i)laintiffs  were  referred  to  as  "the  said  trustees"  and  "the  said 
plaintiffs."  In  the  bond,  "A.,  B.  and  C,  trustees  as  aforesaid," 
became  bound,  and  the  officer  in  his  return,  certified  that  he  had  taken 
a  bond  "  from  the  within-named  A.,  B.  and  C,"  and  the  property 
was  receipted  by  "A.,  B.  and  C,  plaintiffs."  It  was  held  that  the 
action  was  not  l)y  the  corporation,  as  it  should  have  been,  and  judg- 


BUTTON   V.   HOFFMAN.  47 

ment  was  rendered  for  the  defendant.  It  is  said  in  Yan  Allen  v. 
Assessors,  3  Wall.  584,  "  the  corporation  is  the  legal  owner  of  all  the 
propert}'  of  the  bank,  both  real  and  personal."  In  Wilde  v.  Jenkins, 
supra,  where  a  copartnership  bought  all  the  property  and  eflfects, 
together  with  the  franchises  of  a  corporation,  and  elected  themselves 
trustees  of  the  corporation,  it  was  held  that  the  corporation  was  not 
dissolved,  and  that  the  legal  title  to  the  real  and  personal  property 
was  still  in  the  corporation  for  their  benefit.  In  Mickles  v.  M.  C. 
Bank,  11  Paige,  118,  it  was  held  that  although  a  corporation  was 
deemed  to  have  surrendered  its  charter  for  non-user,  it  was  not  dis- 
solved, and  would  not  be  until  its  dissolution  was  judicially  declared, 
and  that  until  then  its  propert}'  could  be  taken  and  sold  by  its  judg- 
ment creditors.  In  Bennett  v.  Am.  Art  Union,  5  Sandf.  614,  it  was 
held  that  "  as  a  general  rule,  the  whole  title,  legal  and  equitable  (to  its 
property),  is  vested  in  the  corporation  itself,"  and  that  the  individual 
members  have  no  other  or  greater  interest  in  it  than  is  expressly  given 
to  them  by  the  charter,  and  the  prayer  of  the  complainant  as  a  share- 
holder in  the  Art  Union,  for  an  injunction  against  a  certain  disposition 
of  its  property  was  denied,  because  he  had  no  interest  in  it.  See  also 
Goodwill  v.  Hardy,  57  Me.  143, 

It  is  true  that  none  of  the  above  cases  are  precisely  parallel  with  the 
present  case  in  facts,  but  they  are  sufficientl}'  analogous  to  be  authorit}' 
upon  the  principle  that  the  plaintiff,  as  the  sole  stockholder  of  the  cor- 
poration, is  not  the  le^al_  owner  of  itj^  property.  He  may  havg_jm- 
equitable  interest  in  it,  but  in  this  action  he  must  show  a  legal  title  to 
the  "property  in.  himself  in  order  To  recoverTand  he  has  shown  that 
such  title  is  in  another  person.  Timj)  v.  Dockham,  32  Wis.  146  ; 
Sensenbrenner  y7l\iatheics^^&^N\s.  250;  s.  c.  33  Am.  Rep.  809.  In 
analogy  to  the  above  principle  it  was  held  in  Murphy  v.  Ilanrahan,  50 
Wis,  485,  that  the  sole  heirs  of  an  estate  did  not  have  such  a  legal 
title  to  a  promissory  note  given  to  their  father  as  would  entitle  them  to 
sue  the  maker  upon  it,  because  the  title  to  it  was  in  the  administrator, 
and  they  could  obtain  the  title  only  by  administration  and  distribution 
according  to  law.  The  heirs  in  that  case  certaiuh'  had  as  much  equi- 
table interest  in  that  note  as  this  plaintiff  has  in  the  property-  in  con- 
troversy. The_want  of  title  to  the  property  being  fatal  to  the  plaintiffs 
reeoy  ery  inthe  action  between  the  present  parties,  other  alleged  errors 
will  nofT5e  considered. 

By  the  Court.     The  judgment  of  the  Circuit  Court  is  reversed,  and 
the  cause  remanded  for  a  new  trial. 

Reversed  and  remanded 


^y 


^ 


.r 


r 


^      GALLAGHER  V.   GEKMANIA   BREWING   CO. 
A    ^/GALLAGHER  v.   GERMANIA  BREWING  CO. 

1893.     53  Minnesota,  214.1 

Freeman  P.  Lane,  and  Tfw?.  H.  Briggs,  for  appellant. 

Gretchen  &  3IcHugh^  for  respondents. 

Mitchell,  J.  The  plaintiff,  as  assignee  of  one  Westphal,  under  a 
general  assignment  for  the  benefit  of  creditors,  brought  this  action  to 
recover  for  goods  sold  and  delivered  by  his  assignor  to  the  defendant 
corporation.  Barge  &  Vander  Horck  intervened,  and  set  up  in  their 
comi)laint  that  they  owned,  and  for  nearly  two  years  had  owned  (each 
one  half),  all  the  capital  stock  of  the  defendant,  no  other  person  but 
themselves  having  an}-  interest  in  the  stock  or  propert}"  of  the  corpora- 
tion ;  that  each  of  them  had  a  valid  and  unsatisfied  judgment  against 
Westphal  upon  a  cause  of  action  which  accrued  before  the  assignment 
to  plaintiff ;  that  Westphal  was,  and  for  over  two  years  had  been, 
utterl}'  insolvent ;  and  that  his  estate,  of  which  plaintiff  is  the  assignee, 
was  so  hopelessl}'  insolvent  that  it  was  insufficient  to  pay  even  the 
expenses  of  administering  the  assignment.  The  relief  sought  was  that 
their  claims  against  Westphal  might  be  allowed,  in  equal  amounts,  as 
equitable  set-offs  to  the  claim  of  the  plaintiff  against  the  defendant  cor- 
poration. From  an  order  overruling  a  demurrer  to  the  complaint,  the 
plaintiff  appeals,  his  contention  being.  First,  that  Barge  &  Vander 
Horck  had  no  such  interest  in  the  litigation  as  to  entitle  them  to  inter- 
vene ;  second,  that  their  claims  cannot  be  set  off  against  a  claim 
against  the  corporation,  because  a  corporation  is  a  legal  entity,  entirely 
distinct  from  its  stockholders.  These  two  propositions  amount  really 
to  the  same  thing,  for,  if  Barge  &  Vander  Horck  cannot  set  off  their 
claims  against  that  of  plaintiff  against  the  corporation,  they  have  no 
sucli  interest  in  the  subject  of  litigation  as  would  entitle  them  to  inter- 
vene ;  on  the  other  hand,  if  their  claims  are  proper,  equitable  set-offs, 
their  right  to  intervene  for  the  purpose  of  setting  them  up  is  very  clear. 
The  case  is  certainly  a  novel  one,  for  we  doubt  whether  an  instance 
can  be  found  in  the  books  where  stockholders  ever  attempted  to  set  up 
their  several  equities  by  way  of  set-off  to  claims  against  the  corpora- 
tion. Of  course,  the  want  of  a  precedent  is  b^'  no  means  controlling 
■with  courts,  especially  in  administering  equitable  relief;  but  it  would 
seem  that,  if  the  relief  iiere  asked  was  consistent  with  legal  or  equita- 
ble principles,  some  case  would  be  found  where  it  had  been  granted. 
The  facts  of  tlie  present  case  appeal  to  a  natural  sense  of  justice,  for 
while,  by  fiction  of  law,  a  corporation  is  a  distinct  entit}',  yet  in  reality 
it  is  an  association  of  persons  who  are  in  fact  the  beneficial  owners  of 
all  the  corporate  {)roperty.  Hence,  if  interveners  cannot  set  off  their 
claims,  the  practical  result  is  tliat  Westphal's  estate  will  collect  its 
entire  claim  out  of  what  is  really  their  property,  while  tlie  estate  is  at 


1  Statemeut  and  ar^ruiiieiits  omitted.  —  Ed. 


/! 


(D/S^/ 


the  same  time  indeDted  to  theni-  on  ^^ms  of  gre^r  aSibunt,  ^hic^L 
they  will  wholly  lose  because  of  Westphal's  insolvenc}' ;  but,  as  ha^j^ 
been  often  said,  hard  cases  are  liable  to  make  bad  law. 

The  right  of  equitable  set-off  is,  of  course,  not  derived  from,  o 
dependent  upon,  statute,  but  rests  upon  a  distinctly  equitable  doctrine, 
which  courts  of  equity  have  applied  on  certain  well-recognized  equitable 
grounds,  the  object  being  to  effect  a  clear  equity  and  prevent  irremedi- 
able injustice  ;  and  it  ma}-  be  stated  as  a  general  rule  that,  whenever 
necessary  to  accomplish  that  end,  the  courts  will  permit  an  equitable 
set-off,  although  the  debts  accrued  in  different  rights  ;  as,  for  example, 
by  allowing  a  separate  debt  to  be  set  off  against  a  joint  debt,  or, 
conversel}',  a  joint  debt  against  a  separate  debt.  Thej-  will  also  dis- 
regard the  nominal  parties  to  the  record,  and  consider  the  real  parties 
in  interest ;  as,  for  example,  when  the  assignor  of  a  chose  in  action 
sues  for  the  benefit  of  the  assignee,  or  a  trustee  for  the  benefit  of 
the  cestui  que  trust.  Hence,  had  the  plaintiff's  claim  been  a  joint 
one  against  the  interveners,  there  would  have  been  no  doubt  of 
their  right  to  set  off  their  separate  claims  against  it,  for  insol- 
venc}'  is  well  recognized  as  a  distinct  equitable  ground  for  allowing^ 
such  a  set-off.  But  such  a  case  is  not  analogous  to  the  present.  To 
allow  the  set-off  here,  it  is  necessary  to  wholly  ignore  the  legal  doc- 
trine, or  fiction,  whichever  you  may  call  it,  that  a  corporation  is  an 
entity  separate  and  distinct  from  the  body  of  its  stockholders,  and  to  I 
treat  it  as  a  mere  association  of  individuals  who  are  the  real  parties  in| 
interest.  In  dealing  with  the  rights  of  creditors,  and  the  obligations 
existing  between  a  corporation  and  its  shareholders  by  reason  of  their 
contract  of  membership,  undoubtedly  the  courts  often  find  it  necessarj' 
to  consider  the  real  parties  in  interest  as  the  individual  shareholders ; 
but  it  may  be  laid  down  as  a  rule  that,  except  in  such  cases,  it  h.as  been 
found  absolutely  essential,  for  the  administration  of  justice,  to  treat  a 
corporation  as  a  collective  entit}',  without  regard  to  its  individual  share- 
holders. In  no  other  wa}-  can  the  title  to  corporate  property  be  kept 
free  from  complication  and  uncertaint}'.  The  transferable  nature  of 
stock  in  a  corporation  is  also  a  good  reason  why  the  theor}'  of  a  cor- 
porate  entitj'  should  be  preserved,  and  why  it  is  necessary  to  discrim- 
inate sharply  between  corporate  rights  and  obligations  and  those  of  I 
shareholders  personall}'.  If  the  rights  or  liabilities  of  a  corporation 
could  be  affected  by  the  acts  of  the  stockholders,  except  when  acting 
in  the  corporate  name,  or  if  shareholders  could  set  up  their  several 
equities  against  persons  having  claims  against  the  corporation,  or,  con- 
versely, if  claims  in  favor  of  the  corporation  could  be  set  off  against 
claims  against  individual  stockholders,  it  can  easily  be  seen  into  what 
confusion  and  chaos  corporate  affairs  would  inevitablv  fall.  Inasmuch- 
as  the  two  interveners  own  all  the  stock  of  this  corporation,  the  facts 
of  this  case  seem  comparatively  free  from  embarrassments,  and  the 
contention  of  respondent  quite  plausible.  But,  suppose  there  were 
fifty  other  stockholders  (which  would  not  alter  the  principle),  what 


50  WARING   V.   CATAWBA  CO. 

would  be  the  result?  Could  interveners  then  interpose  their  claims  as 
set-offs,  and,  if  so,  could  the\'  do  so  to  the  full  amount  of  their  claims, 
or  only  in  the  proportion  which  their  shares  bore  to  the  whole  capital 
stock?  And,  if  the  former,  would  the}-  have  a  claim  for  the  excess 
against  the  corporation,  or  a  right  to  call  on  the  other  stockholders  for 
contribution  ? 

Again,  the  right  of  set-off,  if  any  exists,  must  be  mutual.  Hence,  if 
stockholders  can  interpose  their  individual  demands  as  set-offs  to  a 
demand  against  the  corporation,  it  follows  that  a  defendant  can  set  up 
demands  against  the  individual  stockholders  as  set-offs  to  demands  in 
favor  of  the  corporation.  Illustrations  might  be  multiplied  indefinitely 
to  show  that  to  recognize  a,\\y  such  right  would  result  in  the  worst  sort 
of  complications,  and  that  the  only  safe  or  sound  rule  is  to  adhere 
strictly,  in  such  cases,  to  the  doctrine  of  a  corporate  entit}'  distinct 
from  the  individual  stockholders.  What  means,  if  any,  the  interveners 
might  have  had,  or  may  hereafter  have,  of  protecting  themselves,  it  is 
not  now  our  business  to  inquire,  but  we  are  clear  that  their  claims 
against  plaintiff's  assignor  are  not  the  subjects  of  equitable  set-off  to  a 
claim  against  the  defendant  corporation.  Order  reversed. 


WAEING  V.   CATAWBA   CO. 

J,  1797.     2  Bay,  South  Carolina,  109.1 

Assumpsit  for  goods  sold,  and  for  work  and  labour,  &c. 

Plea  in  abatement. 

This  case  came  before  the  court  upon  a  plea  in  abatement,  which 
pleaded  that  plaintiff  was  himself  a  member  of  the  company,  and 
therefore  could  not  maintain  any  action  against  it  in  his  individual 
capacity'. 

Trezevant^  for  plaintiff. 

Attorney-  Genercd^  coyxtra. 

The  Court,  after  hearing  the  arguments,  overruled  the  plea  in  abate- 
ment, as  containing  principles  subversive  of  justice  ;  but  they  observed, 
that  the  two  cases  of  Bourdeaux  and  Drayton  against  the  Sa.ntee  Canal 
Company,  had  settled  this  point,  as  they  had  both  been  allowed  by 
this  court  to  maintain  their  actions  for  their  salaries,  &c..  against  the 
company,  as  well  as  the  cases  respecting  the  other  i)ublic  societies, 
mentioned  in  the  argument. 

The  plaintiff  was  then  allowed  to  go  on  and  prove  his  debt  to  a 
jury. 

Present,  Burke,  Grimke,  and  Bay  ;  but  ns  Judge  Grimke  was  a 
member  of  the  compan}-,  he  declined  giving  an  opinion. 

^  Arguments  omitted.  —  En. 


FOSTER   V.   COMMISSIONERS   OF   IjNLAND   REVENUE.  51 


JOHN  FOSTER  &  SON  LIMITED  v.  COMMISSIONERS   OF 
INLAND   REVENUE. 

1893.     L.  R.  (1894)  I  Q.  B.  516.1 

Case  stated  by  Commissioners  of  Inland  Revenue. 

The  Stamp  Act  imposes  an  ad  valorem  duty  "  upon  conveyance  or 
transfer  on  sale  of  any  property."  The  consideration,  as  appears  from 
another  clause  of  the  Act,  need  not  always  be  money,  but  may  be  stock 
lor  marketable  securities.  The  Act  provides  that  the  term  "conveyance 
on  sale"  includes  every  instrument  "  whereby  any  property  upon  the 
sale  thereof  is  legall}'  or  equitably  transferred  to  or  vested  in  the 
purchaser  or  any  other  person  on  his  behalf  or  b}'  his  direction." 

Eight  persons,  who  had  for  many  Aears  carried  on  business  in  part- 
nership as  John  Foster  &  Son,  being  desirous  that  the  firm  should  be  ^iiy 
reconstructed  as  a  Limited  Company  (registered  with  limited  liabilit}-                .    1} 
under  the  Companies  Acts),  agreed  to  terminate  their  partnership,  and         /V/'^^^mT*'     A_  ' 
to  transfer  all  the  firm  property  to  a  Limited  Company,  styled  John  ,/'  -^  /^    ,  •*■i^    j-     i   )) 
Foster  &  Son  Limited,  to  be  formed  of  all  the  partners  exclusively  Vo^-^     i  «/»/*    1  ,/r 
for  the  purpose  of  taking  over  the  same  subject  to  all  the  liabilities  ; 


the  whole  of  the  ordinary  shares,  preference  shares,  and  debenture  stock/  ,)f^i     vhA  I    .J?  "* 
of  the  company  to  be  allotted  among  the  partners  in  proportion  to  theirp  y   i  v        ''»a  [ 
respective  shares  in  the  partnership  estate.     In  accordance  with  this^  ,\iJ^ 


agreement,  by  deed  of  indenture  between  the  eight  persons  who  comt  ■*  Cf{a^'^    lyy^'^Kf 
posed  the  partnership  and  the  Limited  Company',  registered  under  thoL    ^^       f\''^    ^\ 
Companies  Acts  under  the  name  of  John  Foster  &  Son  Limited,  all  th*^T      ^P"      >^   *"* 
partnership  property  was  conveyed  to  the  Limited  Compau}-.  ^P    Ah        a     I       i 

The  Commissioners  assessed  an  ad  valoretn  dut}-  upon  the  deed,  j{s   >)  t^  \b-^^ 

coming  under  the  head  of  a  '•  conveyance  or  transfer  on  sale."        \r^^    4/<^A     "^  a 

In  the  Queen's  Bench  Division,  Cave,  J.   held  that  the  assessmenft^ ''^      .  *^^  ^(Li' 
was  erroneous,  and  Wright,  J.  took  the  opposite  view.     Wright,  J.,      j^     ^^^^      ^H^ 
withdrew  his  judgment,  and  the  appeal  from  the  Commissioners  wg^         t^ 
allowed.  yy       ,     ^"^  U 

From  this  decision  of  the  Divisional  Court,  the  defendants  appeVrejT/rjjy    |  *" 
to  the  Court  of  Appeal.  A*/  ^^    y^^'^v 

Sir  Charles  Russell,  A.  G.,  and  Danckwerts  {Sir  John  Bif/hiX  fjj/^    a 


S.  G.,  with  them),   for  appellants.  ^nM 


Firday,  Q.  C,  and  A.  R.  Kh-hy,  for  respondents.     [Argume 
condensed  in  C9  L.  T.  x.  s.  p.  817.]  <3 

In  order  to  constitute  a  sale  there  must  be  two  different  parties  capa  ,  ,  -    ^ 
ble  of  making  an  agreement,  and  there  must  be  two  different  things,',/       "^ 
the  property  sold  and  the  price  given  for  it.     In  the  present  case  there  '^      .     Y^ yjS 
has  merely  been  a  re-arrangement  of  ownersliip.     The  parties  remained  \^^^  W  *'^\. 

the  same,  and  nothing  was  parted  with,  and  nothing  was  given.     It^    tM.^     Q/'^      "^ 

1  Statement  abridged.    Opinion?  in  Queen's  Bench  Division,  and  part  of  argument^      J^  i 
emitted.  — Ed.  If       (^-        .>^ 


#-  ^^-M^^^y^r^ 


ik^^f 


e^' 


FOSTER   V.   COMMISSIONERS   OF   INLAND   REVENUE. 


\yj      w^s  like  a  conveyance  of  property  to  trustees  upon  trust  to  carry  on 
IjLUie   business,   and  divide  tlie  proceeds  arising  from  it  amongst  the 
conveying  persons. 

LiNDLEY,  L.  J.  I  confess  tliat,  with  great  deference  to  Cave,  J., 
I  cannot  see  the  difficulty  in  this  case. 

The  material  sections  of  the  Act  of  1870  must  first  be  considered. 
[The  Lord  Justice  then  read  ss.  70  and  71  of  the  Stamp  Act,  1870,  and 
continued]  :  The  importance  of  s.  71,  to  ray  mind,  is  this:  it  shews 
that  there  may  be  a  convej'ance  on  sale,  although  the  consideration  for 
it  is  not  cash  or  mone}',  but  ma}-  include  or  consist  of  stock  or  market- 
able securities.  The  definition  of  "  stock  "  and  "  marketable  securities  " 
will  be  found  in  s.  2.  Then  s.  78  imposes  a  stamp  duty  on  conveyances 
not  otherwise  charged,  and  the  schedule  shews  what  the  stamps  are 
that  are  imposed  upon  convej'ances  that  are  charged.  First  we  have 
'"conveyance  or  transfer  whether  on  sale  or  otherwise,"  of  certain^ 
stocks  and  dividends.  The  present  case  does  not  come  within  that 
head.  Then  we  have  "conveyance  or  transfer  on  sale,  of  any  prop- 
erty" .  .  .  "where  the  amount  or  value  of  the  consideration  for  the 
sale  does  not  exceed  £5."  That  fits  in  with  ss.  70  and  71.  Then  we 
come  to  "  Conveyance  or  transfer  b}'  way  of  security  of  any  property 
or  of  any  security';"  and  then  we  have  "Conveyance  or  transfer  of 
any  kind  not  hereinbefore  described."  We  must  accordingl}'  consider 
under  which  of  these  heads  the  particular  deed  in  this  case  comes.  It 
certainlj'  does  not  come  under  the  first,  nor  under  "  conve3'ance  or 
transfer  by  way  of  securit}'  of  an}'  property,"  and  the  alternative  is 
between  "  conveyance  or  transfer  on  sale  "  and  "  conveyance  or  transfer 
of  any  kind  not  hereinbefore  described." 

Now,  the  document  in  this  case  is  an  indenture  made  between  eight 
gentlemen  of  the  first  eight  parts,  and  "John  Foster  &  Sons  Limited 
(hereinafter  called  '  the  compan}' '),  of  the  9th  part."  Pausing  there  for 
a  moment :  although  the  persons  of  the  first  eight  parts  may  be,  and 
were  members,  and  the  only  members,  of  John  Foster  &  Co.  Limited, 
John  Foster  &  Co.  Limited  is  not  those  eight  individuals  ;  John  Foster 
&  Co.  Limited,  is  a  corporation.  We  have  accordingly  two  parties, 
one  party  consisting  of  several  individuals,  and  the  other  party  consist- 
ing of  a  corporation.  Whether  they  are  or  are  not  the  members,  or  the 
only  members  of  the  corporation,  is  wholly  immaterial.  The  corpora- 
tion is  a  total!}'  different  person  from  them  in  any  capacity  j'ou  choose 
to  assign  to  them  except  a  corporate  one.  [Tlie  Lord  Justice  then 
stated  the  recitals  in  and  the  operative  part  of  the  conveyances,  and 
continued]  :  — 

Then  the  parties  of  the  first  eight  i)arts  put  their  seals  to  the  instru- 
ment, and  the  comi)any  puts  its  seal  to  it.  Now,  what  is  that  instrument? 
It  is  certainly  a  conveyance  of  proi)ert3' ;  that  is  obvious.  In  order  to 
amount  to  a  conveyance  of  property  there  must  be  a  person  conveying 
and  a  person  taking,  and  3'ou  have  them  both  here.  The  persons  con- 
voying are  the  i)ersons  named  in  the  first  eight  parts,  and  the  persons 
taking  arc  the  corporation  named  in  the  ninth  part. 


FOSTER  l\   COMMISSIONERS   OF   INLAND   REVENUE,  53 

Now,  what  is  the  consideration  ?  The  consideration  for  the  transfer 
of  this  propert}'  is,  I  agree,  not  money,  but  it  is  stocks  and  securities, 
which  for  this  purpose  are  to  be  regarded  as  equivalent  to  money  b}' 
reason  of  s.  71  of  the  Act  to  wliich  I  have  already  alluded.  Then  what 
have  we  got?  To  sum  it  up  shortl}',  it  is  a  conveyance  of  property 
from  one  person  to  another,  for  monej',  or  what  is,  according  to  the 
provisions  of  the  statute,  equivalent  to  mone}-.  What  is  that  except  a 
conveyance  on  sale  ?  What  else  can  j'ou  call  it  ?  It  is  certainly  not  a 
gift ;  it  is  not  an  exchange;  it  is  not  a  partition  ;  it  is  not  a  mortgage. 
I  do  not  know  what  it  is  unless  it  is  a  conveyance  on  sale.  I  do  not 
know  what  is  necessary  to  constitute  a  sale,  except  a  transfer  of  prop- 
ert}-  from  one  person  to  another  for  money,  or  for  the  purposes  of  the 
Stamp  Act,  for  stock  or  marketable  securities. 

But  then  it  is  argued  that  it  is  only  a  redistribution  of  propert}'.  I 
do  not  consider  it  a  redistribution  at  all.  It  is  an  entire  transfer  of 
propert}'  from  one  set  of  people  to  another  person  altogether,  and 
whether  there  are,  as  there  ma}'  well  be  hereafter,  additional  persons 
taking  shares  in  this  company,  is  perfecti}'  immaterial. 

Again  it  is  argued  on  behalf  of  the  appellants  that  this  instrument  is 
in  substance  nothing  more  than  a  conveyance  to  a  trustee  to  carry  on 
the  business  in  trust  for  the  grantor.  Just  tr}'  that.  Supposing  there  is 
a  conveyance  by  half-a-dozen  people,  transferring  their  property  to  a 
trustee  on  trust  to  carry  on  the  business  for  them,  can  3'ou  in  any  sense 
of  the  word,  legal  or  business-like,  or  otherwise,  call  that  trustee  a 
buyer?  There  is  no  buying,  there  is  no  sale  to  him  at  all,  nor  is  there 
any  money,  or  stock,  or  securities,  or  anything  else  parted  with  b}'  him. 
Then  it  was  urged  that  these  shares  can  derive  EO  value  unless  the 
company  gets  this  propert}'  transferred  to  them.  That  is  possible 
enough.  That  is  to  say,  in  other  words,  that  the  shares  in  the  com- 
pany would  be  valueless  unless  the  compan}-  had  assets.  Of  course 
they  would  be,  but  that  does  not  affect  the  question  whether  there  is  a 
sale  or  a  conve3'ance  or  not.  I  think  myself  that  Cave,  J.,  has  attached 
too  little  importance  to  the  fact  that  you  have  here  a  distinct  seller, 
and  a  distinct  buyer,  and  that  in  point  of  law  it  is  immaterial  that  in 
the  present  case  the  buyer  is  a  corporation  which  consists  of  the  eight 
persons  who  formed,  and  who  are,  the  partners.  The  appeal  must  be 
allowed . 

Kat,  L.  J.  I  am  of  the  same  opinion.  With  deference  to  Cave,  J., 
it  seems  to  me  impossible  to  hold  that  this  transaction  was  anything 
else  than  a  conveyance  on  sale.  As  pointed  out  on  the  face  of  the 
statute,  the  consideration  ma}'  be  money  or  money's  worth.  Money's 
worth  certainly  is  sufficiently  expressed  by  a  number  of  shares  and 
debentures  of  an  existing  corporation,  which,  in  effect,  constituted  the 
consideration  for  the  particular  transfer  in  this  case.  Now,  that  there 
was  a  conveyance  is  beyond  all  question.  The  persons  who  are  named 
as  vendors  in  the  deed  have  divested  themselves  of  their  property  in  the 
subject  of  that  conveyance;  and  all  that  property  is  vested  in  an  entirely 


54  FOSTER   V.   COMMISSIONERS   OF   INLAND   REVENUE. 

independent  and  separate  body,  —  namely,  a  corpo'^ation.  Suppose  that 
corporation  liad  consisted  of  altogether  different  persons,  no  one  for  a 
moment  would  doubt  that  this  was  a  conveyance  on  sale.  Suppose 
there  had  been  one  person  in  it  different,  there  is  nothing  that  I  have 
heard  in  the  argument  which  induces  me  to  suppose  that  even  in  that 
case  it  could  have  been  doubted  that  this  was  a  conve^'ance  on  sale. 
But  the  argument,  as  I  understand  it,  is  this,  —  that  the  individual  cor- 
porators who  composed  that  coi-poration  were,  in  fact,  the  ver}'  identical 
persons  who  were  conveying  this  property  to  the  corporation,  and  the 
corporation  had  no  other  property  except  this  which  it  took  under  its 
conveyance  ;  and  that,  as  the  onl}-  value  of  the  shares  and  debentures 
was  derived  from  this  verj'  property  which  the  individual  corporators 
were  conveying  to  the  corporation,  the  conveying  partners  either  got 
no  consideration  for  that  which  the}'  conveyed  other  than  part  of  the 
property  actually  conveyed,  or  the}-  got  no  consideration  at  all.  Now, 
I  do  not  follow  that  argument  in  the  least.  I  think  it  is  a  fallacy  from 
beginning  to  end.  In  the  first  place,  a  corporation  is  a  different  thing 
from  the  individuals  who  compose  it ;  and,  secondly,  the  shares  and 
debentures  of  a  corporation  are  not  the  same  thing  as  the  property 
which  that  corporation  owns.  You  may  say,  in  one  sense,  that  the 
property  is  a  security  for  the  value  of  those  shares.  The  value  of  those 
shares  in  the  market,  which  observe  are  immediately  transferable,  may 
depend  upon  the  solvency  of  the  company,  the  amount  of  property  it 
possesses,  and  its  chance  of  carrying  on  a  profitable  business.  To  say 
that  the  shares  and  debentures  are  part  of  that  property  seems  to  me 
to  be  a  complete  confusion  of  terms.  Suppose  the  case,  which  I  put 
during  the  argument,  of  a  sale  of  real  estate,  and  the  whole  of  the 
purchase-money  not  to  be  paid  at  once  in  cash,  but  to  be  secured  on 
mortgage  on  that  real  estate  ;  and,  if  you  like,  in  order  to  make  the 
analogy  perfect,  suppose  the  purchaser  had  no  other  property  than  that 
property,  would  the  transaction  be  the  less  a  sale  for  that  reason? 
Still  the  consideration  given  would  be  a  certain  amount  of  cash  which 
would  be  left  on  the  security  of  the  estate  ;  but  I  have  never  yet  heard 
tliat  because  the  whole  of  the  purchase-money  upon  a  sale  of  real  estate 
was  left  on  mortgage  of  the  real  estate,  that  for  that  reason  the  trans- 
action ceased  to  be,  or  was  prevented  from  being,  a  sale.  Yet,  really, 
that  is  what  the  argument  in  this  case  comes  to.  I  confess  I  am  not 
able  to  agree  with  it.  Nothing  else  was  suggested  which  should  pre- 
vent this  transaction  from  being  a  sale,  and  it  seems  to  me  clearly  to 
De,  under  the  words  of  this  statute,  "  a  conveyance  on  sale"  for  a  con- 
aidcration,  which,  if  not  money,  at  least  is  money's  worth.  I,  therefore, 
-rt'ith  all  deference  to  Cave,  J.,  think  that  his  decision  must  be  reversed, 
und  the  appeal  allowed. 

A.  L.  Smith,  L.  J.  The  question  in  this  case  is  whether  the  instru- 
•ncnt  of  November  27,  1891,  is  a  conveyance  or  transfer  on  sale  of  any 
of  the  property  mentioned  under  the  second  head — "  conveyance  oi 
transfer"  —  in  the  schedule  to  the  Stami)  Act  of  1870. 


FOSTER  V.   COMMISSIONERS   OF   INLAND   REVENUE.  55 

Now,  in  order  to  find  out  what  is,  or  is  not,  a  conveyance  or  transfer 
on  sale  of  any  property  in  tlaat  second  head  of  the  schedule,  1  must 
refer  to  ss.  70  and  71  of  the  Act.  And,  reading  both  these  sections 
together,  it  seems  to  me  that  the  term  "  conveyance  on  sale"  includes 
every  instrument  whereby  any  property,  upon  the  sale  thereof,  is  trans- 
ferred to  or  vested  in  the  purchaser  in  consideration  of  any  stock  or 
marketable  security.     That  is  the  definition. 

First  of  all,  then,  is  this  an  instrument  whereby  any  property  is 
transferred  to  or  vested  in  the  purchaser  ?  I  beg  to  say.  Yes.  It  is  an 
instrument  upon  the  face  of  which  the  actual  land  of  the  vendors,  and 
the  trade-marks  which  are  their  property,  are  transferred  to  a  limited 
company.  I  do  not  think  that  this  is  disputed,  and  it  does  not  appear 
to  me  to  be  disputed  so  far,  in  the  judgment  of  my  brother  Cave  ;  but 
what  he  says  is  that  this  is  not  an  instrument  whereb\'  any  property-, 
upon  the  sale  thereof,  is  transferred.  The  real  pith  of  his  judgment 
is  that  the  vendors  and  vendees  are  the  same  persons  —  that  the  agree- 
ment as  regards  the  sale  was  carried  out  b}'  the  members  of  the  old 
firm  before  an}-  company  limited  came  into  existence,  and  that  inas- 
much as  they  are  the  same  persons  now  as  then,  there  is  no  sale  at 
all ;  and,  therefore,  there  is  no  instrument  whereby  any  property  upon 
the  sale  thereof  is  transferred.  I  must  here  respectfully  differ  with  my 
brother  Cave.  It  seems  to  me  that  the  compan}'  limited  are  not  the 
same  persons  as  the  eight  members  of  the  old  firm  —  they  are  different 
altogether.  It  was  admitted  by  Mr.  Finlay  in  argument,  though  he 
entirelj'  took  away  the  ground  from  under  m^'  brother  Cave's  feet  when 
he  said  so,  that  the  company  limited  could  maintain  a  suit  for  specific 
performance  against  the  old  partners.  If  that  is  so,  how  can  the}-  be 
the  same  persons?  This  really  shews  that  they  are  not  the  same 
persons.     It  is  here  that  I  disagree  with  my  brother  Cave. 

The  respondents  also  contend  that  there  was  no  consideration.  "We 
must  read  the  two  sections  together.  Sect.  70  enacts  that :  "  The  term 
'  conveyance  on  sale '  includes  every  instrument  whereby  any  property, 
upon  the  sale  thereof,  is  transferred  to  or  vested  in  the  purchaser." 
Then  s.  71  implies  that  it  may  be  in  consideration  of  any  stock  or 
marketable  security.  The  land  and  the  trade-marks  are  transferred 
by  this  instrument  from  the  eight  partners  who  were  the  old  firm  to  the 
new  company  limited.  The  land  and  trade-marks  are  transferred  by 
this  instrument  in  consideration  of  what?  In  consideration  of  stock 
or  marketable  securities,  which,  undoubtedly,  are  not  the  same  things 
as  the  land  and  trade-marks  themselves,  though  they  may  be  charges 
upon  the  land  and  trade-marks  which  are  conveyed.  It  seems  to  me 
that  it  is  untrue  to  say  that  in  this  transaction  there  has  been  no  con- 
sideration passing  from  the  vendee  to  the  vendor.  Although  charges 
upon  the  land  and  the  trade-marks,  the  consideration  comes  within  the 
very  terms  of  s.  71  itself,  —  •'  any  stock  or  marketable  security." 

For  these  reasons,  I  prefer  the  judgment  of  my  brother  Wright  to 
that  of  my  brother  Cave.  Ajyj^eal  allowed. 


LEY  MRDWARE  CO.  V.  TOWERS  HARDWARE  CO. 


OBE/&   HANDLEY   HARDWARE 
V  HARDWARE   CO. 

1888.     87  Alabama,  206.1 


CO. 


V. 


TOWERS 


a  private  corpora* 


Appeal  from  the  Chancery  Court  of  Jefferson. 

11  filed  Dec.  3,  1888,  by  Towers  Hardware  Co. 

against  Moore  &  Handle}"  Hardware  Co. ,  another  private  corpo- 
ration, seeking  to  enjoin  defendant  company  from  selling  "  plow-stocks 

plow-blades"  in  violation  of  a  contract  made  between   plaintiff 
compan}'  and  a  partnership  doing  business  under  the  name  of  Moore, 

•e  &  Handle}",  which  was  composed  of  James  D.  Moore,  Benj.  F. 
^"^loore,  and  William  A.  Handle}",  who,  as  the  bill  alleged,  afterwards 
y  formed  the  defendant  corporation.  The  allegations  of  the  bill  were,  in 
substance,  as  follows  :  Said  partnership,  Ma}'  27,  1887,  sold  out  to  plain- 
tiff their  entire  stock  of  plow-stocks  and  plow-blades  ;  signing  an  agree- 
ent  —  "  we  agree  not  to  handle  any  more  plow-stocks  or  plow-blades, 
except  railroad  plows."  On  March  12,  1888,  the  defendant  company 
was  incorporated  under  the  general  statutes.  The  said  partners  each 
subscribed  one-fourth  of  the  capital  stock,  and  one  Wimberly  one- 
fourth.  If  Wimberly  ever  had  any  interest  in  the  corporation,  he 
had  not  had  it  since  Aug.  8,  1888.  Said  Moores  and  Handley  are 
now  the  sole  owners.  The  defendant  corporation  was  organized  for  the 
purpose  of  carrying  on  the  same  business  which  the  partnership  had 
carried  on.  Its  capital  stock  was  paid  for  wholly  in  the  assets  of  said 
partnership.  It  succeeded  to  all  the  property  rights  and  assets  of  said 
partnership,  as  well  as  all  the  liabilities  thereof.  Said  defendant  cor- 
poration is  none  other  than  said  Jm.  IVIoore,  B.  F.  Moore,  and  Wm. 
A.  Handley,  who  constituted  said  partnership,  and  now  constitute  said 
corporation.  "Your  orator  cannot  say  whether  or  not  said  Moores 
and  Handley  organized  said  corporation  for  the  purpose  of  evading  the 
force  and  effect  of  their  said  agreement  with  your  orator,  but  does  say 
and  charge  that  the  effect  of  their  doing  so  would  be  to  perpetrate  a 
fraud  on  your  orator,  if  they  should  be  allowed  to  handle  plow-blades  and 
plow-stocks  ;  that  the  defendant's  business,  as  now  conducted,  is  iden- 
tically the  same  as  that  conducted  by  said  Moores  and  Handley,  is  con- 
ducted by  the  same  persons,  and  in  substantially  the  same  manner  as 
before,  and  that  the  only  change  in  fact  has  been  in  the  name  of  the 
concern. 

The  defendant  corporation  answered  the  bill ;  denying  that  it  as- 
sumed, or  became  liable  for,  the  obligations  of  said  partnership,  or  of 
its  individual  partners,  or  that  it  acquired  any  interest  in  the  outstand- 
ing notes  and  accounts  due  to  said  partnership,  or  tlie  real  estate  owned 
by  the  partners,  wliich  was  more  than  sufficient  to  pay  all  their  out' 


Statement  abridged.     Arguments,  and  part  of  oijiuioii,  omitted.  —  Ed. 


MOOEE  M' 


...1^7  Y 

^^   ^f 
BtarM^'ng  debts  1^ and  liabiKties  ;'allegihg  thdt  Wimberlj^own^  a  one^  \   n 

fourth   interest  in  the  corporation  at  its  organization,  \and  ibr  some^V 

time  acted  as  its  treasurer,  but  admitting  that  the  Moores  and  Handley 

had  since  bought  out  his  interest ;  and  demurring  to  the  bill  for  want  ^ 

of  equit}'. 

After  answer  filed,  defendant  moved  to  dissolve  the  temporary  in-mj^ 

junction  and  to  dismiss  the  bill ;  and  this  appeal  is  taken  from  they      fj 


V 


decree  of  the  Chancellor  refusing  these  motions. 
Smith  <&  Z/Oice,  for  appellant. 

Cabaniss  &  Weahley^  contra.  ft 

McClellan,  J.     The  equity  of  the  bill,  so  far  as  the  injunction  isT 
concerned,  and  the  sufficiency  of  those  of  its  allegations  which  are  not' 
denied  by  the  answer  to  sustain  the  injunction  depend,  primarily,  o 
two  questions.     First,  whether  the  contract  relied  on  is  void,  as  beingij' 
in  unreasonable  restraint  of  trade  ;  and,  second,  whether  a  negative  un- 
dertaking  entered  into  bv  persons  who  subsequently  organize,  and  fort/^ 
the  time  constitute  a  corporation  for  the  prosecution  of  the  business, 
with  respect  to  which  the  contract  was  made,  can  be  enforced  by  injunc-y 
tion  against  the  corporation. /L/0  •  n    t 

1.  [The  learned  Judge  held  that  the  contract  was  not  void,  as  being 
in  unreasonable  restraint  of  trade.] 

2.  The  general  doctrine  is  well  established,  and  obtains  both  at  law 
and  in  equity,  that  a  corporation  is  a^dlstinct  entity,  to  be  considered,;^,, 
separate  and  apart  from  the  individuals  jwho^compose  it,  and  is  not  to  \  - 
be  affected  by  the  personal  rights  and  obligations  and  transactions  of  its  '" 
stockholders,  and  this  whether  said  rights  accrued  or  obligations  w^re 
incurred  before  or  subsequent  to  incorporation^    1  Mor.  Priv.  Corp. 
§§  227-234,  547-549  ;  3Iorrison  v.  Mining  Co.,  52  Cal.  309  ;  Jlaickins A  s. 
V.  Mining  Co.,  Id.  515  ;  Gent  v.  Insurance  Co.,  107  111.  658  ;  Railroad' 
Co.  V.  Helensburgh,  2  Macq.  391  ;  Match  Co.  v.  Hapgood,  141  Mass../W 
145,  7  N.  E.  Rep.  22.    There  is  a  class  of  contracts,  however,  which  are 
entered  into  between  the  promoters  or  projectors  of  a  contemplated  cor-.'- 
poration  and  third  persons  on  the  faith  of  the  corporation,  intended  to 
inure  to  its  benefit,  and  which  in  point  of  fact  do  inure  to  its  benefit, 
on  which  the  corporation  will  be  charged,  even  in  the  absence  of  an 
express  promise  to  perform,  or  ratification  on  the  part  of  the  company' 
after  it  is  in  esse,  on  "  the  familiar  principle  that  one  who  adopts  the 
benefit  of  a  contract  which  another  volunteers  to  perform  in  his  name 
and   on  his  behalf  is  bound  to  take  the   burden  with  the    benefit." 
1  Redf  R.  R.  (5th  ed.)  18  ;  Edwards  v.  Railroad  Co.,  1  Mylne  &  C.  650  ; 
Stanley  v.  Railway  Co.,  9  Sim.  264;  Little  Rock  &  F.  S.  R.  Co.  v.,, 
Perry,  37  Ark.  164  :  Ferry  v.  Little  Rock  &  F.  S.   R.  Co.,  44  Ark.  '  ^ 
383  ;  Bornmer  v.  Manufacturing  Co.,  81  N.  Y.  468.     And  in  thoseUo 


^^ 


casgsjyhere  associates  combine  together  to  create  a^_pa]2er  corporation 
to  cover  a  partnership  or  joint  venture,  and  where  the  stockholders  are^ 
partners  in  iiitentiun,  and  have  resorted  to  the  fiction  of  separate  cor- 
porate entity  to  free  themselYeiJiflinlindividual  obligations. JiMcIl-bad 


^ 


<\ 


I.A/^ 


.t>^ 


58   MOORE  AND  HANDLEY  HARDWARE  CO.  V.   TOWERS  HARDWARE  CO. 


4 


attached  to  them,  with  respect  to  the  business  they  pi^osejQj3arry_oni^ 
prior  to  the  organization  of  the  company,  coui'ts  of  egiiit}^,  when  the 
ends  of  justice  requii'e~rt,  will  disregardand  look  beyond  the  fiction  of 
corporate  entify,  and  hold  the^  corporation  to  a  discharge  of  the  liabili- 
ties resting  on  its  members  ;  and  this  may  be  done  although  senile  ofthe 
sTiai'eholdersnhadjiot  jHuginallyJncurred^  tjie_obligation  flight  to  be 
enforced,  provided_they  had  notice  oj^  it  Ijefore^entgring  the  corpora- 
tion and  participated  in  the  effort  to  avoid  it.  Wheel  Co.  v.  Wagon 
C^ 20  FedrUep.~lWOi~Beal\.  Chase,  31  Mich.  490,  495,  532. 
The  contract  of  Moore,  Moore  &  Handley,  sought  to  be  enforced 
^against  the  Moore  &  Handley  Hardware  Compan}',  was  not  an  under- 
I taking  between  promoters  of  the  company  and  third  parties,  nor  made 
on  the  faith  of  the  corporation,  nor  intended  to  inure  to  its  benefit,  nor 
I  did  it  inure,  in  point  of  fact,  to  the  benefit  of  the  corporation.  It  is 
I  not  of  that  class  of  contracts  which  courts  enforce  against  corporations 
on  tlie  grounds  that  they  were  made  in  the  corporate  name  by  antici- 
pation, and  that  thfi  corporatioipifecfcived  and  accej^ted  the  benefits  result- 
i  ing  from  theno^J  There  is  no  allegation  of  fraud  made  agamstthe  cor-\ 
rpofatiorT  or  its  shareholders,  and  the  implication  of  the  fraudulent  eff'ect 
of  the  corporate  action  complained  of  is  denied.  It  is  not  shown  that 
tills  is  a  mere  "  paper  corporation  "  to  cover  a  joint  venture  in  which 
the  corporators  are  partners  in  intention,  and  have  resorted  to  this  form 
for  the  purpose  of  evading  and  avoiding  obligations  which  they  had 
taken  upon  themselves  as. individuals,  or  for  the  purpose  of  evading  the 
4a:oiuise  relied  on  here^If  these  things  had  appeared  in  the  case  we 
should  not  hesitateTSnold  the  corporation  answerable  for  the  individual 
obligation.  But  in  the  absence  of  fraud  "  no  authorities  have  gone  the 
length  of  holding  that  any  contract  made  with  individuals  exclusively 
upon  individual  credit  will  become  the  contract  of  any  future  corpora- 
tion that  may  form  for  the  more  convenient  management  and  use  of  the 
benefits  of  it."  Zittle  Hock  S  F.  S.  R.  Co.  Cases,  supra.  If  the 
case  of  Heal  v.  Chase,  supra,  goes  beyond  this  doctrine,  we  cannot 
indorse  it.  We  do  not  think  it  does.  In  that  case  the  corporation  had 
been  formed  for  the  purpose  of  violating  a  contract  not  to  engage  in  a 
certain  business.  All  the  corporators  were  held  to  have  participated  in 
this  purpose.  The  business  was  to  be  conducted  by  the  corporation  in 
connection  with  the  promisor  in  his  individual  capacity.  He  had  an 
interest  in  it,  both  individually  and  as  the  principal  shareholder  of  the 
con)pany ;  and  the  court  enjoined  the  corporation,  not  generally,  but 
from  carrying  on  the  business  with  or  for  the  individual  contracting 
party.  To  put  the  case  at  bar  in  line  with  that  case  it  would  have  to 
ippear,  not  only  that  the  corporation  organized  for  the  purpose  and 
with  the  intention  of  evading  their  contract  through  the  separate  entity 
of  corporate  existence,  but  also  that  the}'  reserved  an  interest  in  the 
business  distinct  from  their  interests  as  stockholders.  None  of  these 
facts  are  shown.  The  effect  of  allowing  the  injunction  in  this  case  to 
continue  would  necessarily  be  to  hold  all  future  shareholders  in  the  cor- 


WAEREN   V.   DAVENPORT   FIEE   INSURANCE   CO. 


59 


poration  to  the  performance  of  a  contract  which  neither  they  nor  tbe 
corporation  had  ever  entered  into,  and  of  which  they  ma}'  not  even 
have  had  notice.  Such  a  result  could  only  be  justified  on  the  ground 
of  bad  faith  in  the  creation  of  the  compan}-.  To  thus  hamper  a  bona 
fide  corporation  would  be  inequitable,  and  have  the  effect  of  establish- 
ing a  doctrine  fraught  with  much  danger  to  corporate  rights,  powers, 
and  propert}'. 

The  allegations  going  to  show  a  ratification  b}'  the  corporation  of 
this  contract  of  Moore,  Moore  &  Handley  are  denied  by  the  answer, 
and  hence  cannot  be  considered  in  passing  on  the  decree  overruling 
the  motion  to  dissolve  the  injunction.  Those  allegations  of  the  bill 
which  are  not  denied  were  not  sufficient  to  authorize  a  continuance  of  the 
injunction,  and  the  decree  on  that  point  was  erroneous,  and  is  reversed* 
The  contract  relied  on  here  is  such  a  one  as  the  respondent  corpora- 
tion could  have  made  under  its  charter.  It  is  therefore  one  which,  being 
already  in  existence  between  complainant  and  the  individuals  compos- 
ing the  defendant  company,  the  corporation  had  the  power  to  ratify 
and  adopt.  The  bill,  in  our  judgment,  sufficiently  avers  such  ratifica- 
tion or  adoption.  These  allegations  give  equit}-  to  the  bill,  and  the 
decree  overruling  the  demurrer  is  affirmed.  The  cause  will  be  re- 
manded, with  instructions  to  the  chancellor  to  dissolve  the  injunction, 
unless  the  complainant^mends  its  bill  so  as  to  entitle  it  to  a  continu- 
ance of  the  writ,  un(3er  the  principles  we  have  announced. 

(/  ,  >  Beversed  and  remanded. 


RREN  V.   DAVENPORT  FIRE  INSURANCE  CO.  : 

1871.     31  loiva,  464.1  ^^  j^^ 

Action  on  a  policy  of  insurance,  issued  b}'  defendant  on  alleged 
ropert}-  of  Goodale  &  Hosford,  payable,  in  case  of  loss,  to  plain- 
tiffs, who  are  creditors  of  G.  &  H. 

Petition  averred  that  defendant  insured  Goodale  &  Hosford  against 
loss  by  fire,  to  the  amount  of  $2,500,  "  on  their  priA'ate  stock  contained 
in  a  one  stor}'  frame  saw-mill,  machiner}',  fixed  and  movable,  engine 
and  boilers  therein,  and  known  as  that  of  the  Dubuque  Lumber  Com- 
pany "  —  loss,  if  any,  payable  to  the  plaintiffs.  Petition  also  averred 
that  Dubuque  Lumber  Co.  was  and  still  is  a  corporation  ,■  that  by 
the  ''private  stock"  before  mentioned  was  meant  the  capital  stock 
which  G.  &  H.  then  had  and  still  have  in  the  corporation,  all  of  which 
was  known  to  defendant's  agent  at  time  of  insurance  ;  that  by  means 
of  such  stock  said  G.  &  H.  had,  and  continued  to  have,  an  interest  in 


1^ 


1  Statement  abrid_£;ed.  —  Ed. 


\J^ 


^  y 


M 


WARREN  V.   DAVENPORT  FIRE  INSURANCE  CO. 


saw-mill,  machineiy,  «&;c.,  to   an 
above  so  much  of  their  interest 


of  f^ 

the  insured  property,  viz.   in   said 
amount  exceeding  $2,500  over  and 

therein  as  was  covered  bj-  an  insurance  of  $15,000,  effected  by  the 
corporation  in  its  corporate  name  ;  that  plaintiffs  are  creditors  of  G.  & 
H.  to  a  large  amount,  and  hold  the  certificates  for  a  considerable 
amount  of  the  stock  of  said  corporation  as  securit}' ;  and  that  the  in- 
surance was  effected  with  the  full  knowledge  and  consent  of  the  lumber 
company. 

Attached  to  the  petition  was  a  cop}'  of  the  polic\',  stipulating  that 
"the  loss  or  damage  is  to  be  estimated  according  to  the  true  and 
actual  cash  value  of  the  pi'operty  at  the  time  the  same  shall  happen 
and  be  paid." 

To  this  petition  defendant  demurred  :  Jirst,  because  it  does  not  show 
that  plaintiffs  have  any  interest  in  the  property  destroyed  or  in  the 
policy  ;  second,  because  it  does  not  show  that  Goodale  &  Hosford  had 
any  insurable  interest  in  the  property  insured  at  the  time  the  insurance 
was  effected  by  them. 

The  demurrer  was  sustained  in  the  District  Court.  Plaintiffs 
appealed. 

Cotton  &  Cross,  for  appellants. 

W.  E.  Le-Qingimll,  for  appellee. 

Miller,  J.  The  question  raised  b\'  the  demurrer  is,  whether  the 
parties  effecting  the  insurance  in  this  case  had  an  insurable  interest 
in  the  property  insured  at  the  time  the  risk  was  taken  and  at  the  time 
of  loss  by  fire. 

Policies  of  insurance  founded  upon  mere  hope  and  expectation,  and 
loithout  some  interest,  are  said  to  be  objectionable  as  a  species  of 
gaming^  and  so  have  been  called  vxiger  policies.  These  policies  were 
expressl}'  prohibited  in  England  by  statute  of  George  II.,  ch.  37,  and 
they  have  been  adjudged  illegal  and  void  in  this  countr}'  upon  the 
principles  of  that  statute,  Angell  on  P'ire  &  Life  Ins.,  §§  18,  55. 
It  is  not  that  wager  policies  are  without  consideration  ,or  unequal  be- 
tween the  parties  that  they  are  held  void,  but  because  they  are  con- 
trary to  public  policy.  Policies  of  fire  insurance,  without  interest,  are 
peculiarly  and  extremely  hazardous  by  reason  of  the  temptation  they 
hold  out  to  the  commission  of  arson  by  the  party  assured,  which  is 
necessarily  attended  with  peril  of  the  most  deplorable  kind  to  a  whole 
neighborhood.  In  King  v.  State  Mutual Ti" ire  Ins.  Co.,  7  Cush.  (Mass.) 
10,  Mr.  Chief  Justice  Shaw  sa3's :  "If  an  insurance  were  made  on  a 
subject  in  which  the  assured  has  no  pecuniary  interest  —  although  in 
other  respects  he  ma}'  be  deeply  concerned,  in  it  and  on  that  ground  be 
willing  to  pay  a  fair  premium — made  with  full  knowledge  of  all  the 
circumstances,  by  both  parties,  without  coercion  or  fraud,  we  cannot 
perceive  why  it  would  not  be  valid  as  between  the  parties.  But  upon 
the  strong  objections,  on  grounds  of  public  i)olic3',  to  all  gaming  con- 
tracts, and  especially  to  contracts  which  would  create  a  temptation  to 
destroy  life  or  pro[)crty,  such  policies  without  interest  are  justly  held 


WAEREN   V.   DAVENPORT   FIKE   INSURANCE   CO.  61 

void."  (Jpon  the  ground  of  public  polic}',  therefore,  if  the  assured 
have  no  interest  in  the  thing  insured,  the  policy  must  be  held  void. 
This  is  well   settled.     Oryiiej)th^r  hand  it_2s_eg[u^^  that 

not  only  the  ahsolute_QSLi:i§ij__  bu^  a^y_oneJiaving_  a  qualified  interest  in 
thejjroperty  insured,  or  even  aii^'  reasonable  expectation^  of  profit  or 
advantage  to  be  derived  from  it,  may  be  the  subject  of  insurance  and 
^specially  if  it  be,  founded  in  some  lega,l  or  equitable  title.  Id.  §  56. 
And  the  general  doctrine  that  anyinterest  in  the  subject-matter  in- 
sured is  sufficient  to  sustain  an  insurance  upon  real  property  is  one 
which  has  been  fully  sustained.  Id.  §  57,  and  notes.  Several  persons 
owning  different  interests  in  the  same  property  maj'  insure  their  several 
interests.  And  it  is  not  material  whether  the  interest  assured  be  legal 
or  equitable.  Any  interest  which  would  be  recognized  b}-  a  court  of 
law  or  equity  is  an  insurable  interest. 

The  interest  of  a  cestui  que  trust,  mortgagor,  mortgagee,  of  a  lender 
or  borrower  on  bottomry,  so  far  as  regards  the  surplus  value,  or  of  a 
captor,  or  of  one  entitled  to  freight  or  commission,  is  insurable.  So 
where  a  lessor  on  ground  rent  has  entered  for  the  arrears,  under  a  cov- 
enant that  he  may  hold  until  the  arrears  are  paid,  &c.,  has  an  insurable 
interest.  So  also  in  case  of  one  in  possession  of  land  by  disseisin. 
Angell  on  Fire  and  Life  Ins.,  §§  57,  58,  59  ;  2  Parsons  on  Cont,  §  2 
of  ch.  14,  commencing  on  p.  438,  and  cases  cited ;  2  Greenlf.  on 
Ev.,  §  379. 

The  term  interest,  as  used  in  applicatioii  to  the  right  to  insure,  does 
not,  necessaxjlj  imply  property  (Hancock  \.  Fishing  Insurayice  Co^, 
3^umner!s_C.  C.  1124_AngelLon  Life^nd  Fire  Ins. ^ J  56),  and  as  the 
contract  of  insurance  is  one  of  indemnity',  against  losses  and  disad^ 
vantages,  an  insurable  interest  may  be  proved  in  the  assured,  without 
the  evidence  of  any  legal  or  eq^uitable^  title  in  the  property.  Putnam 
V,  Mercantile  Insurance  Co.,  5  Mete.  386;  Lazarus  v.  The  Common- 
wealth Insurance  Co.,  19  Pick.  81,  98.  An  "insurable  interest"  is 
9ui  generis,  and  peculiar  in  its  texture  and  operation.  It  sometimes 
exists  where  there  is  not  any  present  property-,  or  jus  in  re,  or  jus  ad 
rem.  Yet  such  a  connection  must  be  established  between  the  subject- 
matter  insured,  and  the  part}'  in  whose  behalf  the  insurance  has  been 
effected,  as  may  be  sufficient  for  the  purpose  of  deducing  the  existence 
of  a  loss  to  him  from  the  occurrence  of  the  injur}-  to  it.  Huck  v. 
Chesapeake  Insurance  Co.,  1  Pet.  163. 

In  the  case  under  consideration  the  assured  were  stockholders  in  the 
Dubuque  Lumber  Co.,  a  corporation  for  pecuniar}'  profit.  The  prop- 
erty destroyed  belonged  to  the  corporation.  The  insurance  was  upon 
the  interest  which  the  assured  had  in  that  property  by  virtue  of  the 
capital  stock  therein  owned  by  them. 

The  object  of  the  insurance  was  to  indemnify  the  assured  against 
loss  to  them  in  the  event  of  a  destruction  of  the  property  by  fire. 
Could  or  would  they  sustain  loss  in  such  event?  How  would  their  in- 
terest be  affected?     It  seems  to  us  to  be  beyond  controversy,  that,  in 


62  WAKKEN   V.   DAVENPOKT   FIRE   INSURANCE   CO. 

case  of  the  destruction  of  the  corporate  property  by  fire,  the  stock- 
holders sustain  loss  to  a  greater  or  less  extent,  dependent  on  the  par- 
ticular circumstances.  Suppose  the  case  of  a  grain  elevator  upon 
some  of  our  numerous  railroad  lines,  built,  owned  and  managed  by  a 
joint-stock  corporation  ;  that  this  is  the  only  property  of  the  corpora- 
tion ;  tliat  the  entire  capital  stock  is  represented  in  and  bj'  this  proi> 
ert\' ;  that,  in  consequence  of  the  profitable  nature  of  the  business, 
large  dividends  are  realized  bj'  the  stockholders,  and  the  stock  is  above 
par  in  the  market.  The  destruction  of  this  property'  by  fire  would  at 
once  result  in  the  loss  of  dividends  to  the  stockholders  and  a  destruc- 
tion of  the  value  of  the  stock,  or  at  least  to  its  reduction  to  a  nominal 
value.  The  entire  propertv,  representing  the  whole  capital  of  the  cor- 
poration, being  destroyed,  it  is  difficult  to  perceive  what  would  give 
any  value  to  the  stock.  It  is  true  that,  primaril}',  the  loss  is 
that  of  the  corporation,  and  hence  it  ma}'  insure,  but  the  corpora- 
tion may  refuse  to  insure,  and  then  the  real  and  actual  loss  falls  on 
the  stockholders. 

The  appellee  argues  that  shares  of  stock  in  a  corporation  are  choses 
in  action,  and  are  not  considered  to  be  an  interest  in  the  real  property 
of  the  company,  and  cites  numerous  authorities  to  sustain  this  posi- 
tion. This  ma}' be  admitted  without  denying  the  shareholders'  "in- 
surable interest"  in  the  property  of  the  corporation.  A  mortgage^ 
also,  is  but  a  chose  in  action.  The  mortgagee  acquires  no^right_tgLthe 
mortgaged  property  which  can  be  attached,  levi£djQn_mideiLa_g£ncra> 
execution^  or  tliat  can_be  inherited.  It  is  a^mei:e^ security  for  a  debt 
Eaton  v.  Whiting,  3  Pick.  484  ;  Smith  v.  People's  Bank.  11  Shep. 
(Me.)  185;  Abbott  v.  Mutual  Fire  Ins.  Co.,  17  id.  414;  Middleton 
Savings  Bankw.  Dubuque,  15  Iowa,  394  ;  Newman  v.  De  Lorimer^ 
19  id.  244  ;  Baldwin  v.  Thompson.,  15  id.  504  ;  Burton  v.  JECintrager, 
18  id.  34a;  HilHard  on  Mort.  215. 

And  yet  the  cases  are  uniform  to  the  efi'ect  that  a  mortgagee  of  real 
property  has  an  insurable  interest  therein  which  he  may  insure  on  his 
own  account,  but  that  when  he  does  so  it  is  but  an  insurance  of  his 
debt.  Eaton  v.  Whiting,  supra.  And  in  case  of  damage  by  fire  to 
the  premises  before  payment  of  the  mortgage,  his  loss,  if  any,  is  that 
his  security  has  been  impaired  or  lost.  His  interest  is  but  a  chose  in 
action  in  the  nature  of  a  security,  which  he  may  insure,  so  that  in  case 
of  destruction  of  or  damage  to  the  property  upon  which  his  security 
rests,  he  will  be  indemnified  for  the  loss  he  actually  sustains.  So,  also, 
it  seems  to  us  that  the  owner  of  stock  in  a  corporation  for  pecuniary 
profit  has  a  like  interest  in  the  corporate  property.  A  mortgagee  of" 
leal  i)ro|)erty  has  an  insural)le  interest  in  the  mortgaged  premises,  based 
upon  the  interest  he  has  in  the  preservation  of  the  same  as  security 
for  a  dol)t.  He  has  a  legal  right  to  contract  for  indemnity  against  in- 
jin-y  to  the  value  of  his  security. 

Ujoon^  precisely  the  same  principle  a  stockholder  may  contract  for 
.ndcmnity  against  injury  to  the  value  of  his  stock,  for  he  also  has  ao 


WAREEN   V.   DAVENPORT  FIRE   INSURANCE   CO.  63 

Interes^in  the  preservation  of  the  corporate  property  from  destruction 
by  fire ;  and  in  its  destruction  he  sustains  loss  in  so  far  as  the  value 
of  his  stock  is  depreciated  in  consequence  thereof,  or  his  dividends 
cut  ofl!*. 

The  argument  that,  if  this  is  allowed,  owners  of  stock  worth  not 
more  than  ten  per  cent  upon  its  nominal  value  may  be  insured  at  its 
par  value,  and  in  case  of  loss  by  fire  such  par  value  of  the  stock  re- 
covered from  the  insurer  seems  to  us  to  be  unsound.  Without  entering 
mto  a  discussion  in  detail  of  what  would  be  the  exact  measure  of  re- 
covery in  such  case,  we  simply  answer  that  no  more  than  the  actual 
loss  sustained  is  in  any  case  recoverable.  This  rule  is  well  established, 
and  rests  upon  just  principles.  See  Angell  on  Fire  and  Life  Ins.,  ch. 
11,  and  cases  cited  in  notes. 

The  question  under  consideration  has  not  received  direct  judicial 
determination  in  any  of  the  States,  so  far  as  we  have  been  able  to 
discover.  The  case  of  Phillips  v.  Knox  County  Ins.  Co.,  20  Ohio, 
174,  is  cited  and  claimed  as  an  authority  against  the  right  of  a  stock- 
holder to  insure.  The  decision  in  that  case,  as  a  careful  examination 
of  the  same  fully  shows,  was  made  entirely  upon  a  construction  of  the 
charter  of  the  insurance  company',  which  gave  a  lie>i  on  the  insured 
property,  including  the  land  on  which  the  buildings  stand.  By  the 
charter  a  sale  of  the  insured  property  rendered  the  policj'  void,  and 
the  ninth  section  declared,  that  if  the  insured  have  a  less  estate  than 
an  unincumbered  title  in  fee  simple  to  the  buildings  insured  and  the 
lands  covered  b}'  the  same,  the  policy  shall  be  void,  unless  the  true 
title  of  the  insured  and  the  incumbrances  be  expressed  in  the  policy 
and  the  application  therefor.  The  plaintiff  insured  as  owner  of  the 
property,  which  in  fact  belonged  to  a  corporation  of  which  he  was  a 
stockholder,  and  the  court  held  that,  '•  where  a  building  and  the  land 
on  which  it  stands  is  the  property  of  an  incorporated  compan}',  the 
stockholders  could  not,  under  the  provisions  of  the  defendant's  charter, 
insure  such  propert}^  as  their  individual  property'  in  the  defendant's 
company." 

Under  the  charter  of  that  compan}',  a  mortgagee  even,  insuring  the 
propert}'  as  his  oion,  would  likewise  be  defeated  in  a  recovery.  So  the 
owner  in  fee  simple  could  not  recover  if  the  propert}'  was  incumbered 
and  the  incumbrance  not  set  forth  in  the  polic}'.  And  of  course  the 
same  result  must  follow  where  a  stockholder  insures  corporate  property 
as  his  own  individual  propert}'.  The  decision  in  that  case  goes  no 
further  than  this,  and  is  no  authority  in  support  of  the  proposition, 
that  a  stockholder  has  no  insurable  interest  in  the  property  of  the  com' 
pany,  and,  hence,  has  no  bearing  upon  the  question  before  us. 

The  jadgment  of  the  district  court  is  Keversed. 


.V 


^ 


fe 


\y. 


lELD   COUNTY   TURNPIKE   CO.   V.   THORP. 


FIELD  COUNTY  TURNPIKE  CO.  v.   THORP- 

1839.     13  Conn.  173.1 

^  Assumpsit  on  stock  subscription.  Defendant  offered  to  prove  an 
admission  made  by  one  Hickolc,  a  stockliolder  in  the  plaintiff  corpo- 
ration. The  evidence  was  excluded.  Verdict  for  plaintiff.  Motion 
for  a  new  trial. 

Dutton,  for  defendant. 

Bissell  and  Booth.,  for  plaintiff. 

Williams,  C.  J.  ...  It  is  claimed,  that  lEcJcoJc  being  a  stockholder 
in  the  company,  his  declarations  are  admissible  as  the  confessions  of  a 
party.  Tllgl-ill-^-^C^"^'^'^^'"!!^  of  the  party  on  the  record  may  be  given_ 
in  evidence,  is  ecitainly  true^  Testimony  oT  this  kind  proceeds  upon" 
the  ground  that  it  is  not  to  be  presumed  that  persons  will  admit  anything 
against  their  interests.  There  are  cases,  however,  where  the  party  on 
the  record  has  really  no  interest,  or  at  most  a  mere  nominal  interest ; 
as  {.where  a  person  has  assigned  a  note  without  recourse ;  where  a 
p'artnership  is  dissolved,  and  one  is  to  discharge  the  debts,  &c. ;  in 
which  cases,  this  evidence  is  admitted,  but  with  reluctance.  In  New- 
York  it  has  been  held,  that  the  admissions  of  partners  after  a  dissolu- 
tion, cannot  be  given  in  evidence  against  a  co-partner,  except  to  pre- 
vent the  operation  of  the  statute  of  limitations.  Ilophins  v.  Banh^ 
7  Cow.  650,  653  ;  Gleason  &  al.  v.  Clark,  admr.  9  Cow.  57  ;  HacMey  v. 
Patrick  &  al.  3  Johns.  Rep.  536.  We  have  adhered  to  the  English  rule 
in  admitting  the  evidence,  although  in  certain  cases  holding  that  it  was 
entitled  to  no  weight.  Coit  v.  Tracy^  9  Conn.  Rep.  1,  8  Conn. 
Rep.  268,  277.  It  becomes  important  to  inquire,  in  this  case,  whether 
Jlickok  is  a  party  upon  the  record.  It  he  is,  then  any  single  share- 
holder in  a  bank  of  any  amount  of  capital  is  a  party  to  any  suit  brouglit 
by  the  bank,  and  his  declarations  are  admissible.     AVhatever  may  be 


said  as  to  the  shareholders  in  corporations  bein^  parties  in  fact  or 
parties  in  intgrest^  it  is  certain  they  are^nqt  parties  upon  the  record. 
The  record  ^)eaks_only  of  the_artificial,  intangible,  being  created  by 
the  act  of  incorporation.  In  corporations  of  this  character,  it  speaks  of 
and  knows  no  individual.  There  are  cases,  however,  in  which  courts 
have  drawn  aside  the  veil  and  looked  at  the  character  of  the  individual 
corporators ;  particularly  when  the  question  arises  as  to  the  jurisdic- 
tion of  the  court.  Tliis  has  been  done  by  the  supreme  court  of  the 
United  States  the  better  to  carry  into  effect  tlie  spirit  of  the  constitu- 
tion, giving  the  courts  of  the  United  States  jurisdiction  in  suits  between 
inhabitants.  Bank  of  the  United  States  v.  Dereaiix,  5  Cranch,  91,  2. 
But  this  is  confined  to  the  question  of  jurisdiction,  and  has  never  been 


'  Statement  abriilf^ed.      Arguments  omitted, 
(^ivcn  as  relates  to  one  point.  —  Eu. 


Only  so  much  of  the   opinion  is 


FAIRFIELD   COUNTY    TURNPIKE   CO.    V.    THORP.  65 

extended  further.  Bank  of  Augusta  v.  Earle,  13  Pet.  586.  So,  too, 
this  court  has  holden,  that  a  judge  shall  not  sit  who  is  within  the  pro- 
hibited degrees  of  relationship  to  a  member  of  a  corporation  ;  and  this 
to  carry  into  effect  the  spirit  of  the  act  and  to  prevent  any  suspicion  of 
partialit}'.  These  cases,  however,  rather  form  exceptions  to  the  rule 
than  create  a  new  one.  We  see  nothing  in  the  case  before  us  which 
ought  to  induce  the  court  to  extend  the  rule  of  law  beyond  its  letter. 
On  the  other  hand,  there  are  strong  objections  to  this  evidence.  The 
first  results  from  the  nature  of  the  evidence  itself  For  although  the 
declarations  of  the  party  in  interest  against  his  interest,  if  fairly  repre- 
sented, are  strong  evidence  against  him  ;  3'et  there  is  so  much  suspicion 
often  attached  to  it  from  tlie  misapprehension  of  the  hearer  and  the 
treachery  of  memory  in  the  reporter,  to  sa}-  nothing  of  the  danger 
arising  from  a  prejudiced  mind,  that  it  is  often  to  be  received  with  man}- 
grains  of  allowance.  In  cases  of  this  kind  the  interest  is  frequently  so 
minute  as  to  create  no  presumption,  or  a  ver}'  slight  one,  that  the  per-, 
son  would  not  make  such  a  declaration  because  against  his  interest. 
On  the  contrary,  many  circumstances  too  minute  for  explanation, 
might  lead  to  a  bias  much  stronger  than  such  pecuniary,  interest. 
Ever}'  day's  experience  will  shew  us  tliat  the  prejudices  and  alienations 
which  arise  in  the  intercourse  of  business,  entirel}'  overpower  the  slight 
interest  of  small  shareholders ;  and  although  this  would  be  no  reasoij 
for  excluding  evidence  clearly  admissible,  3'et  it  may  be  proper,  in 
considering  whether  evidence  excluded  by  the  letter  of  the  rule  i$ 
within  its  spirit.  Besides,  tlie  knowledge  of  individual  stockholders  is 
generally  so  limited  as  to  make  it  of  no  importance. 

It  is  said,  however,  that  all  these  are  proper  considerations  for  the 
jury  to  weigh.  But  when  we  consider  the  surprise  upon  the  real  party  . 
from  testimony  of  this  kind  from  unexpected  quarters,  which  must  fre- 
quentl}'  happen,  and  the  embarrassments  occasioned  thereb}',  the  mul-^ 
titude  of  collateral  inquiries  which  might  often  arise  in  investigating 
the  real  connexion  of  the  persons  whose  admissions  are  offered  in 
evidence,  and  the  delay  attending  such  inquiries,  it  seems  to  us  that 
such  evidence  would  more  often  mislead  than  guide  to  truth.  It  seem& 
to  be  supposed,  that  because  the  individual  stockholder  cannot  be  com- 
pelled to  testify,  his  declarations  therefore  are  admissible  ;  but  it  does 
not  follow  that  the  declarations  of  any  person  who  cannot  be  compellecj 
to  testif)-  on  account  of  his  interest  are  admissible  as  evidence.  Take 
the  case  of  bail,  of  a  feme  covert,  of  a  person  who,  by  his  answer, 
might  subject  himself  to  a  penalt}-  or  a  debt ;  their  declarations  are 
not  admissible  as  a  matter  of  course.  In  such  cases,  perhaps  a  court 
of  chancery,  upon  proper  application,  might  compel  a  disclosure.  Then 
there  would  be  no  surprise ;  and  such  terms  might  be  imposed  as  would 
render  it  safe.  We  know  that  in  England  it  has  been  decided  by  the 
court  of  Kinffs  Bench^  that  the  admissions  of  a  rated  parishioner  may 
be  evidence  in  a  suit  by  the  iniiabitants  of  the  parish.  It  seems  to 
have  been  thus  first  decided  upon  the  ground  that  it  was  in  fact  a  suit 


66    ■  WASHINGTON   INS.   CO.   V.   PRICE. 

against  the  inhabitants  themselves.  The  King  v.  Inhabitants  of 
Hardicick,  11  East,  578,  586.  There  the  suit  is,  in  name  as  well  as 
in  fact,  against  the  inhabitants ;  and  the  property  of  the  individuals  is 
liable  to  be  taken  in  execution.  McLoud  v.  Selby,  10  Conn.  Rep.  395. 
And  in  a  case  but  two  years  before,  Lord  Ellenhorough  held,  that  in  an 
action  by  a  corporation,  what  any  individual  said  [referring  to  individ- 
ual corporators]  could  not  be  given  in  evidence,  although  he  did  not 
extend  the  rule  to  the  declarations  of  a  public  officer  of  the  corporation. 
The  Mayor  of  London  \.  Long,  1  Campb.  22.  Before  either  of  tbese 
cases,  our  superior  court  had  decided  that  the  declarations  of  an  indi- 
vidual memt:)er_of  acorporation,  even  although  he  was  an  officer  in  it, 
could  not  be  given  in  evidence.  Hartford  Bank  v.  Hart,  3  Da}',  494. 
That^Hecision  has  ever  since  been  acquiesced  in  ;  and  it  is  by  the 
supreme  court  of  New  York  favourably  contrasted  with  the  English 
decisions.  Osgood  \.  Manhattan  Bank,  3  Cowen,  623.  And  upon  a 
careful  review,  we  are  not  disposed  to  question  the  propriet}'  of  what 
has  long  been  considered  our  settled  practice.  In  the  state  of  Maine, 
too,  a  similar  decision  has  been  made.  Polleys  v.  Ocean  Insurance 
Company,  2  Shep.  141. 

New  trial  not  to  he  granted. 


^ 


WASHINGTON  INSURANCE  CO.  v.  PRICE. 

1823.     1  Hopkins,  N.  Y.  Chancery  Reports,  1. 

[Before  Sanford,  Chancellor.] 

This  cause  being  noticed  for  hearing,  the  chancellor  informed  the 
counsel  of  the  parties  that  he  was  a  stockholder  in  the  "Washington 
Insurance  Company,  and  that  according  to  the  opinion  which  he  then 
entertained,  he  could  not  hear  the  cause :  but  he  expressed  a  desir^ 
that  the  question,  whether  he  ought  to  act  as  judge  in  the  cause  or  not, 
should  be  argued.-  The  counsel  declined  to  argue  the  question,  and 
the  chancellor  this  day  gave  his  opinion. 

The  sole  judge  of  this  court,  being  a  stockholder  in  the  incorporated 
.  '^  company  which  institutes  this  siut,  can  he  proceed  or  act  as  judge  in 
V^  the  cause?  ^to  \  ^i-^^^^-^U^^^y^  "h 

It  is  a  maxim  of  ever}'  code,  in  every  countiy,  that  no  man  should 
be  judge  in  his  own  cause.  .  .  . 

But  it  has  been  said,  that  where  a  court  consisting  of  a  single  judge, 
has  exclusive  jurisdiction  of  the  subject  of  a  suit,  a  failure  of  justice 
would  take  place  if  the  judge  should  not  act  in  his  own  cause. 

A  failure  of  justice  may  take  place  if  he  should  not  act ;  as  it  also 
may  occur  if  he  should  decide  his  own  cause  :  but  it  belongs  to  the  power 


WASHINGTON   INS.   CO.   V.   PKICE.  67 

which  created  such  a  court  to  provide  another  in  which  this  judge  may 
be  a  part}'  ;  and  whether  another  tribunal  is  established  or  not,  he  at 
least  is  not  entrusted  with  authority  to  determine  his  own  rights  or  his 
own  wrongs. 

By  the  third  section  of  the  act  concerning  the  court  of  chancer}-,  it 
is  provided,  "  That  where  tlie  chancellor  shall  be  a  party  to  a  suit  in 
chancer}',  the  bill  shall  be  filed  before  the  chief  Justice  of  the  state, 
who  shall  thereupon  proceed,  in  like  manner,  as  the  chancellor  could  of 
right  do,  as  a  court  of  chancery  in  other  cases,  and  the  court  of  chan- 
cery shall  be  thereupon  held  in  that  case  before  the  chief  Justice,  and 
shall  proceed  to  hear  and  determine  the  same,  according  to  the  course 
and  usage  of  the  said  court." 

In  this  case,  an  incorporated  company  sues  by  its  corporate  name. 
The  company  consists  of  persons  who  are  joint  proprietors  of  a  com- 
mon fund  in  various  amounts  ;  the  suit  is  the  act  of  these  persons  or 
their  officers  ;  and  the  gain  or  loss  which  may  result  from  it  will  be  the 
gain  or  loss  of  each  stockholder,  according  to  the  extent  of  his  inter- 
est in  the  fund.  The  corporation  is  the  party  in  form  ;  the  stockhold- 
ers are  the  parties  in  substance.  When  a  corporation  is  thus  a  party 
to  a  suit,  it  is  regarded  as  one  sole  partj,  so  long  as  it  is  not  necessary 
to  the  ends  of  justice  that  the  persons  who  use  the  corporate  name 
should  be  disclosed,  ''^ut  whenever  the  ends  of  justice  require  that  the 
persons  who  use  the  name  of  a  corporation  should  be  known,  the  in-  " 
quiryTs^  made,  and  the  stockholders  and  their  officers  are  considered  _' 
and  treated  as  they  are  in  fact,  the  real  litigants  in  the  suit^  '' 

[The  learned  Chancellor  then  discusses  the  meaning  of  the  term 
"party"  in  the  statute,  and  concludes  that  the  provision]  extends  to 
all  cases  in  which  the  chancellor  is  a  party  to  a  suit,  and,  as  I  con- 
ceive, to  all  cases  in  which,  though  neither  complainant  nor  defendant, 
he  is  a  real  party  to  the  subject  of  litigation.- 

Such  is  my  own  view  of  this  question ;  but  it  appears  that  my  im- 
mediate predecessor,  and  the  late  chief  Justice,  held  a  different  opin- 
ion. Their  opinion  is  found  in  the  case  of  Stewart  v.  The  Mechanics 
and  Farmers'  Bank,  19  John.  501.  In  that  case,  the  chancellor  was  a 
stockholder  in  the  bank ;  and  this  fact  appearing,  the  parties  con- 
sented that  the  hearing  of  the  cause  should  proceed,  Upon  a  consul- 
tation between  the  chancellor  and  the  chief  Justice,  they  were  both  of 
.opinion  that  the  chancellor  was  not  a  party  to  the  suit  within  the  pro- 
vision of  the  statute ;  and  the  chancellor  proceeded  to  determine  the 
cause.  The  same  cause  was  removed  to  the  court  of  errors  ;  but  this 
question  was  not  raised  or  considered  in  that  court.  It  is  a  question 
which  has  not  been  determined  by  the  court  of  errors  ;  but  it  has  been 
decided  by  the  opinions  of  two  of  our  most  eminent  judges.  I  have 
the  highest  respect  for  the  late  chancellor,  and  the  late  chief  Jus- 
tice. I  delight  to  honor  them  for  the  ability,  intelligence,  and  in- 
tegrity with  which  they  discharged  their  respective  trusts ;  and  I  feel 
that  I  have  strong  authority,  when  I  am  able  to  produce  their  opin- 


68 


PEOPLE   EX   KEL.   UNION   TRUST   CO.   V.   COLEMAN. 


ions  in  support  of  my  own  decisions.  But  where  my  own  judgment 
is  clear  and  undoubtiug,  I  cannot  surrender  it  to  any  opinion  except 
that  of  a  superior  tribunal. 

My  opinion  is,  that  the  chancellor  is  a  party  to  a  suit  in  this  court 
by  or  against  a  corporate  company,  in  which  he  is  a  stockholder  ;  that 
such  a  suit  is  his  own  cause,  to  the  extent  of  his  interest  as  a  stock- 
holder ;  and  that  he  cannot  determine  such  a  suit.  I  am  also  of  opin- 
ion, that  the  chief  Justice  has  jurisdiction  of  such  suits  ;  and  the 
circuit  courts  are  now  also  open  as  courts  of  equity. 

This  suit  having  been  instituted  before  I  was  chancellor,  I  merely 
direct  at  present,  that  all  proceedings  in  it  before  me  cease.  If  the 
suit  shall  proceed  before  the  chief  Justice,  it  will  be  determined,  as  if 
it  had  been  commenced  before  him,  according  to  the  statute. 


SECTION   II. 


e  Distinction  as  ap^Med  to  Questions  of  Taxation. 


JPEOPLE    EX    REL. 


UNION  TRUST  CO.  v.  COLEMAN. 

1891.     126  Neio  York,  433.1 

A.PPEAL  from  judgment  of  the  General  Term  of  the  Supreme  Court 
in  the  first  judicial  department,  entered  upon  an  order  made  the  first 
]\[onday  of  October,  1890,  which  affirmed  an  order  of  Special  Term 
dismissing  a  writ  of  certiorari  to  review  an  assessment  of  the  rela- 
tor's capital  for  the  year  1889. 

The  relator  is  a  corporation  organized  under  a  special  act  of  the 
legislature  of  1864  (Chap.  316,  Laws  of  1864),  doing  business  as  a 
trust  company  in  the  city  of  New  York.  On  the  second  Monday  in 
January,  1889,  it  furnished  to  the  commissioners  of  taxes  and  assess- 
ment a  detailed  statement  of  its  assets  and  liabilities  which  was  duly 
sworn  to,  and  claimed  that  all  its  capital  stock  and  surplus,  being 
invested  in  United  States  securities,  was  exempt.  The  commissioners 
held  that  the  capital  stock,  the  actual  value  of  which  they  were  to 
assess,  was  the  shares  and  they  ascertained  such  value  by  multiplying 
the  nominal  capital  by  the  market  price  of  the  shares  and  deducted 
therefrom  ten  per  cent  of  the  nominal  capital,  the  assessed  value  of 
the  real  estate  and  the  investments  in  United  States  securities. 

Wheeler  JL  Peckham,  for  appellant. 

D.  J.  Dean,  for  respondents. 

FixcH,  J.  The  relator  has  been  assessed  upon  an  "  actual  value  " 
of  its  capital  stock  derived  entirely  from  tlie  market  value  of  its 
shares.     These  are  selling  at  the  large  premium  of  something  over 

1  Arguments  and  part  of  opinion  omitted.  —  Ed. 


PEOPLE   EX   REL.    UNION   TRUST   CO.   V.  COLEMAN.  69 

five  hundred  dollars  for  each  share  of  one  hundred  dollars,  and  the 
assessors  have  concededly  taken  that  valuation,  or  the  principal  part 
thereof,  as  the  "  actual  value  "  of  the  company's  stock  liable  to  tax- 
ation, instead  of  its  own  proved  and  established  value.  The  relator 
challenges  the  assessment,  and  through  all  the  proceeding  has  per- 
sistently raised  and  pressed  the  inquiry,  not  so  much  as  to  the  mode 
or  manner  of  ascertaining  value,  but  rather  as  to  what  is  thej)recise_ 
thing  to  be  valued,  whether  the  capital  stock  of  the  company  or  the 
"capital  stock  held  in  shares  by  the  corporators.  If  these  are  the  same, 
or,  in  any  just  sense,  equivalents,  either  might  be  valued  without  sub- 
stantial error,  but  if  they  are  not  such,  we  must  determine  which  is 
to  be  valued  before  we  can  solve  the  problem  of  how  to  value  it. 

Now,  it  is  certain  that  the  two  things  are  neither  identical  nor 
equivalents.  The  capital  stock  of  a  company  is  one  thing ;  that  of  the 
shareholders  is  another  and  a  different  things  That  of  the  company 
is  simply  its  capital,  existing  in  money  or  property,  or  both ;  while 
that  of  the  shareholders  is  representative,  not  merely  of  that  existing 
and  tangible  capital,  but  also  of  surplus,  of  dividend  earning  power, 
of  franchise  and  the  good  will  of  an  established  and  prosperous  busi- 
ness. The  capital  stock  of  the  company  is  owned  and  held  by  the 
company  in  its  corporate  character ;  the  capital  stock  of  the  share- 
holders they  own  and  hold  in  different  proportions  as  individuals. 
The  one  belongs  to  the  corporation ;  the  other  to  the  corporators. 
The  franchise  of  the  company,  which  may  be  deemed  its  business 
opportunity  and  capacity,  is  the  property  of  the  corporation,  but  con- 
stitutes no  part  or  element  of  its  capital  stock ;  while  the  same  fran- 
chise does  enter  into  and  form  part,  and  a  very  essential  part,  of 
the  shareholder's  capital  stock.  While  the  nominal  or  par  value  of 
the  capital  stock  and  of  the  share  stock  are  the  same,  the  actual  value 
is  often  widely  different.  The  capital  stock  of  the  company  may  be 
wholly  in  cash  or  in  property,  or  both,  which  may  be  counted  and 
valued.  It  may  have  in  addition  a  surplus,  consistmg  of  some  accu- 
mulated and  reserved  fundjj)r  of  undivided  profits,  j)r  both,  butthat. 
surplus  is~iio  part  of  the  company's  capital  stock,  and,  therefore,  i^ 
not  itself  capital  stock  The  capital  cannot  be  divided  and  distri- 
J2utedj  the  surplus^  may  be.  But~tEat  surplus  does  enter  into  and 
form  part  oFThe  share  stock,  for  that  represents  and  absorbs  into 
its  own  value  surplus  as  well  as  capital,  and  the  franchise  in  addition. 
So  that  the  property  of  every  company  may  consist  of  three  separate 
and  distinct  things,  which  are  its^capital^^stock^  its  suzphis,  its  fran- 
chise ;  but  these  three  things,  several  in  the  ownership  of  the  com- 
pany, are  united  in  the  ownership  of  the  shareholders.  The  share 
stock  covers,  embraces,  represents  all  three  in  their  totality,  for  it  is 
a  business  photograph  of  all  the  corporate  possessions  and  possibili- 
ties. A  company  also  may  have  no  surplus,  but,  on  the  contrary,  a 
deficiency  which  works  an  impairment  of  its  c'apital  stock*  Its  actual 
value  is  then  less  than  its  nominal  or  par  value,  while  yet  the  share 


70  PEOPLE   EX   REL.   UNION   TRUST   CO.  V.   COLEMAN. 

stock,  strengthened  by  hope  of  the  future  and  the  support  of  earnings, 
may  be  worth  its  par,  or  even  more.  And  thus  the  two  things  — 
the  company's  capital  stock  and  the  sharehokler's  capital  ^o^k  — 
are  essentially  and^n  every  material  respect  different.  They  differ 
in  their  character^  in  their  elements,  iij_their  ojvvnership  and  in  their 
values.  How  important  and  vital  the  difference  is,  became  evident  in 
the  effort_Ey_ib£_state  authorities  to  tax  the  property  of  thejiational 
banks^  The  effort  failed,  and  yet  the  share  stock  in  the_ownership 
of  individuals  was  held  to  be  taxable  as  against  them.  The  corpo- 
ration and  its  property  were  shielded,  but  the  shareholders_and  their 
property  were  taxed. 

Now  some  degree  of  confusion  and  trouble  have  come  in  because 
these  two  different  things  are  denominated  alike  capital  stock,  mak- 
ing the  expression  sometimes  ambiguous.  It  is  the  important  and 
decisive  phrase  in  the  law  of  1857,  under  which  the  assessment  here 
resisted  was  made,  and  requires  of  us  to  determine  at  the  outset  in 
which  sense  it  was  used.  The  section  reads  thus  :  "  The  capital  stock 
of  every  company  liable  to  taxation,  except  such  part  of  it  as  shall 
have  been  excepted  in  the  assessment-roll,  or  shall  have  been  ex- 
empted by  law,  together  with  its  surplus  profits  or  reserve  funds 
exceeding  ten  per  cent  of  its  capital,  after  deducting  the  assessed  value 
of  its  real  estate,  and  all  shares  of  stock  in  other  corporations  actu- 
ally owned  by  such  company  which  are  taxable  upon  their  capital 
stock  under  the  laws  of  this  state,  shall  be  assessed  at  its  actual 
value  and  taxed  in  the  same  manner  as  the  other  real  and  personal 
estate  of  the  county." 

There  are  reasons  in  abundance  for  the  conclusion  that  by  the 
phrase  "  capital  stock  "  the  statute  means  not  the  share  stock,  but  the 
capital  owned  by  the  corporation ;  the  fund  required  to  be  paid  in 
and  kept  intact  as  the  basis  of  the  business  enterprise,  and  the  chief 
factor  in  its  safety.     One  ample  reason  is  derived  from  the  fact  that 
the  tax  is  assessed  against  the  corporation  and  upon  its  property,  and 
not  against  the  shareholders,  and  so  upon  their  property.     In  theory 
every  tax  is  charged  against  some  person,  natural  or  artificial,  resi- 
dent or  non-resident,  known  or  unknown.     It  is  assessed  not  upon 
property  irrespective  of  ownership  but  against  persons  in  respect  to 
their  property  (23  N.  Y.  215),  and  affects  not  merely  a  lien,  but  also 
a  personal  liability.     On  the  assessment-rolls  in  this  case  appeared 
the  name  of  the  relator  as  the  person  assessed,  and  the  amount  of  the 
» tax  became  a  charge  against  it.     Of  course  it  could  only  be  assessed 
/  and  taxed  in  respect  to  its  own  property,  that  which  in  its  corporate 
(  character  it  owned  and  possessed,  and  so  it  follows  inevitably  that  the 
\  statute  concerns  the  company's  capital  stock,  that  is  its  real  and  actual 
\  capital,  and  not  in  any  respect  the  share  stock  which  it  does  not  own 
\and  whose  possessors  have  not  been  assessed. 

Another  reason  is  found  in  those  terms  of  the  statute  which  include 
and  exclude  respectively  specific  kinds  or  classes  of  property  in  the 


PEOPLE    EX   KEL.   UNION   TRUST   CO.   V.    COLEMAN.  71 

corporate  ownership.  Thus  the  assessment  is  to  be  laid  not  merely 
upon  the  capital  stock  of  the  corporation,  but  also  upon  its  surplus. 
1^0  such  explicit  direction  was  necessary,  except  upon  the  assumption 
that  by  the  words  "  capital  stock  "  was  meant  simply  "  capital,"  which 
would  not  include  surplus,  and  so  required  that  it  be  subjected  by  name 
to  the  valuation.  If  the  share  stock  was  meant  its  value  would  include 
surplus  and  make  its  specification  not  only  needless  but  confusing. 
But  while  the  statute  includes  surplus  by  specific  mention,  it  excludes 
franchise  by  omitting  it.  The  omission  of  franchise  is  emphasized 
by  the  careful  inclusion  of  surplus.  It  is  fullj^  and  definitely  settled^ 
that  the  tax  imposed  bv  the  statute  is  not  upon  franchise.  (Peojde  v. 
Comrs.  of  Taxes,  2  Black,  620.)  Balif  that  be  so,  it  is  not  upon  the 
share  stock,  for  that  represents_the  value  of  the  corporate  franchise 
as  a  part  of  the  total  of  the  corporate  propeity.  And  so,  both  by 
what  it  speciScally  includes  and  silently  excludes,  the  statute  itself 
informs  us  that  by  "  capital  stock  "  it  means  and  intends  the  com- 
pany's actual  capital  paid  in  and  possessed,  and  not  at  all  or  in  any 
sense  the  share  stock. 

The  same  thing  becomes  apparent  from  a  study  of  the  whole  line  of 
legislation  which  culminated  in  the  law  of  1857.  It  was  traced  in  de- 
tail upon  the  argument  with  great  industry  and  wealth  of  illustration. 
We  have  verified  it  by  travelling  over  the  same  track,  and  without 
taking  pains  to  reproduce  it,  may  assert  the  general  result  which  it 
discloses  and  select  out  one  or  more  illustrations.  The  investigation 
shows  that  the  word  "  capital "  and  the  phrase  "  capital  stock ''  are 
used  interchangeably  and  synonymously,  and  where  the  latter  phrase 
occurs  there  is  almost  always  something  in  the  statute  which  stamps 
and  labels  it  as  referring  to  the  actual  capital  of  the  company.  Thus 
the  law  of  1825  (Chap.  262),  after  providing  for  the  taxation  of  all 
persons  owning  or  possessing  property,  proceeds  to  declare  that  cor- 
porations shall  be  deemed  persons  for  the  purposes  of  the  act,  and 
requires  them  to  furnish  a  statement  of  the  amount  of  "  capital " 
actually  paid  in ;  and  then,  referring  to  turnpike  and  bridge  companies, 
requires  them  to  state  "  the  amount  of  capital  stock  actually  paid  in 
or  secured  to  be  paid  in."  Both  clauses  refer  to  the  same  assets  or 
fund,  naming  it  indiscriminately  "capital"  and  "capital  stock." 
Again,  in  the  law  of  1825  (Chap.  254)  the  assessors,  after  putting 
the  corporation  by  name  on  the  assessment-roll,  are  required  to  add 
the  amount  "  of  its  capital  stock  paid  in  or  secured  to  be  paid  in," 
and  to  designate  how  much  of  it  is  in  real  and  how  much  in  personal 
property,  and  so  no  doubt  is  left  that  by  '•'  capital  stock  "  was  meant 
simply  the  "  capital "  possessed  in  cash  or  invested  in  securities  or 
real  estate. 

The  illustrations  might  be  multiplied  and  fortified  by  reference  to 
numerous  acts  relating  to  the  formation  or  management  of  maniifac- 
turing,  railroad,  business  and  telegraph  comj>anies  in  which  the  two 
forms  of   expression  are  used   indiscriminately  and   as   convertible 


72 


PEOPLE   EX   EEL.   UNION   TRUST   CO.   V.   COLEMAN. 


terms  ;  but  I  think  quite  enough  has  been  said  to  require  unhesitat- 
ing assent  to  the  proposition  that,  under  the  law  of  1857,  the  thing 
to  be  taxed  is  the  capital  of  the  company  and  not  the  shares  of  the 
stockholders. 

Indeed,  I  should  feel  bound  to  apologize  for  arguing  what  seems  to 
me  so  simple  and  plain  a  proposition,  were  it  not  for  the  fact  that  it 
has  been  largely  ignored  by  assessors  and  not  always  clearly  kept  in 
mind  by  the  courts,  and  but  for  the  further  fact  that  the  right  to 
adopt  as  the  taxable  valuation  the  value  of  the  shares,  totally  disre- 
garding the  value  of  the  company's  capital,  has  been  asserted  in  this 
case,  maintained  by  the  courts  below,  and  claimed  to  be  fully  justified 
by  very  much  which  we  ourselves  have  decided  or  said. 

Before  examining  the  cases  in  detail  to  see  whether  they  hamper 
our  freedom  of  judgment  upon  the  question  presented,  I  think  it  safe 
and  also  prudent  to  assert  three  things  as  applicable  generally-'and  to 
all  the  cases  alike.  First,  this  court  has  never  decided,  either  by  a 
direct  determination  or  by  necessary  implication,  that  the  law  of  1857 
authorizes  the  imposition  of  a  tax  upon  anything  else  than  the  actual 
capital  of  the  corporations,  together  with  their  surplus  ;  second,  that 
the  precise  question  whether  the  capital  of  the  companies  or  the  share 
stock  of  the  shareholders  forms  the  basis  of  valuation  and  the  thing 
to  be  assessed,  has  not  been  heretofore  formally  and  distinctly  pre- 
sented ;  and  third,  that  all  seemingly  erroneous  expressions  of  opinion 
are  corrected  at  once  when  they  are  referred  to  the  permissible  con- 
ditions under  which  the  value  of  the  share  stock  in  the  market 
may  be  referred  to,  not  as  the  thing  to  be  valued  and  assessed,  but  as 
an  aid  or  help  in  discovering  the  value  of  the  other  and  different 
thing  which  is  to  be  valued  and  assessed.  Keeping  these  general 
propositions  in  mind  we  now  recur  to  the  cases. 

[After  commenting  upon  various  New  York  cases,  the  opinion  con- 
tinues.] 

And  sq^I  thin^_the  authoritieseither  fairly  permit  or  fully  justify 
the_cQnclusion s  which  I  have  reacEeci  and  which  may  be  stated  witlj. 
reasonable  accuracy  thus  :  First,  the  subject  of  valuation  and  assess- 
ment isneyer  the_share.  stock,  but  always  the  cfljnpapy's  capital  aiid. 
surplus!  Second,  ^uchcapital  an,dLaiL£plus  must  be  assessed  at  its  own 
^lueTandwhen.  tliat  Js^cgrrectly  known_and  ascerta.jup-d,  no  other 
value  can  be  substituted  for  it.  Third,  where  its  amount  and  value 
are  undiscl£senr"aScruiikno\oi  jthe  assifiss^'s  may_£onsid^r_Jiie_iiiarket 

renLeial-caaditiouof  the  company  as 


value  of  the  sh 

indicative  of   surpluSL^r ,  deficiency ,And  of  the  probable  ammint_of 
§ither^  Foui-^tTi,  they  mayjurther  resQi't  to^  s\ich  means  of  informa- 
tion wheg^JJie  ~amou.nt  of  ^npitfil  n.nd  surplus  is  ^disclosed,  but  tlie 
assessors  have  sufficient  reason  to  disbelievejhe_.statemenj:^^ 
i^asonisfounded  i^x>B-ia,cts  estaBTislied  by  competent  proof. 
If  these  conclusions  arecormyTTT  will 


oTlow  that  The  assessment 
complained  of  should  be  cancelled.     The  corporation  presented  to  the 


PEOPLE   EX   REL.   UNION   TRUST   CO.   V.   COLEMAN.  73 

assessors  a  sworn  statement  of  its  assets  and  liabilities.  If  it  be 
true,  there  was  nothing  subject  to  assessment.  But  its  truth  is  not 
questioned,  and  there  is  not  the  least  reason  to  doubt  it.  The  asses- 
sors did  not  doubt  it :  they  merely  deemed  it  immaterial,  and  so  tes- 
tified when  examined.  In  other  words,  knowing  with  certainty  the 
value  of  one  thing,  they  claimed  the  right  to  affix  to  it  the  larger 
value  of  a  different  thing.  Authorized  only  to  tax  against  the  com- 
pany its  capital  and  surplus,  they  assumed  the  right  practically  to 
tax  it  for  the  share  stock  held  by  individuals.  They  have  not  in 
terms  claimed  that  the  share  stock  is  the  subject  of  taxation,  nor  has 
the  counsel  who  represented  them  on  the  argument,  but  both  have 
maintained  and  defended  what  is  the  exact  and  complete  equivalent. 
The  right  asserted  is  a  discretion  in  the  assessors  at  their  free  will 
to  assess  corporations  upon  and  at  the  value  of  their  capital  and  sur- 
plus, or  upon  and  at  the  value  of  the  share  stock  independently  of 
established  facts  and  whenever  they  please.  The  law  gives  them  no 
such  discretion.  How  it  has  been  exercised  and  how  destructively  to 
the  rights  of  taxpayers  may  be  seen  by  comparing  the  action  in  this 
case  with  that  in  one  of  the  cases  which  we  have  reviewed.  "Where 
the  share  stock  was  selling  at  ninety,  and  so  below  par,  the  assessors 
refused  to  take  that  value  and  went  to  the  company's  books  in  search 
^of  a  larger  one,  which  they  found  and  adopted.  Here,  where  the 
actual  value  of  capital  and  surplus  is  established  so  that  they  frankly 
admit  the  fact,  they  calmly  disregard  it  and  fly  to  the  larger  value 
of  the  share  stock.  The  statute  has  given  them  no  such  right.  They 
are  not  lawless  rovers,  wandering  among  corporations  at  Avill,  but 
regular  officers  bound  by  discipline  and  controlled  by  the  law,  and 
whose  discretion  exists  within  fixed  and  definite  limits. 

It  is  said,  and  it  is  true,  that  large  masses  of  personal  property 
escape  taxation,  and  the  owners  are  persistent  and  artful  and  not  over 
nice  in  their  efforts  to  avoid  a  just  share  of  the  public  burdens,  and  so 
we  should  uphold  faithful  assessors  in  every  attempt  to  do  their  full 
duty.  I  think  this  court  will  not  be  unmindful  of  the  situation,  but 
before  all  we  must  first  ascertain  and  then  obey  the  law.  If  in  that 
process  evils  result  or  are  disclosed,  the  remedy  must  be  sought  else- 
where. 

It  follows  that  the  judgment  and  order  of  the  General  and  of  the 
Special  Term  should  be  reversed  and  the  assessment  against  the  rela- 
tor vacated  and  cancelled,  without  costs. 

All  concur,  except  Peckham,  J.,  not  voting. 

Judgment  reversed. 


^..^■■' 


l^l'^Ajr  COOK   V.   CITY   OF   BURLINGTOK 


^'/\ 


IX 


^' 


l^ 


COOK  V.  CITY  OF  BUKLINGTON. 

1882.     59  Iowa,  251. 

The  plaintiffs  are  the  executors  of  the  estate  of  James  W.  Grimes, 
deceased.  They  are  residents  of  the  city  of  Burlington,  where  the 
estate  is  situated.  Part  of  the  estate  consists  of  shares  of  stock  in 
the  Dunleith  and  Dubuque  Bridge  Co.,  which  is  a  corporation  of  that 
name,  incorporated  under  the  general  incorporation  laws  of  the  State 
of  Iowa,  and  having  its  principal  place  of  business  in  Dubuque  county. 
The  corporation  owns  a  bridge  across  the  Mississippi  River,  from  the 
city  of  Dubuque,  Iowa,  to  the  eastern  shore  of  the  river  in  the  State 
of  Illinois,  and  said  bridge  is  all  the  tangible  property  owned  by  the 
corporation.  The  bridge  was  assessed  for  taxation  at  Dubuque,  and 
the  taxes  were  paid.  The  shares  of  stock  in  the  bridge  company  held 
and  owned  by  the  estate  of  Grimes  were  also  assessed  for  taxation 
for  the  same  year  at  the  city  of  Burlington.  The  plaintiffs  claimed 
that  the  stock  was  not  liable  to  taxation,  and  appealed  from  the  board 
of  equalization  of  the  city  of  Burlington  to  the  Circuit  Court.  Upon 
a  trial  in  the  Circuit  Court  it  was  held  that  the  assessment  of  the 
stock  was  authorized  by  law,  and  plaintiffs  appeal. 

Heclf/c  and  Blijthe,  Shiras,  Van  Duzeesiiid  Henderson,  iov  appellants. 

C.  L.  Poor,  for  appellee. 

RoTHROCK,  J.  —  The  assessment  of  the  bridge  as  the  property  of 
the  corporation  was  authorized  by  law.  Ajypeal  of  The  Des  Moines 
Water  Gompamj,  48  Iowa,  324.  Whether  the  shares  of  stock  can  be 
legally  assessed  and  taxed  as  the  property  of  the  stockholders  for  the 
same  year  for  which  the  property  of  the  corporation  is  assessed  and 
taxed  was  not  determined  in  that  case.  It  was  said,  however,  that 
"the  statute  provides  that  the  stock  of  such  corporations  shall  be 
assessed  at  its  cash  value.  When  assessed  and  taxed  under  the  statute, 
stock  must  be  taxed  as  the  property  of  the  respective  owners,  and  there 
is  no  provision  making  the  corporation  liable  therefor." 

We  hay^jthenJ;he_questionJn^  stock 

may  be  taxedjn  addition_^CLthejbajcati^^  the  cor- 

poration. _ 

And  we  may  say,  once  for  all,  at  the  outset,  that  our  views,  as  ex- 
pressed in  the  case  just  cited,  that  the  statute  provides  that  the 
stock  shall  be  assessed  and  taxed,  remains  unchanged.  This  conclu- 
sion is  not  founded  upon  any  doubtful  construction  of  the  statute,  but 
upon  its  j)lain,  certain  and  unecpiivocal  language  and  meaning.  The 
statute  imposing  this  burden  upon  the  stock  is  found  in  section  813 
of  the  Code,  and  is  as  follows  :  "  Depreciated  bank  notes  and  the 
stock  of  corporations  and  companies  shall  be  assessed  at  their  cash 
value,*  *  *  *." 


COOK   V.   CITY    OF   BUKLINGTON.  75 

It  is  idle  to  contend  in  the  face  of  this  plain  and  explicit  language 
that  the  legislature  has  not  required  that  stock  in  corporations  shall 
be  assessed,  and  the  only  question  now  for  determination  is,  does  the 
legislature  have  the  power  to  determine  that  the  property  of  a  cor- 
poration and  the  stock  shall  both  be  taxed. 

Counsel  for  appellants  contend  that  no  such  power  exists,  because 
it  is  duplicate  or  double  taxation  of  the  same  property,  and  it  is  in- 
sisted that  "  this  court  has  over  and  over  again  declared  that  double 
taxation  is  forbidden  by  our  Constitution."  If  this  statement  were 
correct,  and  we  should  concede  that  the  question  here  presented  were 
one  of  duplicate  taxation,  the  case  could  easily  and  speedily  be  disposed 
of  by  a  prompt  reversal.  But,  while  it  is  true  that  this  court  in  Tall/nan 
V.  Butler  County,  12  Iowa,  534,  said  that  it  "  is  neither  the  policy  nor 
the  justice  of  the  law  to  tolerate  double  taxation,"  and  in  U.  S.  Ex- 
press Co.  V.  Ellyson,  28  Id.,  378,  that  "  double  taxation  would  be  so 
unjust  as  to  excite  disfavor  of  both  courts  and  legislature,"  and  in 
McGregor^ s  Executors  v.  Vanpel,  24  Id.,  436,  that  mortgages  upon  real 
estate  should  be  held  to  be  taxable  "  unless  this  will  lead  to  double 
taxation,"  yet  it  never  has  been  held  in  this  State,  that  what  is  de- 
nominated duplicate  taxation  is  in  excess  of  the  legislative  power. 
The  most  that  can  be  said  of  these  utterances  of  this  court  is,  that  it 
should  be  held  in  disfavor  by  courts  and  legislatures. 

In  Cooley  on  Taxation,  165,  it  is  said  :  "  It  has  properly  and  justly 
been  held  that  a  construction  of  the  laws  was  not  to  be  adopted  that 
would  subject  the  same  property  to  be  twice  charged  for  the  same  tax, 
unless  it  was  required  by  the  express  words  of  the  statute  or  by  neces- 
sary implication." 

Upon  the  question  as  to  whether  the  imposition  of  taxes  upon  the 
property  of  a  corporation  and  upon  the  shares  of  stock  in  the  hands 
of  stockholders,  the  general  observations  upon  the  subject  of  duplicate 
taxation  found  in  Cooley  on  Taxation,  page  159,  seem  to  us  to  be  ap- 
propriate to  be  here  quoted.  It  is  there  said  :  "  A  system  of  indirect 
taxes,  combined  with  a  system  of  general  taxation  by  value,  must 
often  have  the  effect  to  duplicate  the  burden  upon  some  species  of 
property  or  upon  some  persons,  and  the  taxation  of  stockholders  of  a 
corporation  and  also  of  the  corporation  itself,  must  sometimes  produce 
a  like  result.  There  is  also,  sometimes,  what  seems  to  be  double  tax- 
ation of  the  same  property  to  two  individuals,  as  where  the  purchaser 
of  property  on  credit  is  taxed  on  its  full  value  while  the  seller  is  taxed 
to  tiie  same  amount  on  the  debt  *  *  *  *.  Now,  whether  there  is  in- 
justice in  the  taxation,  in  every  instance  in  which  it  can  be  shown 
that  one  individual,  who  has  been  directly  taxed  his  due  proportion, 
is  also  compelled  indirectly  to  contribute,  is  a  question  we  have  no 
occasion  to  discuss.  It  is  sufficient  for  our  purposes  to  show  that  the 
decisions  are  nearly,  if  not  quite,  unanimous  in  holding  that  taxation 
is  not  invalid  because  of  any  such  unequal  results." 

It  must  be^conceded^  that  the  taxation  of  the  property  of  the_cor- 


76  COOK   V.   CITY   OF   BURLINGTON. 

poration  and  also  of  the  stock  bears  no  resemblance  to  taxing  tlie_ 
same  tract  of  land  twice  to  the  same  person,  nor^once  to  A.  and  again 
toTB.  That  would  be  a  double  taxation,  which  we  suppose  would  not 
be" allowable  in  any  State  in  the  Union.  It  would  be  a  direct  discrimi- 
nation and  inequality  in  the  exercise  of  the  taxing  power,  which  would 
impose  a  greater  burden  upon  one  citizen  than  upon  another  upon  the 
same  kind  of  property.  But  the  case  at_bar_isjc[uite  different.  The 
corporation  is  a  person  distinct  f  roni_the  stockholder.  It  is  true,  it  is 
what  is  denominated  an  artificial  person,  and  may  be  said  to  be  ideal 
and  intangible.  But  that  it  is  a  person  in  law  is  the  first  principle 
learned  by  the  student  in  opening  any  book  on  corporations.  Its 
stockholders  are  distinct  and  different  persons.  They  are  usually  not 
liable  for  its  debts,  and  have  no  right  to  the  enjoyment  or  possession 
of  its  property  during  the  period  of  its  duration  or  until  it  be  dissolved 
by  some  procedure  known  to  the  law.  The  stockholder  is  entitled  to 
dividends  upon  his  stock,  if  there  be  any  dividends,  and  the  value  of 
his  stock  depends  upon  prospective  dividends,  and  the  dividends  de- 
pend upon  the  net  earnings~orthe  corporation.  If  the  bridge  in  this 
case  be  taxed,  the  tax  must  be  paid  from  the  income,  and  this  reduces 
the  value  of  the  stock,  so  that  there  is  no  duplicate  taxation,  so  far  at 
least  as  the  tax  upon  the  bridge  reduces  the  value  of  the  stock. 

In  McGregor's  ExecWs  v.  Vanpel,  supra,  this  court  held  that  a 
mortgage  given  to  secure  the  payment  of  the  purchase-money  of  the 
premises  mortgaged  is  not  exempt  from  taxation.  In  that  case  it  is 
said  that  "a  system  of  assessments  operating  with  entire  equality  and 
with  absolute  justice  is  a  desideratam  in  government  yet  unattained, 
and  perhaps  unattainable."  And  in  Finley  v.  Philadelphia,  32  Pa. 
St.,  381,  it  is  said  :  "  There  is  nothing  poetical  about  tax  laws,  when- 
ever they  find  property  they  claim  contribution  for  its  protection 
without  any  special  respect  to  the  owner  or  his  occupation." 

The  best  devised  system  of  taxation  based  upon  the  values  of  pro- 
perty must,  of  necessity,  produce  unequal  results,  so  long  as  the  at- 
tempt is  made  to  tax  all  property  including  real  estate,  personal 
chattels,  and  moneys  and  credits.  One  person  will  be  taxed  upon  the 
real  estate  bought  upon  credit,  and  another  upon  the  obligation  which 
he  holds  for  the  purchase-money.  And  this  must  necessarily  be  so  or 
there  would  be  but  little  taxation  upon  credits,  because,  for  the  most 
part,  they  are  either  the  representative  of  money  or  property  of  some 
kind  held  by  another.  If  as  is  said  in  Cooley  on  Taxation,  p.  100, 
"all  the  pro[)erty  in  a  town  is  sold  on  credit  and  the  property  is  taxed 
to  the  purchasers,  and  the  debts  to  sellers,  it  is  manifest  that  the  town 
taxes  twice  as  much  wealth  as  lies  within  its  borders."  And  yet 
under  the  system  of  taxation  adopted  by  the  State  of  Iowa,  it  cannot 
be  claimed  that  the  assessor  must  inquire  of  the  owner  of  promissory 
notes,  or  mortgages,  whether  they  are  credits  for  taxable  property 
which  has  been  sold  by  the  holder  of  these  credits. 

In  the  case  at  bar  the  stockholders  jxiid  to  the  corporation  a  certain 


VAN   ALLEN   V.   THE   ASSESSORS.  77 

sum  of  money.  The  corporation  used  this  money  in  the  construction 
of  a  toll-bridge  from  which  the  corporation  derived  an  income.  The 
agreement  between  the  contracting  parties  is  that  the  corporation  is  to 
manage  and  control  the  bridge,  make  the  necessary  repairs,  and  pay 
the  taxes  assessed  against  the  bridge,  and  after  deducting  these  legiti- 
mate and  necessary  expenses  pay  to  the  stockholder  his  proportionate 
share  of  the  net  earnings,  and  upon  the  dissolution  of  the  corporation 
the  stockholder  is  to  be  repaid  his  money  advanced  from  the  property 
belonging  to  the  dead  corporation.  Now,  suppose  this  very  contract 
were  made  with  a  natural  person  instead  of  a  corporation,  and  the 
stockholder  or  creditor  should  make  a  claim  that  the  obligation  held 
by  him  was  not  taxable.  There  would  be  no  more  grounds  for  such 
claim  under  our  system  of  taxation  than  there  would  be  for  the  claim 
that  if  A  loans  B  $100,  which  is  invested  in  merchandise,  the  debt  is 
not  taxable  because  the  merchandise  is  taxable. 

These  illustrations,  it  appears  to  us,  demonstrate  that  if  we  were  to 
determine  that  the  legislature  has  no  constitutional  power  to  impose 
this  tax  upon  the  stockholder,  it  would  open  a  door  into  a  sea  of 
trouble  in  the  administration  of  the  revenue  laws  of  the  State. 

In  disposing  of  this  important  question  we  have  not  reviewed  the 
authorities  cited  by  the  respective  counsel  of  the  parties.  It  is  suf- 
ficient to  say  that  these  views  are  supported  by  the  very  great  majority 
of  adjudged  cases  upon  this  subject.  We  think  the  Circuit  Court  cor- 
rectly determined  that  the  shares  of  stock  are  taxable.  And  if  the 
public  interests  of  this  State  require  that  either  the  property  of  a  cor- 
poration of  this  character,  or  the  stock  therein  be  exempt  from  taxa- 
tion, that  relief  must  come  from  the  law-making  power.  It  will  be 
understood  that  the  decision  in  this  case  will  have  no  application  to 
capital  stock  in  manufacturing  companies.  By  chapter  57  of  the  laws 
of  1880  such  stock  is  exempt  from  assessment  and  taxation. 

Ajffii'med. 

[Adams,  J.,  delivered  an  opinion,  concurring  in  the  result  but  not        , 


upon  the  foregoing  grounds.] 


f^^.  .i^'^V 


(^ 


VAN  ALLEN  v.  THE  ASSESSOKS.  .     ^ y     ^'  i/t  j/i    f^ 


1865.     3  Wallace  U.  S.  573.1 


'mm 


Error  to  the  New  York  Court  of  Appeals.  ^      y^         '   rr      iN' 

This  was  a  suit  involving  the  question  of  right,  on  the  part  of  States^    i  w  .^ 
to  tax  shares  in  the  national  banking  associations  created  under  theJ^    l 
act  of  Congress  of  June  3,  1864  (amending  the  act  of  Feb.  25,  1863).  -)(/ 
By  the  U.  S.  Laws,  at  least  one  third  of  the  capital  is  required  to  be 
invested  in  interest-bearing  bonds  of  the  United  States.     The  capital 

1  Statement  abridged.    Only  portions  of  the  opinions  are  given.  —  Ed. 


78  VAN   ALLEN   V.   THE   ASSESSORS. 

stock  is  to  be  divided  into  shares  of  $100  each,  and  is  to  be  deemed 
personal  property. 

By  the  40th  section  of  the  act  of  1864  it  is  enacted  —  the  act  of  1863 
containing  no  such  provision  — 

'•  That  the  president  and  cashier  of  every  such  association  shall  cause 
to  be  kept,  at  all  times,  a  full  and  correct  list  of  the  names  and  resi- 
dences of  all  the  shareholders  in  the  association,  and  the  number  of 
sliares  held  by  each,  in  the  office  where  its  business  is  transacted,  and 
such  list  shall  be  subject  to  the  inspection  of  all  shareholders  and 
creditors  of  the  association,  and  the  officers  atcthorised  to  assess  taxes 
under  State  authority,  during  business  hours  of  each  day,"  &c. 

The  41st  section,  of  the  same  act  of  i864,  provides  by  one  part  of  it 
for  taxation  hy  the  United  States.  It  imposes  a  tax  of  one  per  cent, 
annually  on  circulation  ;  one  half  of  one  per  cent,  on  deposits,  and  then 
one  half  of  one  per  cent,  on  the  capital  beyond  the  amount  invested  in 
United  States  bonds  ;  and  after  prescribing  how  the  duty  is  to  be  col- 
lected, and  the  penalty  for  default,  &c.,  the  section  proceeds : 

(1.)  "  Provided,  that  nothing  in  this  act  shall  be  construed  to  pre- 
ivent  all  the  shares  in  any  of  said  associations,  held  by  any  person  or 
body  corporate,  from  being  inchided  in  the  valuation  of  the  personal 
\property  of  such  person  or  corporation  in  the  assessment  of  taxes  imposed 
Iby  or  under  State  authority,  at  the  place  where  such  bank  is  located,  and 
jnot  elsewhere,  but  not  at  a  greater  rate  than  is  assessed  upon  other 
(moneyed   capital  in  the  hands  of  individual  citizens  of  such  State. 
(2.)  Frovided  further,  that  the  tax  so  imposed  under  the  laws  of  any 
State  upon  the  shares  of  any  of  the  associations  authorized  by  this  act 
shall  not  exceed  the  rate  imposed  upon  the  shares  in  any  of  the  banks 
organized  under  authority  of  the  State  where  such  association  is  lo- 
cated.    (3.)  Provided,  also,  that  nothing  in  this  act  shall  exempt  the 
real  estate  of  associations  from  either  State,  county,  or  municipal  taxes 
to  the  same  extent,  according  to  its  value,  as  other  real  estate  is  taxed." 
With  this  statute  of  the  Federal  Government,  authorizing  banking 
associations,  in  force,  the  legislature  of  New  York,  on  the  9th  March, 
1865,  passed  "  an  act,  enabling  the  banks  of  this  State  to  become  as- 
sociations for  the  purposes  of  banking,  under  the  laws  of  the  United 
States."  1     The  act,  frequently  called  "  The  Enabling  Act,"  imposed 
a  tax  upon  all  shares  in  national  banks,  in  the  hands  of  their  holders. 
The  Assessors  of  Albany  assessed  Van  Allen  for  shares,  owned  by 
him,  of  a  National  Bank  in  that  city.     At  the  time  of  assessment  the 
whole  capital  of  the  bank  was  invested  in  various  obligations  of  the 
Federal  Government ;  in  regard  to  all  of  which  Congress  had  enacted 
that,    "whether  held  by  individuals,   corporations,  or  associations," 
they  should  be  "  exempt  from  taxation  by  or  under  State  authority." 
A  previous  N.  Y.  statute,  of  1857,  enacted  that  the  capital  stock  of 
the  banks  of  the  State  should  be  assessed  at  its  actual  value.     The  U. 
S.  Supreme  Court  held  that  a  tax  under  this  statute  could  not  legally 

1  Session  Acts  of  18G5;  chap.  97. 


VAN   ALLEN   V.   THE    ASSESSGKS, 


79 


be  imposed  on  sucli  part  of  the  capital  stock  as  was  invested  in  U.  S. 
securities.  {Bank  of  Comvierce  v.  New  York  City,  2  Black,  620,  de- 
cided in  March,  1863.)  In  April,  1863,  the  N.  Y.  legislature  passed 
another  statute,  enacting  that  all  banks  shall  be  liable  to  taxation  on 
a  valuation  equal  to  the  amount  of  their  capital  stock  paid  in  or 
secured  to  be  paid  in,  and  their  surplus  earnings,  &c.  The  U.  S.  Su. 
pre  me  Court  held  that  the  tax  thus  provided  for  could  not  legally  be 
imposed  upon  such  property  of  the  banks  as  was  invested  in  U.  S. 
securities.  {The  Bank  Tax  Case,  2  Wallace,  U.  S.  200,  decided  in 
1865.)  It  was  within  a  few  days  after  that  decision  that  the  statute 
under  which  the  present  case  arose  was  enacted. 

The  New  York  Court  of  Appeals  held  that  the  tax  was  legal.  The 
case  having  been  carried,  on  error,  to  the  U.  S.  Supreme  Court,  the 
Judges  of  that  Court  were  unanimously  of  opinion  that  the  enabling 
act  of  New  York  did  not  conform  to  the  second  proviso  in  the  41st 
section  of  the  act  of  Congress  ;  and  that  hence,  even  if  the  State  had 
power,  by  a  properly  framed  statute,  to  tax  the  shares,  yet  the  State 
had  not  legally  exercised  that  power.  Consequently  the  decree  of  the 
Court  of  Appeals,  affirming  the  legality  of  the  tax  in  question,  was 
reversed.  But,  as  the  defect  in  the  N.  Y.  statute  was  one  which  might 
be  easily  remedied  by  the  State  legislature,  the  Court  expressed  its 
opinion  on  the  main  question  which  had  been  fully  argued. 

jSTelson,  J.  .  .  .  The  main  and  important  question  involved,  and 
the  one  which  has  been  argued  at  great  length  and  with  eminent  ability, 
is,  whether  the  State  possesses  the  power  to  authorize  the  taxation  of 
the  shares  of  these  national  banks  in  the  hands  of  stockholders,  whose 
capital  is  wholly  vested  in  stock  and  bonds  of  the  United  States  ?  Via. 

The  court  are  of  opinion  that  this  power  is  possessed  by  the  State,  )j^  f)Loju^i>^  €l^) 
and  that  it  is  due  to  the  several  cases  which  have  been  so  fully  andv./H.  /t^ivCW 
satisfactorily  argued  before  us  at  this  term,  as  well  as  to  the  publi^  C^vb.v/  <^j 
interest  involved,  that  the  question  should  be  finally  disposed  of.      il^  ^^yvp  .-i/^ 

•        •      ^^.  k^  ^^^ 

But,  in  addition  to  this  view,  the  tax  on  the  shares  is  not  a  tax  on  '  w 
the  capital  of  the  bank.  The  corporation  is  the  legal  owner  of  all  the 
property  of  the  bank,  real  and  personal ;  and  within  the  powers  con- 
ferred upon  it  by  the  charter,  and  for  the  purposes  for  which  it  was 
created,  can  deal  with  the  corporate  property  as  absolutely  as  a  private 
individual  can  deal  with  his  own.  This  is  familiar  law,  and  will  be 
found  in  every  work  that  may  be  opened  on  the  subject  of  corpora- 
tions. A  striking  exemplification  may  be  seen  in  the  case  of  The 
Queen  v.  Arnoud}  The  question  related  to  the  registry  of  a  ship 
owned  by  a  corporation.  Lord  Denman  observed :  "  It  appears  to  me 
that  the  British  corporation  is,  as  such,  the  sole  owner  of  the  ship. 
The  individual  members  of  the  corporation  are  no  doubt  interested  in 
one  sense  in  the  property  of  the  corporation,  as  they  may  derive  indi- 
1  9  Adolphus  &  Ellis,  New  Series,  806. 


yWj2^<V5'-^;,'^»^^ 


80  CAN  ALLEN  V.   THE   ASSESSORS. 

vidual  benefits  from  its  increase,  or  loss  from  its  decrease ;  but  in  no- 
legal  sense  are  the  individual  members  the  owners." 

The  interest  of  the  shareholder  entitles  him  to  participate  in  the  net 
profits  earned  by  the  bank  in  the  employment  of  its  capital,  during  the 
existence  of  its  charter,  in  proportion  to  the  number  of  his  shares ; 
and,  upon  its  dissolution  or  termination,  to  his  proportion  of  the  pro- 
perty that  may  remain  of  the  corporation  after  the  payment  of  its 
debts.  This  is  a  distinct  independent  interest  or  property,  held  by 
the  shareholder  like  any  other  property  that  may  belong  to  him.  Now, 
it  is  this  interest  which  the  act  of  Congress  has  left  subject  to  taxation 
by  the  States,  under  the  limitations  prescribed,  as  will  be  seen  on 
referring  to  it. 

[After  commenting  on  various  provisions  in  the  National  Banking 
Act,  in  which  the  terms  "  shares  "  and  "  shareholders  "  occur. J 

In  all  these  instances,  it  is  manifest  that  the  term  as  used  means  the 
entire  interest  of  the  shareholder ;  and  it  would  be  singular,  if  in  the 
use  of  the  term  in  the  connection  of  State  taxation.  Congress  intended 
a  totally  different  meaning,  without  any  indication  of  such  intent. 

This  is  an  answer  to  the  argument  that  the  term,  as  used  here,  means 
only  the  interest  of  the  shareholder  as  representing  the  portion  of  the 
capital,  if  any,  not  invested  in  the  bonds  of  the  government,  and  that 
the  State  assessors  must  institute  an  inquiry  into  the  investment  of 
the  capital  of  the  bank,  and  ascertain  what  portion  is  invested  in  these 
bonds,  and  make  a  discrimination  in  the  assessment  of  the  shares.  If 
Congress  had  intended  any  such  discrimination,  it  would  have  been 
an  easy  matter  to  have  said  so.  Certainly,  so  grave  and  important  a 
change  in  the  use  of  this  term,  if  so  intended,  would  not  have  been 
left  to  judicial  construction. 

Upon  the  whole,  after  the  maturest  consideration  which  we  have 
been  able  to  give  to  this  case,  we  are  satisfied  that  the  States  possess 
the  power  to  tax  the  whole  of  the  interest  of  the  shareholder  in  the 
shares  held  by  him  in  these  associations,  within  the  limit  prescribed 
by  the  act  authorizing  their  organization.  But,  for  the  reasons  stated 
in  the  fore  part  of  the  opinion,  the  judgment  must  be  reversed  and  the 
case  remitted  to  the  Court  of  Appeals  of  the  State  of  New  York,  with 
directions  to  enter  judgment  for  the  plaintiffs  in  error,  with  costs. 

Chase,  C.  J.,  dissenting.  [Wayne,  J.,  and  Swayne,  J.,  concurring 
in  the  dissent.] 

But,  it  is  insisted  that  the  shares  of  capital  may  be  taxed  by  another 
rule  than  that  which  governs  the  taxation  of  other  moneyed  capital, 
because  of  something  peculiar  in  the  nature  of  shares.  It  is  said,  that 
the  association  owns  the  capital,  and  that  the  shareholders  have  no 
control  over  this  property  except  through  the  choice  of  officers,  direc- 
tors, or  agents,  and  no  right  to  the  property  except  the  right  to  receive 


MONROE   SAVINGS   BANK  V.   CITY   OF   ROCHESTER.  81 

a  due  proportion  of  the  earnings  of  the  association  while  it  exists,  and 
a  similar  proportion  of  the  property  after  its  dissolution. 

It  is  true  that  the  shareholder  has  no  right  to  the  possession  of  any 
part  of  the  corporate  property  while  the  corporation  exists  and  its 
affairs  are  honestly  managed.  He  has  committed  his  interest,  for  a 
time,  to  the  possession  and  control  of  the  corporation  of  which  he  is  a 
member,  and  he  has  only  a  member's  voice  in  the  management  of  it. 

So  a  man  who  has  leased  a  farm  has  no  right  to  possession  or  con- 
trol during  the  lease  ;  but  who  denies  his  property  in  the  farm  ?  And 
if  a  dozen  owners  join  in  the  lease,  has  not  each  one  an  interest  in  the 
jjroperty  to  the  extent  of  one-twelfth  ? 

So,  if  for  the  time  the  property  of  the  shareholder  is  placed  beyond 
his  direct  control,  and  converted  into  property  of  the  association,  how 
can  that  circumstance  affect  the  intrinsic  character  of  his  shares  as 
shares  of  the  whole  corporate  property  ?  How  can  a  man's  shares  of 
any  property  be  the  subject  of  valuation  at  all  if  not  with  reference 
to  the  amount  and  productiveness  of  the  property  of  which  they  are  a 
part  ?  What  value  can  they  have  except  that  given  them  by  that 
amount  and  that  productiveness  ?  A  certificate  of  title  to  a  share  is 
not  a  share.  It  is  evidence  of  the  shareholder's  interest.  His  interest 
may  be  transferred  by  the  transfer  of  the  certificate  ;  but  it  is  not  the 
certificate  that  is  valued  when  the  worth  of  the  share  is  estimated 
either  by  the  speculator  in  the  market,  or  by  the  tax  assessor.  It  is 
the  property  which  it  represents  that  is  valued,  by  the  speculator  often 
with  reference  to  speculation  only,  but  by  the  public  officer,  always, 
if  he  does  his  duty,  by  the  real  worth  of  the  property,  all  things  con- 
sidered. 


./'/^■/f^ 


^  //■ 


^J^  ^]y]J|lM)jp^SJjyVINGS  BANK  t;.  CITY  OF  EOCHESTER. 

r\'^     lAs/p^  yt  ^  ^^^'^'     37  A^e«7  rori,  3^5,1-     \    „Xj'      f^^ 

**"        subfhitted  on  a  written  statement  of  facts ;  ta  test  the  validity 
Lssessed  against  the  Savings  Bank  for  a  "  valuation  of  per- 


^onaV^  property "  $83,000.     At  the  time  of  assessment  the  Savings 
BaiSk  was  indebted  to  depositors  in  the  sum  of  $1,611,000.  and  held 
^nd  owned  money  and  securities  to  the  nominal  amount  of  $1,694,000. 
25,000  of  its  bonds  and  securities  were  in  bonds  and  securities 
ssued  by  the  United  States.     The  statute  under  which  the  tax  was 
essed  is  quoted  in  the  opinion. 
y    The  General  Terra  of  the  Supreme  Court  gave  judgment  for  de- 
^^flendant.     The  Savings  Bank  appealed. 
y     James  L.  Angle  and  Isaac  Hills,  for  appellants. 
',  r   ^  ■  ^  Statement  abridged.  —  Ed. 


82  MONKOE   SAVINGS   BANK  V.   CITY   OF   ROCHESTER. 

U.  A.  Rcujmoii,  for  respondents. 

FuLLERTOx,  J.  It  is  Settled  by  the  decisions  of  the  Supreme  Court 
of  the  United  States,  that  the  State  legislature  has  no  power  to  im- 
pose a  tax  upon  the  bonds  or  securities  mentioned  in  the  foregoing 
statement,  issued  as  a  means  of  borrowing  money  upon  the  credit  of 
the  United  States,  whether  such  bonds  and  securities  are  held  by 
individuals  or  corporations ;  and  it  is  agreed  in  such  statement  that 
they  are  "  exempt  from  assessment  by  the  laws  of  congress." 

It  is  a  necessary  result  that  such  exemption  cannot  be  evaded  by 
any  mere  change  of  form  or  name  in  the  law  by  which  the  tax  is  im- 
posed. If,  in  fact,  the  tax  is  laid  upon  such  bonds  or  securities,  then, 
by  whatever  form  of  words  the  imposition  is  laid,  it  is  illegal. 

Hence,  it  is  not  lawful,  for  the  purpose  of  state  legislation,  to 
'assess  the  whole  capital  of  a  bank,  at  its  value,  or  at  its  nominal 
amount,  when  such  capital  is  invested,  in  whole  or  in  part,  in  such 
securities.     (2  Black,  U.  S.  620.) 

And  a  tax  imposed  by  a  State  upon  a  bank,  at  a  valuation  equal  to 
the  amount  of  its  capital  stock  paid  in,  is  a  tax  upon  the  property  of 
the  stock  constituting  its  capital ;  and  if  such  capital  is  invested  in 
such  securities,  the  tax  is  illegal,  and  the  law  imposing  it  is  void. 
(2  Wallace's  U.  S.  200.) 

The  principle  decided  in  these  and  other  cases  decided  in  the  same 
court,  is  that  whenever  by  State  law  a  tax  is  laid  upon  property  which 
consists  of  United  States  bonds  exempt  from  taxation,  then,  in  what- 
ever form,  or  in  whatever  terms  the  law  is  expressed,  it  is  void,  and 
cannot  be  enforced. 

I  proceed  to  apply  the  rule  thus  stated  to  the  case  under  considera- 
tion.    The  act  in  question  provides  as  follows : 

"  The  privileges  and  franchises  granted  by  the  legislature  of  this 
State  to  savings  banks  or  institutions  for  savings,  are  hereby  declared 
to  be  personal  property,  and  liable  to  taxation  as  such,  in  the  town  or 
ward  where  they  are  located,  to  an  amount  not  exceeding  the  gross 
sum  of  their  surplus  earned,  and  in  the  possession  of  said  banks 
or  institutions,  and  the  officers  of  such  institutions  or  banks  may  be 
examined  on  oath  by  assessors  as  to  the  amount  of  such  surplus ;  and 
the  property  of  such  banks  and  institutions  shall  be  liable  to  seizure 
and  sale  for  the  payment  of  all  taxes  assessed  upon  them  for  said 
privileges  and  franchises."     (Laws  of  18GC,  vol.  2,  p.  1674.) 

In  declaring  the  privileges  and  franchises  of  a  bank  to  be  personal 
property,  the  legislature  has  adopted  no  novel  principle  of  taxation. 
The  powers  and  privileges  which  constitute  the  franchises  of  a  cor- 
poration are  in  a  just  sense  property,  and  quite  distinct  and  separate 
from  the  property  which  by  the  use  of  such  franchises  the  corpora- 
tion mny  acquire.  They  are  so  regarded  by  the  law  and  so  regarded 
by  common  acceptation.  And,  although  it  has  not  heretofore  been 
customary,  in  this  State  at  least,  to  subject  them  to  taxation,  yet  it 
must  be  conceded  that  it  may  be  done  if  the  legislature  see  fit  so  to 
enact. 


MONROE   SAVINGS   BANK  V.  CITY   OF  ROCHESTER.  83 

It  follows,  that,  if  such  taxation  falls  within  the  scope  of  legisla- 
tive power,  that  power  may  also  prescribe  a  rule,  or  test,  of  value.  In 
the  case  stated,  the  legislature,  leaving  the  estimate  to  the  assessors, 
would  make  the  valuation  depend  upon  all  the  circumstances  which, 
irrespective  of  the  amount  of  property  which  the  corporation  actually 
holds,  give  value  to  the  privileges  enjoyed.  All  franchises  are  not  of 
equal  value.  One  corporation  may  eujoy  a  monopoly,  and  another  be 
subject  to  competition  with  rivals,  thus  being  less  valuable.  In  some 
instances,  the  value  of  the  franchise  would  depend  upon  the  nature 
of  the  business  authorized,  and  the  extent  to  which  permission  was 
given  to  multiply  capital  for  its  prosecution.  Under  such  circum- 
stances, it  would  be  expected  that  the  legislature  would  prescribe 
some  equitable  test  or  rule  of  valuation  which  should  guide  or  control 
the  estimate  of  the  assessors  in  fixing  the  amount  of  the  tax.  It  can 
hardly  be  denied  that  a  fair  measure  of  the  value  of  the  franchises  of 
corporations  would  be  the  profits  resulting  from  their  use ;  and  in 
adopting  such  a  rule  of  estimate,  no  one  could  justly  complain  of  its 
being  unequal  in  its  effects  upon  different  corporations,  or  unjust  in 
its  general  operation. 

In  the  case  before  us,  the  test  of  value  of  the  franchises  is,  not  the 
amount  of  annual  profits,  but  the  rule  is,  the  judgment  of  the  asses- 
sors, limited  to  the  amount  of  profits  over  and  above  the  dividends  of 
profits  which  the  corporation  has  seen  fit  to  declare  and  pay  to  its 
depositors. 

These  observations  are  made,  not  because  the  question,  whether 
the  operation  of  this  statute  is  just  and  right,  is  open  to  judicial  ex- 
amination, but  because  they  tend  to  prove  that  the  act  in  question  is, 
what  it  professes  to  be,  a  tax  laid  xipon  the  franchises  named  in  it, 
and  not  an  indirect  tax  upon  the  securities  held  by  the  bank,  and  in 
that  way  attempting  to  avoid  the  principle  of  the  decisions  already 
quoted.  Bad  faith,  or  a  design  to  evade  the  inhibitions  implied  in 
the  Constitution  of  the  United  States  or  expressed  in  the  acts  of  con- 
gress, are  not  to  be  presumed  or  to  be  imputed  to  the  legislature, 
unless  necessary  construction  compels  it.  . 

In  this  case  the  tax  is  declared  in  terms  to  be  upon  the  franchises 
and  privileges  granted.  I£  there  are  no  surplus  earnings,  then  there 
can  be  no  tax.  If  there  are  such  earnings,  then  it  is  reasonable  to 
say  that  the  privilege  which  produced  them  is  valuable,  and  may 
justly  be  regarded  as  property  subject  to  the  taxing  power.  This 
mode  of  limiting  the  taxing  power,  indicates  strongly  that  the  inten- 
tion of  the  legislature  was  that  it  should  not  exceed  a  just  and  equita- 
ble assessment  of  the  franchises  and  privileges  granted,  considered  in 
reference  to  the  pecuniary  benefits  and  advantages  resulting  from 
their  use. 

It  now  becomes  important  to  inquire,  whether  the  assessment  in 
the  case  now  before  us  is  affected  by  the  fact  that  the  banks  have 
invested  a  portion  of  their  moneys  received  from  depositors,  or  the 


84  MONROE   SAVINGS   BANK  V.   CITY   OF   ROCHESTER. 

profits  arising  on  such  moneys,  in  bonds  or  securities  of  the  United 
States  which  are  exempt  from  taxation. 

In  my  opinion,  if  the  whole  of  the  plaintiff's  funds  were  so  invested, 
it  would  not  affect  the  validity  of  the  act.  The  tax  being  levied  upon 
the  franchises  and  privileges  of  the  corporation,  the  special  use  which 
it  makes  of  its  lawful  powers  is  quite  unimportant.  Because,  I  re- 
peat, that  neither  the  aggregate  property  employed,  nor  the  accu- 
mulated profits,  are  taxed.  They  are  regarded  as  important  only  as 
they  may  furnish  a  just  and  fair  measure  of  estimating  the  value  of 
the  property  which  produced  them,  in  order  that  such  value  may  form 
the  basis  of  taxation. 

I  find  no  warrant  for  the  assumption,  that,  in  the  cases  now  before 
us,  the  surplus  earned  and  in  the  possession  of  the  plaintiffs  is  in- 
vested in  bonds  or  securities  of  the  United  States,  The  classifica- 
tion of  their  assets,  which  lays  the  foundation  for  it,  does  not  result 
from  the  application  of  any  rule  of  law,  and  we  cannot  judicially  de- 
clare that  the  funds  so  invested  are  not  the  identical  funds  received 
from  depositors.  If  it  would  affect  the  legal  question,  it  should  be 
shown,  as  matter  of  fact,  that  the  surplus  is  specifically  so  invested. 

It  is  true,  that  where  a  State  tax  is  laid  upon  the  property  of  an 
individual  or  a  corporation,  so  much  of  their  property  as  is  invested 
I  in  United  States  bonds  is  to  be  treated,  for  the  purposes  of  assess- 
ment, as  if  it  did  not  exist,  but  this  rule  can  have  no  application  to  an 
assessment  upon  a  franchise,  where  a  reference  to  property  is  made 
only  to  ascertain  the  value  of  the  thing  assessed. 

It  is,  however,  argued  with  great  ingenuity  and  skill,  that,  inas- 
much as  the  plaintiffs,  among  other  powers  given  them,  have  the 
right  to  invest  their  money  in  United  States  bonds,  their  franchises 
and  privileges  cannot  be  taxed  by  the  State.  The  power  thus  to  in- 
vest their  moneys,  it  is  contended,  is  a  franchise  for  lending  to  the 
United  States,  and  therefore  cannot  be  taxed,  because  such  taxation 
would  trench  on  tlie  power  of  the  United  States  to  borrow.  This  is 
stretching  the  argument  too  far.  It  cannot  be  pretended  that  the 
State  would  violate  any  obligation  resulting  from  the  power  of  the 
United  States  to  borrow  money,  if  the  law  conferring  the  power  upon 
the  plaintiffs  to  invest  their  moneys  in  United  States  stocks  and 
bonds  were  repealed.  The  State  is  under  no  obligation,  express  or 
implied,  to  legislate  to  enhance  the  credit  of  the  general  government, 
and  should  it  adopt  a  system  of  legislation  which  indirectly  produces 
such  a  result,  its  power  of  repeal  cannot  be  doubted.  The  position, 
that  a  franchise  granted  by  the  bounty  of  the  State  is  not  taxable, 
because  coupled  with  that  franchise  is  the  privilege  of  loaning  money 
to  the  general  government,  is  not  more  untenable  than  to  argue,  that, 
because  such  a  franchise  enhances  the  credit  of  the  United  States, 
therefore  the  legislature  could  not  repeal  the  law  granting  the  fran- 
chise without  violating  its  constitutional  obligations.  Suppose  the 
legislature  had  limited  the  amount  in  which  the  plaintiffs  could  in- 


MAYOR,   &c.   OF  BALTIMORE   V.   BALTIMORE   &   OHIO   R.  R.   CO.       85 


^' 


vest  its  moneys  in  the  securities  of  the  United  States,  it  will  not  be 
contended  that  such  limitation  would  be  void  because  it  impaired  the 
power  of  the  United  States  to  borrow  money. 

It  must,  therefore,  be  regarded  as  sound  doctrine  to  hold  that  the 
State,  in  granting  a  franchise  to  a  corporation,  may  limit  the  powers 
to  be  exercised  under  it,  and  annex  conditions  to  its  enjoyment,  and 
make  it  contribute  to  the  revenues  of  the  State.  If  the  grantee 
accepts  the  boon  it  must  bear  the  burden. 

In  my  opinion,  the  statute  in  question  here  is  not  obnoxious  to  the 
objection  that  it  is  in  conflict  with  the  power  of  the  United  States, 
nor  is  it  to  be  regarded  in  any  sense  as  indicating  an  unfriendly  or 
hostile  spirit. 

Judgment  affirmed. 


BALTIMORE 


DoRSEY,  J.,  IN  MAYOR,  «&c.  OF  BALTIMOEE 
&  OHIO  R.  R.  CO. 

1848.     6  Gill  {Maryland),  288,  pp.  295-296. 

[Charter  provides  that  "  the  shares  of  the  capital  stock  of  the  saiai      Vi  ^  ^ 

company  shall  be  deemed  and  considered  personal  estate,  and  shall  be  r/y       f/^    \   V 
exempt  from  the  imposition  of  any  tax  or  burthen."]  ^'^    »  .   i  \\ 

DOKSEY,  J.  *       ,  VjJ/'* 

But  it  is  said,  that  although  by  the  charter  of  the  Baltimore  and      , . 
Ohio  Rail-road  Com^pany,  its  shares  of  stock  may  be  exempt  from  all   ' 
taxatioUjjyet  that  such  exempjtion  in  no  wise  protects  from  taxation 
the  specific  articles  of  property  of  the  Compan5\     If  such  a  specific.  - 
property  be  deemed  liable  to  the  imposition  of  taxes,  no  sufficient 
reason  can  be  assigned  why  the  franchise  should  not  be  subject  tq     .    ' 
the  like  imposition.     It  is  as  much  an  ingredient  in  the  shares  of  ■ 
stock,  and  component  part  of  their  value,  as  is  any  portion  of  the  .^ 
corporate  property  of  the  Company ;  and  if  under  such  an  expresa 
legislative  exemption  as  that  now  before  us,  the  one  be  exempt  fromjyv-^, 
taxation,  so  also  is  the  other.  \ 

The  design  contemplated  by  the  legislature  in  the  insertion  of  thife  \ 
clause  of  exemption  in  the  act  of  Assembly,  was  to  confer  a  certain^  V,. 
substantial,  not  a  nominal  benefit,  on  the  stockholders,  and  to  induce  /^ 
capitalists  to  risk  their  money  in  a  novel  and  hazardous  enterprise.  tAj     | 

To  impute  to  the  legislature,  in  the  case  before  us,  an  intention  to    ,    ^  ,  fir 

exempt  the  shares  of  the  stock  from  taxation,  and  at  the  same  time  to  (jP*      ^^^^   t 
reserve  the  right  to  tax  every  thing  which  constituted  it  a  stock,  and   ^^    -  -*  -  ' 

gave  to  it  its  value,  would  be  gratuitously  to  cast  an  imputation  upork^ 
the  legislature,  inconsistent  with  every  principle  of  judicial  courtesy.  ^ 
If,  as  has  been  contended,  the  legislature  designed  to  retain  the  right  \ 


'\rf 


z'' 


86  SHELBY   COUNTY   V.   UNION,   &c.   BANK. 

of  taxation  upon  the  property  of  the  Company,  other  than  its  fran- 
chise, it  would  have  expressed  its  intention  in  terms  about  which 
there  would  have  been  no  controversy;  it  would  have  limited  its 
immunity  to  the  franchise  only,  not  to  the  shares  of  stock,  which 
embraces  every  species  of  property  owned  by  the  Company. 


Van  Stckel,  J.,  in  SINGER  MFG.   CO.  v.   HEPPENHEIMER. 

1896.    58  New  Jersey  Law,  633,  pp.  637-638. 

Van  Syckel,  J. 

It  has  long  been  the  accepted  law  of  this  state  that  an  enactment 
which  exempts  a  corporation  or  its  property  from  taxation,  exempts 
also  the  shares  of  its  stock  held  by  individuals. 

The  reasoning  of  the  court  upon  which  that  conclusion  was  rested 
was  that,  as  the  entire  burden  of  taxes  levied  upon  a  corporation 
ultimately  fell  upon  the  shares  of  stock,  it  must  have  been  the  inten- 
tion of  the  legislature  in  exempting  the  former  to  relieve  the  latter. 
State  V.  Branin,  3  Zabriskie,  484 ;  State  v.  Bentley,  Id.  532 ;  State 
V.  Powers,  4  Id.  400. 

The  converse  of  this  it  seems  must  be  conceded,  so  that  an  express 
exemption  of  the  shares  from  taxation  will  also  exempt  the  company. 
Otherwise,  the  exemption  is,  in  fact,  not  an  exemption,  for  every  bur- 
den cast  upon  the  property  of  the  company  is  a  burden  upon  the 
shares  which  represent  that  property. 

•..1  \^  SHELBY  COUNTY  v.  UNION,  &c.  BANK. 

I         J>      J>  ■  \r^V    (C    ^^  1896.     161  U.  S.  149.1 

V-     N^  '         ^^      Appeal  from  U.  S.  Circuit  Court  for  Western  District  of  Tennessee. 
A^    ^  ^-  ^-    ^'"^^^^^   (^-  W.  Metcalf  ^\\i}i  F.   T.  Edmondson,  with  him), 

\'-\  for  Shelby  County. 

Wm.  IL  Carroll  (Isham  G.  Harris  Avith  him),  for  Union  and  Plant- 
ers' Bank. 

Peckham,  J.  This  is  an  appeal  from  the  decree  .  .  .  granting  an 
injunction  at  the  suit  of  the  Union  and  Planters'  liank  to  restrain  the 
municipal  authorities  from  collecting  any  tax  laid  upon  the  surplus  of 
the  bank,  on  the  ground  that  such  surplus  is  exempt  under  a  clause 

1  Citations  of  counsel  omitted  ;  also  portions  of  opinion.— Ed. 


V 


SHELBY   COUNTY   V.   UNION,   &c.   BANK.  87 

in  the  charter  of  theijank  similar  to  the  one  discussed  in  the  above 
cases  of  the  Bank  of  Coymnerce,  ante,  134.^ 

There  are  two  grounds,  either  of  which,  if  decided  in  favor  of  ap- 
pellants in  this  case,  would  result  in  upholding  the  validity  of  the  tax 
upon  the  surplus :  First,  if  it  should  be  held  that  by  the  true  inter- 
pretation of  the  charter  the  exemption,  while  applying  to  the  shares 
of  stock  in  the  hands  of  the  shareholders,  does  not  extend  to  the  cor- 
poration itself,  the  tax  woidd  be  valid ;  second,  even  if  the  tax  on  the 
capital  stock  were  void,  that  upon  the  surplus  might  still  be  upheld 
on  the  authority  of  the  case  of  the  Bank  of  Commerce,  ante,  134.  We 
have  already  held  in  that  case  that  a  tax  on  the  surplus  was  valid, 
but  the  question  whether  a  tax  on  the  capital  stock  of  the  bank  was 
valid  could  not  be  raised  there,  because  the  case  was  before  us  on  a 
writ  of  error  taken  to  a  state  court,  and  the  question  in  the  state 
court  was  decided  in  favor  of  the  exemption  claimed  by  the  bank. 
This  being  an  appeal  from  a  judgment  of  the  United  States  Circuit 
Court,  both  questions  are  open  for  our  decision.  We  think  it,  there- 
fore, proper  to  here  decide  the  question  first  above  stated. 

We  stated  in  the  Bank  of  Commerce  case,  ante,  134,  that  the  tax 
provided  in  this  charter  is  laid  upon  the  shares  of  stock  in  the  hands 
of  the  shareholders,  and  they  are  exempt  from  any  further  taxation 
on  account  of  their  ownership  of  such  shares.  In  that  respect  we 
followed  the  case  of  Farrington  v.  Tennessee,  95  U.  S.  679,  and  we  re- 
fused in  the  Bank  of  Commerce  case  to  overrule  or  distinguish  it ; 
but  it  is  claimed  on  the  part  of  the  appellee  herein  that  the  Farrinr/ton 
case  also  decided  that  the  charter  tax  is  in  lieu  of  all  other  taxes,  not 
only  upon  the  shares  in  the  hands  of  the  shareholders,  but  that  it  ex- 
empts the  corporation  and  all  its  property  from  any  further  taxation. 
We  cannot  give  so  broad  an  effect  to  the  decision  in  the  Farrington 
case.  The  question  of  the  exemption  of  the  corporation  and  its  pro- 
perty from  taxation  did  not  arise  in  that  case,  and  there  was  no 
adjudication  of  that  question  by  its  decision. 

There  are  undoubtedly  some  expressions  in  the  opinion  of  Mr. 
Justice  Swayne  which  lend  color  to  the  idea  that,  in  his  belief,  not 
only  were  the  shares  in  the  hands  of  the  shareholders  exempt  from 
any  further  taxation  than  that  imposed  by  the  charter,  but  that  the 
property  of  the  corporation  was  itself  exempt  from  any  taxation  other 
than  that  provided  for  in  that  section  ;  the  latter  question,  however, 
was  not  before  the  court  and  was  not  decided  by  it,  and  we  are  of  opin- 
ion that,  assuming  that  the  charter  tax  was  laid  upon  the  shares  of 

1  "  Said  institution  shall  have  a  lien  on  the  stock  for  debts  due  it  by  the  stockholders 
before  and  in  preference  to  other  creditors,  except  the  State  for  taxes  ;  and  shall  pav  to  the 
State  an  annual  tax  of  one  half  of  one  per  cent  on  each  share  of  capital  stock,  which  shall  be 
in  lieu  of  all  other  taxes."' — Ed. 


88  SHELBY   COUNTY   V.   UNION,   &c.   BANK. 

stock  in  the  hands  of  the  shareholders,  the  exemption  from  furthei 
taxation  applies  to  the  subject  which  was  taxed  under  the  charter, 
and  is  not  of  any  greater  scope,  and  that  it  would  not,  therefore, 
include  the  exemption  from  taxation  of  either  the  capital  stock  or  the 
surplus,  which  is  the  property  of  the  corporation  itself.  We  come  to 
this  conclusion  because  of  the  fact,  well  established  by  the  decisions 
cf  this  as  well  as  many  state  courts,  tliat  there  is  a  clear  distinction 
between  the  capital  stock  of  a  corporation  and  the  shares  of  stock  of 
such  corporation  in  the  hands  of  its  individual  shareholderSr-  So 
separate  are  these  properties,  and  so  distinct  in  their  nature,  that  the 
taxation  of  the  one  property  is  not  the  taxation  of  the  other.  This  is 
no  new  doctrine,  and  the  distinction  between  the  two  properties  was 
recognized  by  the  Supreme  Court  of  Tennessee  as  long  ago  as  in  the 
case  of  the  Union  Bank  v.  State,  9  Yerger,  490,  decided  in  1836.  It 
was  held  that,  under  the  clause  of  the  charter  there  under  considera- 
tion, any  furtlier  tax  on  the  capital  stock  than  that  which  was  pro- 
vided for  in  the  charter  itself  was  void,  but  that  the  State  might  tax 
the  shares  of  stock  in  the  hands  of  individuals  notwithstanding  the 
exemption  from  further  taxation  on  the  capital  stock. 

[After  commenting  upon  various  cases,  including  Gordon  v.  Appeal 
Tax  Court,  3  Howard,  U.  S.  133.]  Long  after  that  case  was  decided 
this  court  in  many  cases,  notably  that  of  Va7i  Allen  v.  Assessors,  3 
Wallace,  573,  and  People  v.  Commissioners,  4  Wallace,  244,  recognized 
the  separate  and  distinct  character  of  the  two  properties,  the  capital 
stock  and  the  shares  thereof  in  the  hands  of  individual  shareholders, 
and  such  separate  property  in  our  opinion  is  strong  proof  of  the  limi- 
tation of  the  exemption  to  the  property  which  is  taxed. 

We  have  found  no  case  in  this  court  which  is  authority  for  the 
proposition,  that  language,  such  as  is  under  consideration  in  this  case, 
exempts  from  further  taxation  both  the  capital  stock  of  the  corpora- 
tion and  the  shares  of  stock  in  the  hands  of  individual  shareholders. 
As  the  Farrington  case  decides  that  this  language  does  import  that 
the  charter  tax  is  laid  upon  the  shares  in  the  hands  of  individual 
shareholders,  and  that  those  shares  are  exempt  from  further  taxation, 
that  question  is  set  at  rest,  and  there  being  nothing  in  any  case  which 
extends  that  language  to  both  properties,  we  hold  that  when  it  is  made 
applicable  to  the  separate  shares  in  the  hands  of  individual  share- 
holders, it  does  not  apply  to  or  cover  the  case  of  the  capital  stock  of 
the  corporation,  and  that  such  stock  is  liable  to  be  taxed,  as  the  State 
may  determine. 

This  determines  the  liability  of  the  capital  stock  of  the  Union  and 
Planters'  Bank  to  taxation,  and  of  course  it  overrules  any  claim  on 
the  part  of  that  bank  for  exemption  from  taxation  of  its  surplus  or 
accumulated  profits.  The  question  whether  such  surplus  could  be 
taxed  if  the  capital  stock  itself  were  to  be  regarded  as  exempt  has 


SHELBY   COUNTY   V,   UNION,   &c.   BANK.  89 

also  been  decided  in  the  preceding  case  of  the  Bank  of  Commerce. 
The  decree  of  the  Circuit  Court  must,  therefore,  be 

Reversed,  and  tlie  cause  remanded  to  that  court  xvith  directions  to 
dismiss  the  bill  with  costs. 

Mr.  Justice  White  dissented. 

The  question  -^vhether  the  surplus  could_b£__taX£d_if^  the  capital 
stockitself  were  to  be  regarded  as  exempt  wasj^swered  affirmatively 
in  the  preceding  case.  Bank  of  Commerce  v-  Tp.nnp.s^^.p,^  1.61  U.  S.  134. 
While  a  similar  exemption  clause  was  in  force,  the  legislature  enacted, 
"  that  the  surplus  and  undivided  profits  in  such  bank  .  .  .  shall  be 
assessable  to  said  bank  .  .  .  and  the  same  shall  not  be  considered  in 
the  assessment  of  the  stock  therein." 

The  case  came  up  on  error  to  the  Supreme  Court  of  Tennessee. 
That  court  had  held  that  the  capital  stock  was  exempt  from  taxation  ; 
and  the  U.  S.  Supreme  Court  held  that  it  had  not  power  to  review  the 
decision  of  the  State  court  on  this  point.  (See,  however,  a  decision  on 
rehearing,  163  U.  S.  416.)  The  Tennessee  Court  had  also  held,  that 
the  surplus  was  taxable;  and  the  correctness  of  that  decision  was 
open  to  review  in  the  U.  S.  Supreme  Court. 

The  opinion  of  the  Court  upon  this  branch  of  the  case  was  as  follows  : 

Peckham,  J.  The  corporation,  plaintiff  in  error,  demands  the  same 
exemption  from  taxation  on  its  surplus  that  has  been  accorded  it  for 
its  capital  stock,  and  it  bases  its  contention  upon  the  same  clause  of 
exemption  in  its  charter.  We  think  it  cannot  be  ^a^tained^as  to_the 
surplus,  which  we  believe  is  taxabla  under  the  law  above  quoted. 
This  whole  demand  oi  exemption  from  taxation  made  by  the  bank 
and  its  shareholders  must  be  considered  with  reference  to  the  general 
rule  governing  claims  of  that  nature.  It  is  well  known,  has  long 
existed,  and  is  undoubted.  Neu-  Orleans  City  &  Lake  Railroad  v.  Neio 
Orleans,  143  U.  S.  192,  195 ;  Vicksburrj  &  Pacific  Railroad  v.  Dennis, 
116  U.  S.  665,  and  many  cases  there  cited  :  Farrinr/ton  v.  Tennessee, 
95  U.  S.  679,  686 ;  West  Wisconsin  Railway  v.  Supervisors,  93  U.  S. 
595 ;  Tucker  v.  Ferguson,  22  Wall.  527. 

These  cases  show  the  principle  upon  which  is  founded  the  rule  that 
a  claim  for  exemption  from  taxation  must  be  clearly  made  out.  Taxes 
being  the  sole  means  by  which  sovereignties  can  maintain  their  exist- 
ence, any  claim  on  the  part  of  any  one  to  be  exempt  from  the  full 
payment  of  his  share  of  taxes  on  any  portion  of  his  property  must  on 
that  account  be  clearly  defined  and  founded  upon  plain  language. 
There  must  be  no  doubt  or  ambiguity  in  the  language  used  upon 
which  the  claim  to  the  exemption  is  founded.  It  has  been  said  that 
a  well  founded  doubt  is  fatal  to  the  claim ;  no  implication  will  be  in- 
dulged in  for  the  purpose  of  construing  the  language  used  as  giving 
the  claim  for  exemption,  where  such  claim  is  not  founded  upon  the 
plain  and  clearly  expressed  intention  of  the  taxing  power. 


W^ 


90  SHELBY   COUNTY   V.   UNION,   &c.   BANK. 

The  capital  stock  of  a  corporation  and  the  shares  into  which  such 
stocky  may  be  divided  and  held  by  individual  shareholders  are  two  dis- 
tinct jsieces  of  property.  The  capital  stock  and  the  shares  of  stock  in 
the  hands  of  the  sluy^eb^ldersjnayjjothjje  taxed,  and  it^is_not  double 
ta^atiQiLZ_  Va7i  Allen  v.  Assessors,  3  Wall.  573  ;  People  v.  Commission- 
ers, 4  Wall.  244,  cited  in  Farrington  v.  Tennessee,  95  U.  S.  687. 

This  statement  has  been  reiterated  many  times  in  various  decisions 
by  this  court,  and  is  not  now  disputed  by  any  one.     In  the  case  last 
cited,  Mr.  Justice  Swayne,  in  delivering  the  opinion  of  the  court, 
enumerated  many  objects  liable  to  be  taxed  other  than  the  capital 
/  stock  of  a  corporation,  and  among  them  he  instanced,  (1.)  the  fran- 
chise to  be  a  corporation  ;  (2.)  the  accumulated  earnings ;  (3.)  profits 
and  dividends ;    (4.)    real  estate  belonging  to   the   corporation  and 
necessary  for  its  business^;  and  he  adds  that  "  this  enumeration  shows 
the  searching  and  comprehensive  taxation  to  which  such  institutions 
are   subjected  where  there  is  no  protection  by  previous   compact." 
*'And    in  Tennessee   v.    Whiticorth,  117  U.  S.  129,  at  page   136,    Mr. 
Chief  Justice  Waite,  in  delivering  the  opinion  of  the  court,  says : 
.  "  That  in  corporations  four  elements  of  taxable  value  are  sometimes 
/  found.     First,  the  franchise  ;  second,  the  capital  stock  in  the  hands 
/  of  the  corporation  ;  third,  the  corporate  property ;  and,  fourth,  the 
I    shares  of  capital  stock  in  the  hands  of  the  individual  stockholders." 
*       The  surplus  belonging  to  this  bank  is  "  corporate  property,"  and  is 
distinct  from  the  capital  stock  in  the  hands  of  the  corporation.     The 
exemption,  in  terms,  is  upon  the  payment  of  an  annual  tax  of  one 
lialf  of  one  per  cent  upon  each  share  of  the  capital  stock,  which  shall 
be  in  lieu  of  all  other  taxes.     The  exemption  is  not,  in  our  judgment, 
greater  in  its  scope  than  the  subject  of  the  tax.     Recognizing,  as  we 
do,  that  there  is  a  different  property  in  that  which  is  described  as 
capital  stock  from  that  which  is  described  as  corporate  property  other 
than  capital  stock,  and  remembering  the  necessity  there  is  for  a  clear 
expression  of  the  intention  to  exempt  before  the  exemption  will  be 
granted,  we  must  hold  that  the  surplus  has  not  been  granted  exemp- 
tion by  the  clause  contained  in  the  charter  under  discussion.     The 
very  name  of  surplus  implies  a  difference.     There  is  capital  stock 
and  there  is  a  sur})lus  over,  above  and  beyond  the  capital  stock,  which 
surplus  is  the  property  of  the  bank  until  it  is  divided  among  stock- 
holders. 

The  case  of  Bank  v.  Tennessee,  104  U.  S.  493,  does  not  hold  to  the 
contrary  of  this  doctrine.  This  question  was  not  therein  discussed  or 
decided.  Tlie  question  which  was  decided  related  only  to  the  taxation 
of  real  property  not  used  by  the  bank  in  its  business,  and  it  was  held 
liable  to  taxation. 

The  case  is  no  authority  for  the  proposition  contended  for  here, 
namely,  that  the  whole  surplus  of  this  bank  is  exempt  from  taxation. 
No  individual  sliareholder  has  any  legal  right  to  claim  any  portion  of 
this  surplus  ;  until  divided  by  the  board  of  directors  it  remains  the 


UNITED   STATES   V.  WOLTERS.  91 

property  of  the  corporation  itself,  and  in  the  sense  in  which  the  words 
"  capital  stock  "  are  used  in  the  exemption  clause  the  surplus  does  not 
form  any  part  thereof.  It  is  said  that  the  purpose  of  incorporating  a 
bank  is  to  enable  the  institution  to  accumulate  profits  and  to  make 
dividends  out  of  them,  and  that  the  dividends  cannot  be  made  until 
the  profits  have  been  accumulated,  and  that  under  this  ruling  profits 
would  come  under  the  description  of  surplus  to  be  taxed  before  dis- 
tribution in  a  dividend.  It  is  true  that  dividends  cannot  rightfully 
be  made  until  profits  have  accumulated  ;  but  it  is  one  thing  to  accu- 
mulate profits  each  six  months  or  annually  and  then  divide  them  among 
the  stockholders  by  way  of  dividends,  and  quite  another  thing  to  ac- 
cumulate profits  year  after  year,  and,  while  still  declaring  dividends, 
accumulate  a  surplus  which  is  not  so  divided.  The  sums  accumulated 
by  way  of  profit  between  the  regularly  recurring  dividend  days  might 
not  be  regarded  as  surplus,  provided  those  profits  were  regularly  dis- 
tributed in  dividends.  The  surplus  in  this  case  is  clearly  not  of  that 
kind  which  has  been  saved  for  the  purpose  of  being  distributed  by 
dividends.  It  may  be  true  that  the  general  effect  of  a  tax  on  this  sur- 
plus might  indirectly  operate  upon  the  shareholder  by  possibly  lessen- 
ing  thejv^alue  of  his  shares  to  some^xtejit,  but  that  is  not  the  same 
as  if  a  tax  had  been  laid  upon  those  shares.  In  levying  the  charter 
tax  it  was  conceded  that  the  tax  has  always  been  measured  by  the  par 
value  of  the  shares  of  stock,  while  the  actual  value  of  such  shares, 
because  of  the  large  surplus  owned  by  the  bank,  may  have  been  very 
much  greater,  and  the  statute  under  which  the  surplus  is  taxed  pro- 
vides that  such  surplus  must  not  be  considered  in  the  assessment  upon 
the  stock  ;  so  that  provision  is  made  whereby  a  tax  upon  the  surplus 
and  the  charter  tax  upon  the  shares  of  stock  will  neither  be  double 
nor  unjust  taxation.  Although  a  surplus  may  be  required  by  the 
national  banking  act,  and  also  by  the  laws  of  good  and  safe  banking, 
yet  we  do  not  perceive  that  this  fact  has  any  material  effect  upon  the 
question. 

We  are,  therefore,  of  opinion  that  the  surplus  was  properly  taxed, 
and  that  the  bank's  claim  of  exemption  as  to  such  surplus  is^jvithout      .    p       v 
foundation  in  law.  tv  \    'J^      f^ 

UNITED  STATES  v.   WOLTEKS.  f    V  ^         \.^      ^ 

1891.     iC,  Federal  Reporter,  f)09.  P\      ^  J^  e^f^J^  A'}^    ^ 

Ross,  J.     This  is  a  suit  to  recover  of  the  holders  of  the  stock  of  a'"    A,^^ 
corporation  organized  under  the  laws  of  California  to  engage  in,  and^  r     j/ 
which  did  engage  in,  the  business  of  distilling,  a  tax  amounting  toA^ 
$20,124.40  on  spirits  distilled  by  it,  and  of  which  tax,  it  is  alleged, 
the  distiller  defrauded  the  government.     The  action  is  based  on  that 
clause  of  section  3251  of  the  Revised  Statutes  which  declares  that 


/'y 


92  UNITED  STATES  V.   WOLTERS. 

"  every  proprietor  and  possessor  of,  and  every  person  in  any  manner 
interested  in  the  use  of,  any  still,  distillery,  or  distilling  apparatus, 
shall  be  jointly  and  severally  liable  for  the  taxes  imposed  by  law  on 
i the  distilled  spirits  produced  therefrom."  Demurrers  to  the  complaint 
have  been  filed  by  some  of  the  defendants,  and  in  their  support  it  is 
urged  that  the  language  of  the  statute  in  question  is  not  broad  enough 
to  include  the  stockholders  of  a  corporation  engaged  in  the  business 
of  distilling ;  that  stockholders  are  neither  proprietors  nor  possessors 
of  the  corporate  property ;  and  that  the  words  "  interested  in  the  use 
of  "  were  inserted  "  to  designate  a  class  who  might  be  using,  or  inter- 
ested in  using,"  such  distillery,  although  not  interested  in  the  pro- 
perty itself. 

The  language  of  the  act  does  not  admit  of  such  limitation.  Revenue 
laws  are  not,  like  penal  laws,  to  be  strictly  construed,  nor  are  they, 
like  remedial  statutes,  to  be  construed  with  extraordinary  liberality; 
but  they  should  be  so  construed  "  as  most  effectually  to  accomplish 
the  intention  of  the  legislature  in  j)assing  them."  Taylor  v.  U.  S.,  3 
How.  197.  The  provisions  of  the  law  are  rigid,  and  in  some  instances 
perhaps  arbitrary,  in  their  operation.  But  they  were  designed  to  pre- 
vent frauds  upon  the  government,  and  whoever  engages  in  business 
by  virtue  of  their  provisions  must  be  governed  by  them.  The  holder 
of  stock  in  a  corporation  organized  for  and  engaged  in  the  business 
of  distilling  spirits,  if  not  the  proprietor  or  possessor  of  the  distillery 
within  the  meaning  of  the  statute,  is  certainly  "  interested  in  the  use 
of  "  the  distillery  operated  by  the  corporation  of  which  he  is  a  stock- 
holder. He  has  a  direct,  pecuniary  interest  in  the  business  of  distill- 
ing, —  the  purpose  for  which  the  distillery  is  used,  —  as  well  as  in 
the  property  itself.  The  amount  of  such  interest,  whether  large  or 
small,  is  of  no  consequence.  The  statute  declares  that  every  person 
so  interested  shall  be  jointly  and  severally  liable  for  the  taxes  im- 
posed by  law  on  the  distilled  spirits  produced  therefrom.  It  is  obvi- 
oiis  that  the  state  statute  regulating  the  liability  of  stockholders  of 
corporations  organized  under  its  laws  has  no  application  here.  The 
liability  of  the  defendants  is  to  be  measured  by  the  provisions  of  the 
statute  under  which,  and  by  virtue  of  which  only,  the  distilling  was 
done. 

Demurrers  overruled,  with  leave  to  defendants  to  ansicer  within  the 
usual  time. 

A  similar  result  was  reached  by  the  Supreme  Court  of  California 
in  Richter  v.  Henninr/san,  110  California,  530,  decided  in  1895. 

Tlie  Court  said,  in  part : 

A  stockholder  in  a  private  corporation  for  profit  is  not  in  any  proper 
sense  the  owner  of  the  property  of  the  corporation  as  such.  He  has, 
how^yexj^a  direct  i,yt(^rost  i\i  thf;  porporntinn.  In  Plimpton  v.  Bir/elow, 
03  N.  Y.  502,  it  was  said  :  "  The  right  wliich  a  shareholder  in  a  corpora- 
tion has,  by  reason  of  his  ownership  of  shares,  is  a  right  to  partici- 


UNITED   STATES   V.  WOLTERS.  93 

pate  according  to  the  amount  of  his  stock  in  the  surplus  profits  of  the 
corporation  on  a  division,  and  ultimately  on  its  dissolution,  in  the 
assets  remaining  after  payment  of  its  debts."  Gibbons  v.  Mahon,  136 
U.  S.  549,  and  Kohl  v.  Lilienthal,  81  Cal.  378,  are  to  like  effect. 

A  stockholder  has  an  insurable  interest  in  the  property  of  the  cor- 
poration. (Rif/gs  V.  Commercial  Miit.  Ins.  Co.,  125  N.  Y.  7  ;  21  Am. 
St.  Rep.  716;  Warren  v.  Davenport  etc.  Ins.  Co.,  31  Iowa,  464;  7  Am. 
Rep.  160.) 

At  common  law  a  stockholder  in  a  corporation,  on  account  of  his 
interest,  was  not  a  competent  witness  for  the  corporation  in  an  action 
against  it,  or  to  serve  as  a  jvidge  or  juror  where  the  corporation  was 
a  party. 

We  must  not  confound  the  liability  of  a  stockholder  in  a  corpora- 
tion, under  the  law  of  its  creation,  with  that  imposed  upon  him  by 
the  act  of  Congress.  His  liability  under  the  latter  is  quite  independ- 
ent of  the  former,  and  is  just  what  the  act  of  Congress  has  imposed 
upon  him. 

That  liability  under  the  law  applies  not  only  to  every  proprietor 
and  possessor  of  a  still,  but  also  to  " ev&ryjjierson  in  any_manner 
interested  in  the  use  of  any  still,  distillery,  etc.,"  and  makes  them  all 
jointly  ahd^  severally  liable  for  the  tax.    ^ 

[The  court  refer  to  opinions  of  the  Attorneys  General ;  vol.  15,  p. 
559 ;  vol.  16,  p.  10.^] 

1  In  Regina  v.  Arnaud,  9  Queen's  Bench,  806,  the  Court  decided  that  a  British  corpora- 
tion, whose  shareholders  were  in  part  foreigners,  was  entitled  to  have  a  vessel  owned  by  it 
registered  under  a  statute  limiting  the  right  of  registry  to  such  vessels  as  "shall  wholly 
belong  and  continue  wholly  to  belong  to  her  Majesty's  subjects;  "  and  further  providing 
that  no  foreigner  should  be  "  the  owner,  in  whole  or  in  part,  directly  or  indirectly,"  of  any 
vessel  entitled  to  be  registered.  Lord  Denman  said:  "  It  appears  to  us  that  the  British 
corporation  is,  as  such,  the  sole  owner  of  the  ship,  and  a  British  subject  within  the  meaning 
of  the  fifth  section,  as  far  as  such  term  can  be  applicable  to  a  corporation,  notwithstanding 
some  foreigners  may  individually  have  shares  in  the  company;  and  that  such  individual 
members  of  the  corporation  are  not  entitled,  in  whole  or  in  part,  directly  or  indirectly,  te 
be  owners  of  the  vessel." 

[The  above  is  quoted  from  2  Morawetz  on  Corporations,  s.  1091.] 


r 


'K  OF  UNITED   STATES   V.  DEVEAUX. 

V 


^^     'Jf  /T',  ,  SECTION  III.  .oy  A 


I^^r^ 


\r 


TM  Distinction  as  applied  to  Jurisdiction  ofll.  S.  Court  on  the  Ground 
^  of  Diversiti/  of  Citizenship. 

BANK   OF   UNITED   STATES   v.   DEVEAUX  et   al. 

1809.     5  Cranch,  U.  S.  61.1 

Error  to  the  U.  S.  Circuit  Court  for  the  District  of  Georgia. 

The  declaration  describes  the  plaintiffs  as  "  The  President,  Direc- 
tors and  Company,  of  the  Bank  of  the  United  States,  .  .  .  estab- 
lished under  an  act  of  congress.  .  .  ."  At  the  close  of  the  declaration 
is  the  following  allegation  :  "  And  your  petitioners  aver  that  they  are 
citizens  of  the  State  of  Pennsylvania,  and  the  said  Peter  Deveaux 
and  Thomas  Robertson  are  citizens  of  the  State  of  Georgia." 

Plea  in  abatement,  denying  the  jurisdiction  of  the  U.  S.  Circuit 
Court.     Demurrer.     Judgment  for  defendants  upon  the  demurrer. 

Blnyiey  and  Harper,  for  plaintiffs  in  error. 

P.  B.  Key,  and  Jones,  contra. 

Marshall,  C.  J.     Two  points  have  been  made  in  this  cause. 

1.  That  a  corporation  composed  of  citizens  of  one  State  may  sue  a 
•  '*'               citizen  of  another  State  in  the  federal  courts. 

2.  That  a  right  to  sue  in  those  courts  is  conferred  on  this  bank  by 
the  law  which  incorporates  it. 

y>  The  last  point  will  be  first  considered.  .  . 

[The  court  holds,  that  no  right  is  conferred  on  the  bank,  by  the  act 
of  incorporation,  to  sue  in  the  federal  courts.] 

2.  The  other  point  is  one  of  much  more  difficulty. 

The  jurisdiction  of  this  court  being  limited,  so  far  as  respects  the 
character  of  the  parties  in  this  particular  case,  ''  to  controversies  be- 
".ween  citizens  of  different  States,"  both  parties  must  be  citizens  to_ 
come  within  the  description.  ~ 

That  invisible,  intangible,  and  artificial  being,  that  mere  legal 
entity,  a  corporation  aggregate,  is  certainly  not  a  citizen  ;  and,  conse- 
quently, cannot  sue  or  be  sued  in  the  courts  of  the  United  States, 
unless  the  rights  of  the  members,  in  this  respect,  can  be  exercised  m 
their  corporate  name.  If  the  corporation  bs  considered  as  a  mere" 
faculty,  and  not  as  a  company  of  individuals,  who,  in  transacting 
their  joint  concerns,  may  use  a  legal  name,  they  must  be  excluded 
from  the  courts  of  the  Union. 

'J'he  duties  of  this  court,  to  exercise  jurisdiction  where  it  is  conferred, 
and  not  to  usurp  it  where  it  is  not  conferred,  are  of  equal  obligation. 
The  constitution,  therefore,  and  the  law,  are  to  be  expounded,  without  a 
loaning  the  one  way  or  the  other,  according  to  those  general  principles 
which  usually  govern  in  the  construction  of  fundamental  or  other  laws. 

1  Stfitomcnt  ahridf^ed.     Arguments  and  part  of  opinion  omitted.  —  Ed. 


BANK   OF  UNITED   STATES   V.   DEVEAUX.  95 

A  constitution,  from  its  nature,  deals  in  generals,  not  in  detail.  Its 
framers  cannot  perceive  minute  distinctions  which  arise  in  the  pro- 
gress of  the  nation,  and  therefore  confine  it  to  the  establishment  of 
broad  and  general  principles. 

The  judicial  department  was  introduced  into  the  American  constitu- 
tion under  impressions,  and  with  views,  which  are  too  apparent  not  to 
be  perceived  by  all.  However  true  the  fact  may  be,  that  the  tribunals 
of  the  States  will  administer  justice  as  impartiall}'  as  those  of  the 
nation,  to  parties  of  every  description,  it  is  not  less  true  that  the  con- 
stitution itself  either  entertains  apprehensions  on  this  subject,  or 
views  with  such  indulgence  the  possible  fears  and  apprehensions  of 
suitors,  that  it  has  established  national  tribunals  for  the  decision  of 
controversies  between  aliens  and  a  citizen,  or  between  citizens  of  dif- 
ferent States.  Aliens,  or  citizens  of  different  States,  are  not  less  sus- 
ceptible of  these  apprehensions,  nor  can  they  be  supposed  to  be  less 
the  objects  of  constitutional  provisions,  because  they  are  allowed  to 
sue  by  a  corporate  name.  That  name,  indeed,  cannot  be  an  alien  or  a 
citizen ;  but  the  persons  whom  it  represents  may  be  the  one  or  the 
other;  and  the  controversy  is,  in  fact  and  in  law,  betweeu  those  per- 
sons suing  in  their  corporate  character,  by  their  corporate  name,  for 
a  corporate  right,  and  the  individual  against  whom  the  suit  may  be 
instituted.  Substantially  and  essentially,  the  parties  in  such  a  case, 
where  the  members  of  the  corporation  are  aliens,  or  citizens  of  a  differ- 
ent State  from  the  opposite  party,  come  within  the  spirit  and  terms  of 
the  jurisdiction  conferred  by  the  constitution  on  the  national  tribunals. 

Such  has  been  the  universal  understanding  on  the  subject.  Repeat- 
edly has  this  court  decided  causes  between  a  corporation  and  an  indi- 
vidual without  feeling  a  doubt  respecting  its  jurisdiction.  Those 
decisions  are  not  cited  as  authority  ;  for  they  were  made  without  con- 
sidering this  particular  point ;  but  they  have  much  weight,  as  they 
show  that  this  point  neither  occurred  to  the  bar  or  the  bench ;  and 
that  the  common  understanding  of  intelligent  men  is  in  favor  of  the 
right  of  incorporated  aliens,  or  citizens  of  a  different  State  from  the 
defendant  to  sue  in  the  national  courts.  It  is  by  a  course  of  acute 
metaphysical  and  abstruse  reasoning,  which  has  been  most  ably  em- 
ployed on  this  occasion,  that  this  opinion  is  shaken. 

As  our  ideas  of  a  corporation,  its  privileges  and  its  disabilities,  are 
derived  entirely  from  the  English  books,  we  resort  to  them  for  aid,  in 
ascertaining  its  character.  It  is  defined  as  a  mere  creature  of  the 
law,  invisible,  intangible,  and  incorporeal.  Yet,  when  we  examine 
the  subject  further,  we  find  that  corporations  have  been  included 
within  terms  of  description  appropriated  to  real  persons. 

There  is  a  case,  however,  reported  in  12  Mod.  669,  which  is  thought 
precisely  in  point.  The  corporation  of  London  brought  a  suit  against 
Wood,  by  their  corporate  name,  in  the  mayor's  court.  The  suit  was 
brought  by  the  mayor  and  commonalty,   and  was  tried  before  the 


96  BANK   OF   UNITED   STATES   V.  DEVEAUX. 

mayor  and  aldermen.  The  judgment  rendei'ed  in  this  cause  was 
brought  before  the  court  of  king's  bench  and  reversed,  because  the 
court  was  deprived  of  its  jurisdiction  by  the  character  of  the  indi- 
viduals who  were  members  of  the  corporation. 

In  that  case  the  objection  that  a  corporation  was  an  invisible,  intan- 
gible  thing,  a  mere  incorporeal  legal  entity,  in  which  the  characters  of 
the  individuals  who  composed  it  were  completely  merged,  was  urged, 
and  was  considered.  The  judges  unanimously  declared  that  they  could 
look  beyond  the  corporate  name,  and  notice  the  character  of  the  indi- 
vidual. In  the  opinions,  which  were  delivered  seriatim,  several  cases 
are  put  which  serve  to  illustrate  the  principle  and  fortify  the  decision. 

The  case  of  The  Mayor  and  Commonalty  v.  Wood  is  the  stronger 
because  it  is  on  the  point  of  jurisdiction.  It  appears  to  the  court  to 
be  a  full  authority  for  the  case  now  under  consideration.  It  seems 
not  possible  to  distinguish  them  from  each  other. 

If,  then,  the  congress  of  the  United  States  had  in  terms  enacted 
'that  incorporated  aliens  might  sue  a  citizen,  or  that  the  incorporated 
citizens  of  one  State  might  sue  a  citizen  of  another  State,  in  the  fed- 
eral courts,  by  its  corporate  name,  this  court  would  not  have  felt  itself 
justified  in  declaring  that  such  a  law  transcended  the  constitution. 

The  controversy  is  substantially  between  aliens,  suing  by  a  corpo- 
rate name,  and  a  citizen,  or  between  citizens  of  one  State,  suing  by  a 
corporate  name,  and  those  of  another  State.  When  these  are  said  to 
be  substantially  the  parties  to  the  controversy,  the  court  does  not 
mean  to  liken  it  to  the  case  of  a  trustee.  A  trustee  is  a  real  person 
capable  of  being  a  citizen  or  an  alien,  who  has  the  whole  legal  estate 
in  himself.  At  law,  he  is  the  real  proprietor,  and  he  represents  him- 
self and  sues  in  his  own  right.  But  in'  this  case  the  corporate  name 
represents  persons  who  are  members  of  the  corporation. 

If  the  constitution  would  authorize  congress  to  give  the  courts  of 
the  Union  jurisdiction  in  this  case,  in  consequence  of  the  character  of 
the  members  of  the  corporation,  then  the  Judicial  Act  ought  to  be 
construed  to  give  it.  For  the  term  citizen  ought  to  be  understood  as 
it  is  used  in  the  constitution,  and  as  it  is  used  in  other  laws.  That  is, 
to  describe  the  real  persons  who  come  into  court,  in  this  case,  under 
their  corporate  name. 

That  corporations  composed  of  citizens  are  considered  by  the  legis- 
lature as  citizens,  under  certain  circumstances,  is  to  be  strongly  in- 
ferred from  the  Registering  Act.  It  never  could  be  intended  that  an 
American  registered  vessel,  abandoned  to  an  insurance  company  com- 
posed of  citizens,  should  lose  her  character  as  an  American  vessel ; 
and  yet  this  would  be  the  consequence  of  declaring  that  the  members 
of  the  corporation  were,  to  every  intent  and  purpose,  out  of  view,  and 
merged  in  the  corporation. 

The  court  feels Jiself^  authorized  j)y^he_case_in_12JVIod.  (on  a  ques- 
tion of  jurisdiction),  to  look  to  the  character  of  the  individuals  who 
compose  the  cqr])oratio]i,  and  they  think  that  the  precedents  of  tlii^ 


LOUISVILLE,   &c.    R.   R.   CO.   V.   LETSON.  97 

court,  though  they  were  not  decisions  on  argument,  ought  not  to  be 
absolutely  disregarded. 

If  a  corporation  may  sue  in  the  courts  of  the  Union,  the  court  is  of 
opinion  that  the  averment  in  this  case  is  sufficient. 

Being_authorized  to  sue  in  their  corporate  name,  they  could  make_ 
the  averment;  and  it  must  apply  to  the_ plaintiffs  as  individualSj_ 
because  it  could  not  be  true  as  applied  to  the  corporation. 

Judgment  reversed;  plea  in  abatement  overruled,  and  cause 
remanded. 

[In  1806,  the  Supreme  Court,  in  Straivhridge  v.  Curtiss,  3  Cranch 
(U.  S.),  267,  decided  that,  where  there  are  two  or  more  joint  plaintiffs 
and  two   or   more   joint   defendants,  each  of  the  plaintiffs  must  be  / 
capable  of  suing  each  of  the  defendants  in  the  U.  S.  courts,  in  order  / 
to  support  the  jurisdiction.     Strawbridge  was  a  citizen  of  Massachu-  (     C' 
setts.     One  of  the  defendants  was  a  citizen  of  Vermont ;  the  other 
defendants  were  citizens  of  Massachusetts.     Held,  that  the  U.  S.  court 
had  not  jurisdiction. 

A  logical  application  of  the  combined  principles  of  Straivhridge  v. 
Curtiss  and  Bank  v.  Deveaux  was  made  in  Commercial,  &c.,  Bank  of 
Vicksburg  v.  Slocomb  (a.  d.  1840),  14  Peters,  60.  The  plaintiffs,  citi- 
zens of  Louisiana,  brought  an  action  in  the  U.  S.  Circuit  Court  for  the 
Southern  District  of  Mississippi  against  a  Mississippi  corporation. 
The  defendant  pleaded  that  two  of  the  members  of  the  corporation 
were  citizens  of  Louisiana.  It  was  held,  that,  upon  the  facts  thus_ 
pleaded,  the  court  had  not  jurisdiction  ;  the  court  saving  (in  effect) 
that  all  the  corporators  must  be  citizens  of  a  different  State  from  the 
opposite  party.] 


^ 


LOUISVILLE,   CINCINNATI   AND  CHARLESTON  RyR 

(Plaintiffs  in  Error)  v.  LETS0I^y5f\"  "^  .^ 

1844.     2  toward  (Cr.S.)  497.1  K)     V^j^V    .a 

Action  in  the  U.  S.  Circuit  Court  for  the  District  of  South  Caro-' 
lina,  by  Letson,  a  citizen  of  New  York,  against  a  railroad  corporation 
chartered  by  South  Carolina.  A  plea  to  the  jurisdiction  alleged 
{inter  alia)  that,  although  some  of  the  members  of  the  corporation 
were  citizens  of  South  Carolina,  there  were  two  members  who  were 
citizens  of  North  Carolina.  A  demurrer  to  this  plea  was  sustained. 
Defendant  then  pleaded  the  general  issue.  After  trial  and  verdict  for 
plaintiff,  the  defendant  brought  a  writ  of  error. 

1  Statement  abridged.  Arguments  omitted.  Onlv  a  small  part  of  the  opinion  is  given- 
-  Ed. 


l^ 


h 


98  LOUISVILLE,   &c.   R.    E.    CO.   V.    LETSON. 

Mazyck,  for  plaintiffs  in  error. 

Pettigru,  Lesestie,  and  Legare  (Attorney  General),  for  defendant  in 
error. 

Wayne,  J. 

The  objection  is  equivalent  to  this  proposition,  that  a  corporation 
in  a  State  cannot  be  sued  in  the  circuit  courts  of  the  United  States 
by  a  citizen  of  another  State,  unless  all  the  members  of  the  corporation 
are  citizens  of  the  State  in  which  the  suit  is  brought. 

If  it  be  right  to  look  to  the  members  to  ascertain  whether  there  be 
jurisdiction  or  not,  the  want  of  appropriate  citizenship  in  some  of  them 
to  sustain  jurisdiction  cannot  take  it  away,  when  there  are  other  mem- 
bers who  are  citizens,  with  the  necessary  residence  to  maintain  it. 

After  mature  deliberation,  we  feel  free  to  say  that  the  cases  of 
Strawbridge  and  Curtis,  and  that  of  the  Bank  and  Deveaux,  were  car- 
ried too  far.  .  .  .  The  case  of  The  Commercial  Bank  of  Vlckshm-g  said 
Slocomb,  14  Peters,  60,  was  most  reluctantly  decided  upon  the  mere 
authority  of  these  cases. 

/  A  corporation,  created  by  a  State,  to  perform  its  functions  under  the 
authority  of  that  State,  and  only  suable  there,  though  it  may  have 
(members  out  of  the  State,  seems  to  us  to  be  a  person,  though  an  arti- 
Ificial  one,  inhabiting  and  belonging  to  that  State,  and  therefore  en- 
jtitled,  for  the  purpose  of  suing  and  being  sued,  to  be  deemed  a  citizen 
/of  that  State. 

[After  asserting  that  the  Act  of  Feb.  28,  1839,  enlarged  the  juris- 
diction of  the  courts.] 

The  case  before  us  might  be  safely  put  upon  the  foregoing  reason- 
ing and  upon  the  statute,  but  hitherto  we  have  reasoned  upon  this  case 
upon  the  supposition  that,  in  order  to  found  the  jurisdiction  in  cases 
of  corporations,  it  is  necessary  there  should  be  an  averment,  which,  if 
contested,  was  to  be  supported  by  proof,  that  some  of  the  corporators 
are  citizens  of  the  State  by  which  the  corporation  was  created,  where 
it  does  its  business,  or  where  it  may  be  sued.  But  this  has  been  done 
in  deference  to  the  doctrines  of  former  cases  in  this  court,  upon  which 
we  have  been  commenting.  But  there  is  a  broader  ground,  upon  which 
we  desire  to  be  understood,  upon  which  we  altogether  rest  our  present 
judgment,  although  it  might  be  maintained  upon  the  narrower  ground 
already  suggested.  It  is,  that  a  corjooration  created  by  and  doing  busi^ 
ness  in  a  particular  Stat^,  is  to  be  deemed  to  all  intents  and  purposes 
as  a  person^  although  anjirtificial  person,  an  inhabitant  of  the  same" 
State^^or^h^purposes_of  its  incorporation,  capable  of  being  treated 
as  a  citizen  of  tliat^Statgj.  as  imicli  as  a  iiatural__person.  Like  a  citizen 
ff  makes  contracts,  and  tliMii;^li   in  regard  to  what  it  may  do  in  some 


ST.   LOUIS,   &c.   E.    CO.  V.   JAMES. 


99 


particulars  it  differs  from  a  natural  person,  and  in  this  especially,  the 
manner  in  which  it  can  sue  and  be  sued,  it  is  substantially,  within  the 
meaning  of  the  law,  a  citizen  of  the  State  which  created  it,  and  where 
its  business  is  done,  for  all  the  purposes  of  suing  and  being  sued. 

Judgment  affirmed. 


Grier,  J.,  IN  MARSHALL  v.  BALTIMOEE  &  OHIO  R.  CO. 

1853.     16  Howard,  314,  pp.  328-329. 

But  it  is  contended  that,  notwithstanding  the  court,  in  deciding  the 
question  of  jurisdiction,  will  look  behind  the  corporate  or  collective 
name  given  to  the  party,  to  find  the  persons  who  act  as  the  representa- 
tives, curators  or  trustees,  of  the  association,  stockholders,  or  cestui  que 
trusts,  and  in  such  capacity  are  the  real  parties  to  the  controversy ; 
yet  that  the  declaration  contains  no  sufficient  averment  of  their  citi- 
zenship. Whether  the  averment  of  this  fact  be  sufficient  in  law  is 
merely  a  question  of  pleading.  If  the  declaration  sets  forth  facts  from 
which  the  citizenship  of  the  parties  maybe  presumed  or  legally  in- 
ferred,  it  is  sufficient,  f  The  presumption  arising  from  the  habitat  of  a 
corporation  in  the  place  of  its  creation  being  conclusive  as  to  the  resi- 
dence or  citizenship  of  those  who  use  the  corporate  name,  and  exercist 
the  faculties  conferred  by  it,  the  allegation  that  the  "defendants  are 
a  body  corporate  by  the  act  of  the  general  assembly  of  Maryland,"  il 
a  sufficient  averment  that  the  real  defendants  are  citizens  of  that  State/ 


Shiras,  J.,  IX  ST.  LOUIS,  &c.  R.  CO.  v.  JAMES. 

1896.     161  U.  S.  545,  pp.  562-565. 

There  is  an  indisputable  legal  presumption  that  a  state  corpora-/ 
tion,  when  sued  or  suing  in  a  Circuit  Court  of  the  United  States,  is 
composed  of  citizens  of  the  State  which  created  it,  and  hence  such  a 
corporation  is  itself  deemed  to  come  within  that  provision  of  the  Con- 
stitution of  the  United  States  which  confers  jurisdiction  upon  the 
Federal  courts  in  ''controversies  between  citizens  of  different  States." 


9i 


it' 


h^ 


3« 


We  are  now  asked  to  extend  the  doctrine  of  indisputable  citizen- 
ship, so  that  if  a  corporation  of  one  State,  indisputably  taken,  for  the 
I  purpose  of  Federal  jurisdiction,  to  be  composed  of  citizens  of  such'  V/J 

State,  is  authorized  by  the  law  of  another  State  to  do  business  therein,    yfJ  ^     ,  . 
and  to  be  endowed,  for  local  purposes,  with  all  the  powers  and  priv-  -f/^'*]    ^^ 
ileges  of  a  domestic  corporation,  such  adopted  corporation  shall  be'' 
deemed  to  be  composed  of  citizens  of  the  second  State,  in  such  "^^^ 


I 


\ 


^ 


100  ST.   LOUIS,  &c.   R.   CO.    V.  JAMES. 

sense  as  to  confer  jurisdiction  on  the  Federal  courts  at  the  suit  of  a 
citizen  of  the  State  of  its  original  creation. 

We  are  unwilling  to  sanction  siich  an  extension  of  a  doctrine  which, 
as  heretofore  established,  went  to  the  very  verge  of  judicial  power. 
That  doctrine  began,  as  we  have  seen,  in  the  assumption  that  State 
corporations  were  composed  of  citizens  of  the  State  which  created 
them ;  but  such  assumption  was  one  of  fact,  and  was  the  subject  of 
allegation  and  traverse,  and  thus  the  jurisdiction  of  the  Federal  courts 
'might  be  defeated.  Then,  after  a  long  contest  in  this  court,  it  was 
settled  that  the  presumption  of  citizenship  is  one  of  law,  not  to  be 
defeated  by  allegation  or  evidence  to  the  contrary.  There  we  are 
content  to  leave  it. 

It  is  true  that  by  the  subsequent  act  of  1889,  by  the  proviso  to  the 
second  section,  it  was  provided  that  every  railroad  corporation  of  any 
other  State,  which  had  theretofore  leased  or  purchased  any  railroad 
in  Arkansas,  should,  within  sixty  days  from  the  passage  of  the  act, 
file  a  certified  copy  of  its  articles  of  incorporation  or  charter  with  the 
secretary  of  state,  and  shall  thereupon  become  a  corporation  of 
Arkansas,  anything  in  its  articles  of  incorporation  or  charter  to  the 
contrary  notwithstanding;  and  it  appears  that  the  defendant  com- 
pany did  accordingly  file  a  copy  of  its  articles  of  incorporation  with 
the  secretary  of  the  state.  But  whatever  may  be  the  effect  of  such 
legislation,  in  the  way  of  subjecting  foreign  railroad  companies  to 
control  and  regulation  by  the  local  laws  of  Arkansas,  we  cannot  con- 
cede that  it  availed  to  create  an  Arkansas  corporation  out  of  a  for- 
eign corporation  in  such  a  sense  as  to  make  it  a  citizen  of  Arkansas 
within  the  meaning  of  the  Federal  Constitution  so  as  to  subject  it  as 
such  to  a  suit  by  a  citizen  of  the  State  of  its  origin.  In  order  to  bring 
such  an  artificial  body  as  a  corporation  within  the  spiriFandJetter  of 
that  Constitution,  as  construed  by  the  decisions  of  this  court,  it  would 
be  necessary  to  create  it  out  of  naturalpersons,  jwhose  citizenship 
of  the  State^ creajting  it  could_beimputed_jbo  the  corporation  its^IL 
But  it  is  not  pretended  in  the  present  case  that  natural  persons,  resi- 
dent in  and  citizens  of  Arkansas,  were  by  the  legislation  in  question 
created  a  corporation,  and  that  therefore  the  citizenship  of  the  indi- 
vidual corporators  is  imputable  to  the  corporation. 


HANCHETT  V.   BLAIR. 


s 


HANCHETT   V. 


1900. 


100  Federal  Reporter,  817.1 


Blair,  alleging  himself  to  be  a  citizen  of  Isew  Jersey,  brought  suft^T 
in  the  U.  S.  Circuit  Court  for  the  District  of  Nevada,  against  th^  " 
Silver  Peak  Mines,  a  New  York  corporation,  to  foreclose  a  mortgage '  J 
on  real  estate  in  Nevada.  L.  J.  Hanchett,  a  citizen  of  California,  was  '^ 
made  a  co-defendant.  The  answer  of  Hanchett  alleged,  in  effect,  that 
Blair  was  the  owner  of  all  the  capital  stock  of  the  corporation,  save  a 
nominal  number  of  shares  standing  in  the  name  of  his  agents  for  the 
purpose  of  permitting  them  to  be  officers  thereof.  Judgment  was 
rendered  for  Blair  in  the  U.  S.  Circuit  Court,  and  Hanchett  appealed 
to  the  Circuit  Court  of  Appeals  for  the  Ninth  Circuit 

Morrow,  Circuit  Judge. 


-j^ 


f. 


/- 


l^ 


It  would  appear  from  the  foregoing  that  the  citizenship  of  the  coiaw/B-  '^  ^  */<  fyr 
plainant,  as  alleged  in  the  bill  of  complaint,  was  sufficiently  estaD-,'.  K  «  ^  tJn/tt 
lished  by  the  proofs.  But  the  appellant  further  attacks  the  allegatioqi/^  .^^ 
of  diverse  citizenship  upon  the  ground  that  the  evidence  disclosed 
the  fact  that  the  complainant  is  a  stockholder  of  the  defendant  corpo- 
ration, and  must  therefore  be  presumed  to  be  a  citizen  of  the  same 
state  as  the  corporation.  It  is  claimed  that  authority  for  this  doc 
trine  is  found  in  the  case  of  Railroad  Co.  v.  Letson,  2  How.  497,  ll^^' 
L.  Ed.  353;  In  Railroad  Co.  v.  Wheeler,  1  Black,  286,  29G,  17  L.  EdJ yfA 
130 ;  and  in  Shaiu  v.  Mining  Co.,  145  U.  S.  444,  451,  12  Sup.  Ct.  935Jf 
36  L.  Ed.  768.  The  question  under  consideration  in  those  cases  was ' 
not  the  citizenship  of  individuals,  but  the  status  of  a  corporation  under 
the  constitution  and  laws  of  the  United  States  relating  to  jurisdic- 
tion of  circuit  courts  over  controversies  between  citizens  of  different 
states.  It  was  conceded  that  a  corporation  was  not  a  citizen,  but 
courts  had  in  certain  cases  recognized  the  real  persons  who  composed 
the  corporation,  and  hence,  for  the  purpose  of  jurisdiction,  the  su- 
preme court  would  consider  a  corporation  created  by  the  laws  of  a 
state  as  an  organization  similar  to  a  partnership  composed  of  individ- 
uals having  citizenship ;  and  thus  it  followed  that  if  all  the  members 
of  a  corporation  were  citizens  of  one  state,  and  the  party  on  the  other 
side  was  a  citizen  of  a  different  state,  the  court  had  jurisdiction.  But 
another  difficulty  arose.  There  were  many  cases  of  large  corpora- 
tions, where  the  members  or  stockholders  were  citizens  of  different 
states,  and  sometimes  of  foreign  countries  ;  and  in  such  cases,  the 
legal  entity  of  the  corporation  not  being  recognized,  the  suit  was 
necessarily  between  the  individual  members  of  such  corporation  and 
the  opposing  party.  With  the  rapidly  growing  number  of  corpora- 
tions, however,  and  the  increasing  volume  of  business  transacted  by 
1  Only  so  much  of  the  case  is  given  as  relates  to  a  single  point.  —  Ed. 


102  HANCHETT  V.   BLAIR. 

means  of  corporate  association,  with  interests  extending,  not  only 
tlirough  many  states,  but  over  the  entire  world,  and  the  holdings  of 
stock  naturally  scattered,  it  became  apparent  that  the  effort  to  brin^ 
individual  members,  either  personally  or  by  representation,  into  the 
courts,  would  result  in  the  most  cumbersome  and  tedious  litigation 
with  unnecessary  annoyance  to  the  stockholders,  and  in  some  in 
stances  accomplish  the  final  defeat  of  the  jurisdiction  of  the  court, 
when  based  upon  the  lack  of  diverse  citizenship  between  some  of  the 
members  of  the  corporation  on  one  side  and  parties  on  the  other  side 
of  the  controversy^  To  meet  this  difficulty  the  supreme  court  deter- 
mined that,  "  where  a  corporation  is  created  by  the  laws  of  a  state, 
the  legal  presumption  is  that  its  members  are  citizens  of  the  state 
in  which  alone  the  corporate  body  has  a  legal  existence."  It  was 
further  determined  "  that  a  suit  by  or  against  a  corporation  in  its  cor- 
porate name  must  be  presumed  to  be  a  suit  by  or  against  citizens 
of  the  state  which  created  the  corporate  body,  and  that  no  averment 
or  evidence  to  the  contrary  is  admissible  for  the  purpose  of  with- 
drawing the  suit  from  the  jurisdiction  of  a  court  of  the  United  States." 
Railroad  Co.  v.  Wheeler,  supra.  These  presumptions  preserved  the 
jurisdiction  of  the  United  States  courts  over  corporations  in  accord- 
ance with  the  evident  spirit  and  purpose  of  the  constitution,  but  such 
presumptions  had  no  relation  to_the  citizenship  of  individuals  as 
parties  to  a  controversy  in  their  own  right,  and  it  would  manifestly  be 
an  unauthorized  extension  of^their  scope  and  effect  to  so  construe  the 
decisions  of  the  supreme  court.  It_follows  that  therejs^no  legal  ure.- 
sumption  that  the  individual  complainant,  who  is  also  a  stockholder 
of  the  defendant  corporation,  is  a  citizen  of  the  same  state  as  the  cor- 
poration.^ 

1  As  to  the  "inhabitancy,"  or  "residence,"  of  a  corporation,  see  Curtis  on  Jurisdiction 
of  U.  S.  Courts,  2d  edition,  152-154;  Shaw  v.  Quincy  Mininr/  Co  ,  145  U.  S.  444;  Galveston, 
<fc.  R.  Co.  V.  Gonzales,  151  U.  S.  496;  also  criticisms  in  6  Thompson  on  Corporations,  ss. 
7488,  7489. 

A  corporation  is  not  a  "citizen  "  within  the  clause  in  the  U.  S.  Constitution  which  pro- 
vides that  "the  citizens  of  each  state  shall  be  entitled  to  all  the  privileges  and  immunities 
of  citizens  in  the  several  states."     Paul  v.  Virginia,  8  Wallace,  168. 

A  corporation  is  a  "person"  within  the  14th  Amendment  to  the  U.  S.  Constitution. 
Santa  Clara  County  v.  Southern  Pacific  R.  Co.,  118  U.  S.  394.  —  Ed. 


ffiANKLIN   BRIDGE   CO.   V.   WOOD. 


103 


CHAPTER  III. 


CREATIOX  OF  CORPORATION. 


SECTION   I. 


By  what  Authority,  and  in  what  Method.         t 

^  A*  \ 
FRANKLIN  BRIDGE  CO.  v.  WOOD."^  \/     J^ 

1853.     14  Georgia,  80.  fv^  ^  \    J\  J^ 

Assumpsit  in  Heard  Superior  Court.     Tried  before  Judge  HilLjI       rW^ 
Term,  1853.  j:r^    P  V  jT 

Ttie  Franklin  Bridge  Company-  was  incorporated  under  tiie  Act  ofj^Vj^  ^ .  ■ 
tlie  Legislature  of  1843,  to  prescribe  tlie  mode  of  incorporating  com-  ^^  ^^ 
n.q^nips    fnr    fprtnin    niirnnsps.    bv    an     orrlpr    of  flip   Tnfprinr   fmirf    r\f^    «v^ 


panics    for  certain 
Heard  County, 

Tlie  company  sued 
their  stock. 


purposes,  by  an    order   of  the  Inferior  Court  of 
the  defendant,  "Wood,  for  his   subscription   to 


T' 


The  defendant  pleaded  that  ihe  company  was  not  legally  incorpo-^  ^  V^  j/^  0"' 
rated ;    contending  that  the  act  of   the  Legislature,  referred  to,  was  y^    J^  J 
unconstitutional  and  void.  ^     r\  'y      '^l 

Upon  argument,  the  coui-t  held  that  the  act  aforesaid  was  unconstitu./^ 
tional,  and  nonsuited  the  plaintiffs. 

To  this  decision  plaintiff  excepted.  ''■      ,J^ 

Mabry^  for  plaintiff  in  error.  \  1        cT' 

Featherston,  for  defendant. 

By  the  Court,  Lumpkin,  J.,  delivering  the  opinion:  — 

Is  the  Act  of  184.S  and  that  of  1845,  amendatory  thereof,  pointfeg 
out  the  manner  of   creating  certain  corporations  and  defining  their/-' 
rights,  privileges,  and  liabilities,  unconstitutional?  ft^ 

By  the  first  section  of  the  Act  of  1843,  it  is  provided  "That  when  ' 
the  persons  interested  shall  desire  to  have  anj'  church,  camp-ground, 


u\ 


f^    .y"" 


f^V 


manufacturing  company-,  trading  company,  ice  company,  fire  compan}-, 
theatre  company,  or  hotel  company,  bridge  company,  and  ferry  com- 1 ,  ~4V« 
pany,  incorporated,  they  shall  petition  in  writing  the  Superior  or  Infe-Vvji' 
rior  Court  of  the  county  where  such  association  may  have  been  formed,  ^^] 
or  may  desire  to  transact  business  for  that  purpose,  setting  forth  the-j^    jj^ 


'^' 


\ 


104  FRANKLIN   BRIDGE   CO.   V.   WOOD. 

object  of  their  association,  and  the  privilege  they  desire  to  exercise, 
together  with  the  name  and  stj'le  by  which  they  desire  to  be  incorpo- 
rated ;  and  said  court  shall  pass  a  ride  or  order,  directing  said  petition 
to  be  entered  of  record  on  the  minutes  oOjIi3"court." 

Section  2  enacts  "  That  when  such  rule  or  order  is  passed,  and  said 
petition  is  entered  of  record,  the  said  companies  or  associations  shall 
have  power  respectively,  under  and  by  the  name  designated  in  their 
petition,  to  have  and  use  a  common  seal ;  to  contract  and  be  con- 
tracted with  ;  to  sue  and  be  sued  ;  to  answer  and  be  answered  unto  in 
an}'  court  of  law  or  equity ;  to  appoint  such  officers  as  the}'  may  deem 
necessary  ;  and  to  make  such  rules  and  regulations  as  they  may  think 
proper  for  their  own  government ;  not  contrary  to  the  laws  of  this 
State  ;  but  shall  make  no  contracts  or  purchase  or  hold  any  property  of 
any  kind,  except  such  as  may  be  absolutely'  necessar}'  to  carry  into 
effect  the  object  of  their  incorporation.  Nothing  herein  contained 
shall  be  so  construed  as  to  confer  banking  or  insurance  privileges  on 
any  company'  or  association  herein  enumerated ;  and  the  individual 
members  of  such  manufacturing,  trading,  theatre,  ice,  and  hotel  com- 
panies, shall  be  bound  for  the  punctual  payment  of  all  the  contracts 
of  said  companies,  as  in  case  of  partnership." 

The  third  section  declares  that  "  No  company  or  association  shall 
be  incorporated  under  this  act,  for  a  longer  period  than  fourteen  years  ; 
but  the  same  may  be  renewed  whenever  necessar}*,  according  to  the 
provisions  of  the  first  section  of  this  act." 

The  fourth  section  confers  upon  the  Superior  and  Inferior  Courts 
respectively,  the  power  to  change  the  names  of  individuals. 

Section  fifth.  "  For  entering  any  of  said  petitions  and  orders,  and 
furnishing  a  certified  copy  thereof,  the  clerk  shall  be  entitled  to  a  fee 
of  five  dollars ;  except  in  cases  of  applications  by  individuals  for  the 
change  of  names,  —  in  which  case,  the  clerk  of  said  court  shall  be  en- 
titled to  the  fee  of  one  dollar.  And  that  such  certified  copy  shall  be 
evidence  of  the  matters  therein  stated  in  an}-  court  of  law  and  equit}' 
in  this  State."     Cobb's  Digest,  542,  543. 

By  the  Act  of  1845  the  provisions  of  the  Act  of  1843  are  extended 
to  all  associations  and  companies  whatever,  except  banks  and  insurance 
companies  ;  and  the  individual  members  of  all  such  incorporations  are 
made  personally  liable  for  all  the  contracts  of  said  associations  or 
companies.     Ibid. 

The  argument  against  the  validity  of  the  charter  of  the  Franklin 
Bridge  Compan}',  created  under  these  statutes,  is  this  :  — 

1.  Tiiat  in  England,  corporations  are  created  and  exist  by  prescrip- 
tion, by  lloyal  Charter,  and  by  Act  of  Parliament.  With  us  tliey  are 
created  by  authorit}"  of  the  Legislature,  and  not  otherwise.  That  to 
establish  a  corporation  is  to  enact  a  law ;  and  that  no  power  but  the 
legislative  body  can  do  this. 

2.  That  legislative  power  is  vested  under  our  Constitution,  in  the 
General  Assembly,  to  consist  of  a  Senate  and  House  of  Representa- 


FRANKLIN   BRIDGE   CO.   V.   WOOD.  105 

lives,  to  be  elected  at  stated  periods  b}'  the  citizens  of  the  respective 
counties. 

3.  And  that  the  General  Assembly  is  bound  to  exercise  the  power 
of  making  laws  thus  conferred  upon  them  b}-  the  people  in  the  pri- 
mordial compact,  in  the  mode  therein  prescribed,  and  in  none  other ; 
and  that  a  law  made  in  an}-  other  mode  is  unconstitutional  and  void. 
That  the  Legislature  is  but  the  agent  of  their  constituents  ;  and  that 
they  cannot  transfer  authority'  delegated  to  them  to  any  other  body, 
corporate  or  otherwise,  —  not  even  to  the  Judiciar}-,  a  co-ordinate 
department  of  the  government,  unless  expressly'  empowered  by  the 
Constitution  to  do  so.  That  to  do  this  would  be  to  violate  one  of  the 
fundamental  maxims  of  jurisprudence  as  well  as  of  political  science, 
namely,  delegata  potestas  non  potest  delegari.  That  to  do  this  would 
not  only  be  to  disregard  the  constitutional  inhibition  which  is  binding 
upon  the  representative,  but  by  shifting  responsibility  introduce  inno- 
vations upon  our  system,  which  would  result  in  the  overthrow  and 
ultimate  destruction  of  our  political  fabric. 

The  constitutional  inquiry  thus  presented  is  an  exceedingly  grave 
one.  It  reaches  far  beyond  the  case  made  in  the  bill  of  exceptions, 
and  extends  to  the  whole  range  of  topics  which  fall  under  legislative 
cognizance.  In  the  view  we  take  however  of  the  statutes  before  us, 
no  such  proposition  as  that  which  has  been  discussed  is  presented  for 
our  adjudication.  And  we  rejoice  that  it  is  so,  not  onl}-  on  account  of 
the  delicacy  of  the  task,  in  pronouncing  an  act  of  Legislature  uncon- 
stitutional and  void,  — one  which  is  never  justifiable  unless  the  ease  is 
clear  and  free  from  doubt ;  and  even  then  one  might  almost  be  for- 
given for  shrinking  from  the  performance  of  a  duty  which  would  be 
productive  of  such  incalculable  mischief  and  confusion.  Bridges  have 
been  built  at  a  heavy  expense  ;  manufacturing  and  innumerable  other 
associations  have  been  formed  in  Georgia,  and  are  in  full  operation, 
under  charters  incorporated  under  this  law.  And  in  view  of  the  con- 
sequences any  court  might  hesitate,  unless  the  repugnance  between 
the  statute  and  the  Constitution  was  so  palpable  as  to  admit  of  no 
doubt,  and  produce  a  settled  conviction  of  their  incompatibility  with 
each  other. 

4.  It  was  formerly  asserted  that  in  England  the  act  of  incorpora- 
tion must  be  the  iminediate  act  of  the  king  himself,  and  that  he  could 
not  grant  a  license  to  another  to  create  a  corporation.  10  Keports, 
27.  But  Messrs.  Angell  and  Ames,  in  their  Treatise  on  Corporations, 
state  that  the  law  has  since  been  settled  to  tlie  contrary  ;  and  that  the 
king  may  not  only  grant  a  license  to  a  subject  to  erect  a  parliLiilar 
corporation,  but  give  a  general  power  by  charter  to  erect  corporations 
indefinitely,  on  the  principle  that  qui  facit per  alium  facit p)er  se;  that 
the  persons  to  whom  the  power  is  delegated  of  establishing  corpora- 
tions, are  only  an  instrument  in  the  hands  of  the  government.  1  Kjd, 
50  ;  1  Black.  Com.  ;  Ang.  &  Am.  63. 

Before  the  revolution,  charters  of  incorporation  were  granted  by  the 


106  FRANKLIN   BRIDGE   CO.   V.   WOOD. 

proprietaries  of  Pennsylvania  under  a  derivative  authorit}'  from  the 
Crown  ;  and  those  charters  have  since  been  recognized  as  valid.  3  Wil- 
son's Lectures,  409.  A  similar  power  has  been  delegated  bj-  the 
Legislature  of  Penns^-lvania  with  regard  to  churches.  7  S.  &  R.  517. 
The  acts  of  the  instrument  in  these  cases  become  the  acts  of  the 
mover,  under  the  famihar  maxim  above  mentioned.  See  also 
I  Missouri  R.  5. 

5.  Our  opinion  is  that  no  legislative  power  is  delegated  to  the  courts 
by  the  acts  under  consideration.  There  is  simply  a  ministerial  act  to 
be  performed,  —  no  discretion  is  given  to  the  courts.  The  dut}'  of 
passing  the  rule  or  order  directing  the  petition  of  the  corporators  to  be 
entered  of  record  on  the  minutes  of  the  court,  setting  forth  to  the 
public  the  object  of  the  association  and  the  privilege  they  desire  to 
exercise,  together  with  the  name  and  style  by  which  they  are  to  be 
called  and  known,  is  made  ohligatonj  upon  the  courts  ;  and  should 
they  refuse  to  discharge  it,  a  mandamus  would  lie  to  coerce  them.  It 
is  true  the  Legislature  has  seen  fit  to  use  the  courts  for  the  purpose  of 
giving  legal  form  to  these  companies.  But  it  might  have  been  done  in 
any  other  way.  Under  the  Free  Banking  Law  of  1838,  instead  of 
petitioning  the  court,  and  having  the  order  passed  and  entered  upon  its 
minutes,  the  certificate  specifying  the  name  of  the  association,  its 
place  of  doing  business,  the  amount  of  its  capital  stock,  the  names 
and  residence  of  the  shareholders,  and  the  time  for  which  the  com- 
pany was  organized,  is  required  merely  to  be  proven  and  acknowl- 
edged, and  recorded  in  the  office  of  the  clerk  of  the  Superior  Court, 
where  an}-  office  of  the  association  is  established,  and  a  copy  filed  with 
the  Comptroller  General.     Cobb's  Digest,  107,  108. 

And  so  under  the  Act  of  1847,  authorizing  the  citizens  of  this  State, 
and  such  others  as  they  may  associate  with  them,  to  prosecute  the 
business  of  manufacturing  with  corporate  powers  and  privileges.  The 
persons  who  propose  to  embark  in  that  branch  of  business  are  required 
to  draw  up  a  declaration  specifying  the  objects  of  their  assdciation  and 
the  particular  branch  of  business  the}'  intend  carrying  on,  together 
with  the  name  by  which  they  will  be  known  as  a  corporation,  and  the 
amount  of  capital  to  be  employed  by  them  ;  which  declaration  is  re- 
quired to  be  first  recorded  in  the  clerk's  office  of  the  Superior  Court  of 
the  countj^  where  such  corporation  is  located,  and  published  once  a 
week  for  two  months  in  the  two  nearest  Gazettes  ;  which  being  done, 
it  is  declared  that  said  association  shall  become  a  bod}'  corporate  and 
politic,  and  known  as  such,  witliout  being  specially  pleaded,  in  all 
courts  of  law  and  equity  in  this  State,  to  be  governed  by  the  provi- 
sions and  be  subject  to  the  liabilities  therein  specified.  Cobb's  Digest, 
431),  440. 

In  tlicse  two  instances,  and  others  which  might  be  cited,  the  Legis- 
lature have  dispensed  with  the  action  of  the  courts,  or  of  any  othe.' 
agency,  to  carry  out  their  enactments  with  regard  to  these  various 
associations  which  have  become  tlic  usual  and  favorite  mode  of  con- 
ducting tlic  industrial  pursuits  of  the  civilized  world  in  modern  times. 


FRANKLIN    BRIDGE   CO.    V.   WOOD.  107 

All  these  Statutes  were  complete  as  laws  when  the}'  came  from  the 
bands  of  the  Legislature,  and  did  not  depend  for  their  force  and  effi- 
cacy upon  the  action  or  will  of  any  other  power.  It  is  true  that  they 
could  only  take  effect  upon  the  happening  of  some  event,  such  as  the 
filing  the  petition  or  declaration,  and  giving  publicity  to  the  purpose  of 
tne  association  in  the  mode  prescribed  b}'  the  act.  But  if  this  were 
a  good  reason  for  regarding  these  statutes  as  invalid,  then  how  few 
corporations  could  abide  the  test !  For  it  requires  the  acceptance  of 
the  charter  to  create  a  corpoi'ate  bod}' ;  for  the  government  cannot 
compel  persons  to  become  an  incorporated  bod}'  without  their  consent. 
And  this  consent,  either  express  or  implied,  is  generally  subsequent 
in  point  of  time  to  the  creation  of  the  charter.  And  yet,  no  charter 
that  we  are  aware  of  has  been  adjudged  invalid,  because  the  law  cre- 
ating it  and  previously  defining  its  powers,  rights,  capacities,  and  lia- 
bilities, did  not  take  effect  until  the  acceptance  of  the  corporate  body, 
or  at  least  a  majority  of  tliem,  was  signified. 

The  result  therefore  of  our  deliberation  upon  this  case  is,  that  the 
Acts  of  1843  and  1845,  vesting  in  all  associations,  except  for  banking 
and  insurance,  the  power  of  self-incorporation,  do  not  impugn  the 
Constitution,  and  that  the  charter  of  the  Franklin  Bridge  Company 
and  all  others  created  under  them,  and  in  conformity  to  their  provi- 
sions, are  legal  and  valid.  With  the  policy  of  these  Statutes  v/e  have 
nothing  to  do.  The  province  of  this  and  all  other  courts  is  jus  dlcere^ 
not  Jus  dare.  Jadyntent  reversed. 

Under  tlie  common  law  of  England  and  the  United  States  a  cor- 
poration  cannot  be  formed,  like  a  partnership,  merely  by  a  contract 
between  the  individuals  composing  it.  The  right  of  forming  a~cox- 
poration  and  of  acting  in  a  corporate  capacity  must  be  treated  as  a^ 
franchise,  or  special  privilege,  whjch.  mav  not  be  assumed  without  a 
errant  of  authority  from  some  governing  ijpweii 

In  England  the  right  of  forming  a  corporation  may  be  granted 
either  by  the  king  alone  or  by  act  of  Parliament.  .  .  . 

In  the  United  States,  where  written  constitutions  define  the  powers 
of  the  several  branches  of  the  government,  the  power  of  chartering 
corporations  belongs  to  the  legislature  only.  It  is  a  power  which  be- 
longs to  the  legislature,  unless  expressly  taken  away  by  the  Constitu- 
tion, and  is  incidental  to  the  general  power  of  making  laws  for  the 
welfare  of  the  State. 

Congress  has  power  to  grant  a  charter  of  incorporation  whenever 
this  is  an  appropriate  measure  for  carrying  out  any  of  the  authorized 
purposes  of  the  Federal  government.  .  .  . 

In  many  of  the  States  the  legislature  is  prohibited  by  constitutional 
provision  from  granting  corporate  franchises  except  in  accordance 
with  certain  prescribed  rules.  Thus  it  is  provided,  in  many  instances, 
that  no  charter  of  incorporation  shall  be  granted  by  special  act,  and 


108  FEANKLIN   BRIDGE   CO.   V.   WOOD. 

that  corporations  shall  be  formed  only  in  accordance  with  general 
laws. 

1  Morawetz  on  Private  Corporations,  2d  edition,  ss.  8,  9,  and  10. 

For  a  collection  of  constitutional  provisions,  restraining  the  legis- 
lature from  granting  special  charters  or  from  passing  special  acts  con^ 
ferring  corporate  powers ;  see  1  Thompson  on  Corporations,  ss.  539, 
540. 

A  charter  is  the  instrument  which  creates  the  corporation.  It 
formerly  was  granted  by  the  king.  Later  it  was  granted  by  an  act 
of  the  legislature  — a  separate  act  being  passed  for  each  charter.  At 
present  the  constitutions  of  many  of  the  states  require  that  in  all 
possible  cases  the  legislature  shall  pass  general  acts  whereby,  by  the 
simple  filing  of  a  prescribed  instrument,  persons  may  form  a  corpora- 
tion without  applying  to  the  legislature  at  all.  These  general  acts 
specify  the  contents  of  the  instrument  to  be  filed,  and  specify  also 
the  powers  of  the  corporation.  A  charter  is  special  where  a  spe- 
cial act  of  the  legislature  creates  the  corporation.  A  charter  is 
under  the  general  act,  when  it  consists  of  a  certificate  of  incorpora- 
tion filed  with  the  public  authorities  in  accordance  with  a  general  act 
of  the  legislature  allowing  corporations  to  be  formed  in  that  manner. 

Cook  on  Corporations,  4th  edition,  s.  2. 

The  differences  between  an  enabling  statute  and  a  charter  are,  how- 
ever, mainly  differences  in  form.  A  charter  as  well  as  an  enabling 
statute  prescribes  rules  for  conduct ;  the  difference  being  that  these 
rules  in  the  case  of  a  charter  have  a  more  limited  application.  And 
an  enabling  statute,  as  well  as  a  charter,  proffers  terms  and  facilities 
of  action  which  are  accepted  by  the  corporators  by  filing  their  articles 
of  association ;  only  in  the  case  of  an  enabling  statute  tlie  terms  are 
offered  to  the  citizens  of  the  state  at  large,  any  sufficient  number  of 
whom  may  accept  them  and  incorporate  themselves  by  complying 
with  them. 

Taylor  on  Private  Corporations,  3d  ed.  s.  451. 

At  the  present  day  corporations  are  usually  formed  by  the  adoption 
of  articles  of  association  and  the  subscription  of  capital,  in  pursuance 
of  general  incorporation  laws  enacted  by  the  legislature.  The  articles 
of  association  of  a  company  thus  organized,  taken  in  connection  with 
the  laws  under  w})ich  the  organization  takes  place,  form  the  constitu- 
tion of  the  association,  and  answer  the  same  purposes  as  a  special 
charter. 

1  Morawetz  on  Private  Corporations,  2d  ed.  s.  318. 

General  incorporation  laws  are  now  almost  universal,  and  their 
utility  is  so  manifest  that  few  corporations  are  created  by  special 


STATE   V.  DAWSON.  109 

acts,  even  in  states  where  such  legislation  is  not  forbidden.  In  fu- 
ture the  law  of  the  creation  of  corporations  will  be  the  law  of  the 
formation  of  corporations  under  general  laws.  The  same  is  true  as 
to  the  law  of  corporate  existence. 

Note  in  12  Lewis'  Amer.  R.  R.  &  Corporation  Reports,  p.  474-475. 


No  form  of  words  is  required  in  order  to  create  a  corporation.  A 
grant  of  the  power  to  perform  corporate  acts,  implies  a  grant  of  cor- 
porate powers.  .  .  . 

Lewis,  J.,  in  Com.  v.  Westchester  R.  Co.,  3  Grant's  Cases,  Pa.  200, 
p.  202. 

.  .  .  this  word  incorporo,  or  any  derivative  thereof,  is  not  in  law 
requisite  to  create  a  corporation ;  but  other  equivalent  words  are 
sufficient.  .  .  . 

...  to  the  creation  of  an  incorporation  the  law  had  not  restrained 
itself  to  any  prescript  and  incompatible  words. 

The  Case  of  Sutton's  Hospital,  10  Coke's  Reports,  23,  pp.  30  a,  30  b. 


HI 

SECTION  IL  ^^  V'  y^i\ 

Acceptance  of  Charter.        \    \  /,  »}-^  t  ^  "  /^      k.'^    ./ 

STATE   V.   DAWSON   et  i W]^  '  V  ,W  ^"^'^ \        ' 

1861.     Ulndiana^.^      '^"w^  "^         ^     r^    ^^"^i 

Appeal  from  the  CTrtrA;  Circuit  Courljjjt    (\  jT^  A)  \  r  Csff  ^jC    ,V    r\J, 

Perkins,  J.   Information  against  the  defendants,  charging  that  they     V".  J^  ^\  ^ 
are  pretending  to  be  a  corporation,  and  to  act  as  such,  when  they  ar^p     ./^    •    -t.^ 
not  a  corporation.     It  charges  that  in  January,  1849,  the  Legislature\j^       -^    *  * 
of  the  State  of  Indiana  enacted  a  special  charter  of  incorporation,  r- 
(which  is  set  out  at  length,)  for  a  railroad  from  Foi^t  Wai/ne,  Indiana,  ^^ 
to  JeffersonviUe,  to  be  called  the  Fort  Wayne  and  Southern  Railroad  ; 
that  the  persons  named  in  the  charter  as  directors  did  not  accept  said,  ljt 
charter  till  June  2,  1852,  when  they  did  meet  and  accept  the  same^  j^/* 
and  organize  under  it.    It  is  alleged  that  tdie  defendants  are  assuming  ,'^<^  ^ 
to  act  under  said  charter,  never  having  organized  under  any  other..,y^A  ■♦    / 
The  court  below  sustained  a  demurrer  to  the  information;  tlius  hold-..'tAj;  * 
ing  the  defendants  to  be  a  legal  corporation.  tj^    * -/ 

The  present  Constitution  of  Indiana  took  effect  on  November  1,      I  ,,        ^ 
1851.     It  contains  these  provisions  :  —  V^ 

"  All  laws  now  in  force  and  not  inconsistent  with  this  Constitution, 
shall  remain  in  force,  until  they  shall  expire  or  be  repealed."  Sched. 
(1  sub.  sec.)  of  Const. 


no  STATE   V.   DAWSON. 

"  Corpovations,  other  than  banking,  shall  not  be  created  b}  special 
act,  but  ma}'  be  formed  under  general  laws."     Art  11,  §  13. 

"  All  acts  of  incorporation  for  municipal  purposes  shall  continue  in 
force  under  this  Constitution,  until  such  time  as  the  General  Assembl}- 
shall,  in  its  discretion,  modify  or  repeal  the  same."  Sched.  siqjra,  sub. 
sec.  4. 

The  charter  for  the  J^ort  Wayne  and  Southern  Railroad  was  not  a 
charter  for  municipal  purposes,  and,  hence,  was  not  specialh'  continued 
in  existence.  Art.  11,  §  13,  above  quoted,  prohibits  the  creation  of  a 
corporation  b}'  special  act  oi'  charter,  tliat  is,  as  we  construe  the  pro- 
hibition, through,  or  b}'  virtue  of,  such  special  act  or  charter,  after 
Noveynher  1,  1851.  The  policy  that  induced  the  prohibition,  as  well  as 
its  literal  import,  demands  this  construction.  It  is  necessary  for  us  to 
ascertain,  then,  when  the  defendants,  if  ever,  were  created  a  corpora- 
tion. The  simple  enactment  of  the  charter  for  the  corporation,  by  tlie 
Legislature,  did  not  create  the  corporation.  [t_required  one  act  on  the 
part  of  the  persqnsnamed  in  the^bartei^tp  do  that,  viz:  acceptance 
of  the  charter  enacted. 

Says  Grants  in  his  work  on  corporations,  vide  p.  13  :  "  Nor  can  a 
charter  be  forced  on  any  bod^-  of  persons  who  do  not  choose  to  accept 
it."  And  again,  at  page  18,  he  says,  "  The  fundamental  rule  is  this: 
no  charter  of  incorporation  is  of  an}'  effect  until  it  is  accepted  by  a 
majorit}'  of  the  grantees,  or  persons  who  are  to  be  the  corporatoi's  un- 
der ib.  Bagge's  case,  2  Brownl.  &  G.  100  ;  S.  C.  1  Roll.  Rep.  224  ; 
Dr.  Askeio^s  case,  4  Burr.  2200  ;  Butter  v.  Chapman,  8  M.  &  W.  25  ; 
per  Wilmot,  J.,  Hex  v.  Vice- Chancellor  of  Cambridge,  3  Burr,  1661. 
This  is  analogous  to  the  general  rule  that  a  man  cannot  be  obliged  to 
accept  the  grant  or  devise  of  an  estate.  Townson  v.  TicJcell,  3  B.  & 
Aid.  31."  See,  also,  Ang.  &  Am.  §  83,  whore  it  is  said,  if  a  charter 
is  granted  to  those  who  did  not  appl}'  for  it,  the  grant  is  said  to  be  i)i 
fieri  till  acceptance.  We  need  not  inquire  whetlier  this  rule  extends  to 
municipal  corporations  in  this  countr}-.  As  to  what  may  constitute  an 
acceptance  we  are  not  here  called  on  to  decide,  as  the  information  ex- 
presslv  sliows  that  there  was  none  in  this  case  till  June,  1852,  which 
fact  is  admitted  by  the  demurrer. 

The  grant  of  the  charter  in  question,  then,  to  those  who  had  not  ap- 
plied for  it,  was  but  an  offer,  on  the  part  of  the  State  ;  a  consent  that 
tlie  persons  named  in  the  charter  might  become  a  corporation,  might  be 
created  such  an  artificial  being,  by  accepting  the  charter  offered.  But 
an  offer,  till  accepted,  may  be  withdrawn.  In  this  case,  the  offer  made 
by  the  State,  in  1849,  was  witiidrawn  by  the  State,  November  1,  1851, 
by  then  declaring  tliat  no  corporation,  after  that  date,  should  be  cre- 
ated except  pursuant  to  regulations  wliich  she,  in  future,  tluougli  lier 
Legislature  would  prescribe. 

Tliis  pretended  corporation,  then,  was  not  created  before  November 
1,  1851  ;  and  it  could  be  created  afterward  only  by  the  concur/ent  con- 
^nt  of  the  State  and  the  corporators.     But,  at  that  date,  the  Constitu- 


REX   V.   WESTWOOD.  Ill 

don  prohibited  both  the  State  and  corporators  from  giving  consent  to 
such  a  corporation,  to  wit :  one  coming  into  existence  through  a  special 
charter ;  and  hence  necessarily  prohibited  the  creation  thereof.  This 
decision  accords  with  that  of  the  Supreme  Court  of  the  United  Stattn 
in  Asplnwall  v.  Daviess  County,  22  How.,  p.  364;  where  it  was  held 
that  the  new  Constitution  prohibited  a  subscription  of  stock  to  the  Ohio 
and  Mississippi  Railroad  Company^  authorized  by  the  charter  of  the 
corporation,  granted  under  the  former  Constitution,  and  actually  voted 
b}-  the  people  of  the  county,  under  that  Constitution. 

Whether,  as  a  matter  of  fact,  the  charter  in  this  case  was  accepted 
under  the  old  Constitution,  must  be  determined  on  a  trial  of  the  cause 
below. 

Had  the  provision  in  our  Constitution,  like  that  on  this  subject  in  the 
Constitution  of  Ohio,  ordained  that  the  Legislature  should  "  pass  no 
special  act  conferring  corporate  powers,"  the  restraint  would  clearly 
have  been  imposed  alone  upon  future  legislative  action  ;  but,  in  our 
Constitution,  the  restraint  is  plainlj'  imposed  upon  the  creation,  the 
organization,  of  the  corporation  itself  See  The  State  v.  Hoosa,  H 
O.  St.  R.  16. 

Per  Curiam.  The  judgment  is  reversed,  with  costs.  Cause  re- 
manded for  further  proceedings  in  accordance  with  this  opinion. 

C.  B.  Smith,  J.  W.  Gordon,  and  Watt  J.  Smith,  for  the  appellant. 

a.  Crawford,  for  the  appellees.^ 


n 


'{' 


1825.     4  Barnewall  ^  Cresswell,  781.      ^      a/\     J 

1830.     7  Bin(jham,  1.2  (\j       />'     J^      P 

hw  Wai^nf.o  ffpr  nsnrpincr  the  ofRce  of  burgcss  of  the  Dorongh  of 
lepping  Wycombe.  It  was  admitted  on  the  pleadings  that  the  cor- 
poration of  Chepping  Wycombe  has  existed  from  time  immemorial. 
Plea,  alleging,  inter  alia,  defendant's  election  by  a  select  body  of  the 
burge.Bses,  according  to  the  custom  from  time  immemorial.  Replica- 
tion, setting  out  a  charter  granted  by  the  Crown  in  15  Charles  II., 
whereby  it  was  granted  that  the  entire  bod}'  of  burgesses  should  and 
might  be  able  to  elect  new  burgesses.  Rejoinder,  that  said  charter 
was  not  accepted  by  the  then  burgesses  as  to  that  part  thereof  which 
ordained  the  mode  of  electing  new  burgesses.  Demurrer. 
Scarlett,  in  support  of  demurrer. 
Tindal,  contra. 

1  Citations  of  counsel  for  appellees  are  omitted.  —  Ed. 

'^  Statement  abridged.    Arguments  omitted.    Only  so  much  of  the  case  is  given  aa 
relates  to  one  point.  —  Ed. 


112  EEX   V.   WESTWOOD. 

LiTTLEDALE,  J.  .  .  .  But  then  the  rejoinder  sajs  the  charter  was 
not  accepted  in  that  part  which  relates  to  the  election  of  the  burgesses. 
1  think  that  rejoinder  is  bad,  because_^  think  a  corporation  ^-annot 
a'cceijt  a  charter  in  part  only.  When  a  charter  is  given  b}'  the  crown, 
it  IS  consklei-ed  as  forming  a  whole  schenae^  formed  upoji  deliberation 
for  the  good  government  of  the  borough.  Some  parts  of  this  maj'jiot 
be  what  the  corporation  may  like  in  themselves  ;  but  the  crown,  on  the 
other  hand,  may  have  granted  them  other  valuable  privileges  as  a  sort 
of  compensation  for  the  inconvenience  andJa-QuMe,  thej'^  might  suffer 
from  other  parts.  But  the  corporation  would  never  have  had  the  valu- 
able parts  unless  they  had  had  some  of  the  troublesome  ones  also.  In 
Tlie  King  \\  The  Vice  (JhanceUor  of  Cambridge,  3  Burr.  1647,  it  was 
considered  b}"^  Lord  Mansfield,  that  a  corporation  might  accept  a  char- 
ter in  part.  In  page  1656,  he  says,  "  but  there  is  a  vast  deal  of 
difference  between  a  new  charter  granted  to  a  new  corporation  (who 
must  take  it  as  it  is  granted)  and  a  new  charter  given  to  a  corporation 
already  in  being,  and  acting  either  under  a  former  charter,  or  under 
prescriptive  usage.  The  latter,  a  corporation  already  existing,  are  not 
obliged  to  accept  the  new  charter  in  toto,  and  to  receive  either  all  or 
none  of  it ;  they  may  act  partly  under  it,  and  partly  under  their  old 
charter  or  prescription."  And  Mr.  Justice  Wilmot,  3  Burr.  1661, 
says,  "  It  is  the  concurrence  and  acceptance  of  the  universit}'  that  give 
the  force  to  the  charter  of  the  crown,  and  they  may  take  and  accept 
the  body  of  statutes  or  code  of  laws  separately  and  distinctly- ;  they 
are  not  bound  to  take  all,  or  leave  all."  But  though  such  is  the  law 
laid  down  it  was  not  necessary  to  do  so,  because  the  office  of  High 
Steward  was  an  ancient  office  existing  long  before  the  statutes  of 
Queen  Elizabeth^  and  from  the  language  of  those  statutes,  it  is  plain, 
the  crown  did  not  mean  to  interfere  with  the  mode  of  electing  the 
ancient  officers  in  the  university,  except  such  as  were  particularly  men- 
tioned ;  and  a  question  lately  arose  in  this  court  upon  the  construction 
of  one  of  those  statutes,  whether  a  particular  professorship  fell  within 
the  meaning  of  it,  viz.,  that  all  officers  where  the  mode  of  election  was 
not  pointed  out,  should  be  elected  as  the  Vice-Chancellor.  That  was 
not  a  general  charter  given  to  the  university  to  form  the  whole  consti- 
tution of  it,  but  a  selection  of  statutes  for  the  election  of  particular 
officers,  and  it  is  by  the  aggregate  of  different  statutes  given  at  differ- 
ent times  by  the  crown,  that  the  university  is  governed.  In  T/ie  King 
V.  Amenj,  1  T.  R.  589,  BuUer,  J.,  says,  "  The  averment  proceeds  on  a 
mistake  by  supposing  that  a  charter  may  be  accepted  in  part  and 
rejected  as  to  the  rest.  The  only  instance  in  which  I  have  ever  heard 
it  contended  that  a  charter  could  be  accepted  in  part  only,  is  where  the 
king  has  granted  two  distinct  things,  both  for  the  benefit  of  the  grant- 
ees ;  there  I  know  that  some  have  thought  that  tlie  grantees  may  take 
one,  and  reject  the  oilier.  However  that  may  be,  it  cannot  extend  to 
this  case.     lln^4jor])or^tion^jnust  _eit^^  accciited  in  toto,  or  not. 

at  all.     If  thex,could  liave  accepted  a  part  only  of  the  charter,  they 


EEX   V.   WESTWOOD.  113 

would  have  been  a  corporation  ^reated_Jjj Jhemselves.  and  not  bvjh^ 
king.     If  a  charter  directed  that  the  corporation  should  consist  of  a ' 
niaj-or,  aldermen,  and  twenty-four  common  councilmen,  the}-  could  noti 
accept  the  charter  for  the  mayor  and  aldermen  only,  omitting  the  com-j 
nion  councilmen."     There  not  being  any  case  where  I  consider  the) 
point  as  having  distinctl}'  come  in  judgment,  there  are  only  the  oppo- 
site dicta  of  judges  to  guide  us,  and  then  I  must  give  my  judgment  in 
that  way  which  appears  most  consonant  to  the  general  principle  of  law 
as  applicable  to  grants  of  the  crown,  that  the  grantees  must  take  the 
whole  of  one  entire  thing  which  the  crown  grants,  or  none  at  all. 
Therefore,  the  rejoinder  is  no  answer  to  the  replication  to  the  first  and 
second  pleas,  and  judgment  must  be  for  the  crown  on  that  part  of  the 
record. 

^Omitting  other  opinions.] 

Judgment  for  the  Crown  on  the  first  two  pleas.     For  the  cfe* 
fendant  upon  the  third  plea. 

[A  writ  of  error  was  brought  to  the  House  of  Lords,  where  it  was 
argued  that  the  judgment  ought  to  be  reversed  upon  another  point. 

Lord  Tenterden  delivered  an  opinion,  from  which  the  following  is 
an  extract.] 

Two  questions  of  law,  therefore,  have  arisen  upon  this  record ;  the 
first,  whether  it  is  competent  to  an  existing  corporation,  to  whom  a 
charter  of  the  crown  is  offered,  to  accept  that  charter  in  part  and  reject 
it  in  part ;  or  if  it  accept  it  in  part,  whether  that  must  not  be  taken  to 
be  an  acceptance  of  the  whole  ?  Upon  that  point  there  never  has  been 
any  difference  of  opinion  among  the  learned  Judges.  There  are, 
indeed,  to  be  found  some  expressions  of  Judges  in  former  times  im- 
porting that  a  corporation  might  accept  part  of  a  charter  and  reject 
the  remainder ;  but  of  late  times  all  Judges  have  been  of  opinion  that 
it  is  not  open  to  a  corporation  ;  otherwise  a  corporation  might  reject 
the  obligation  which  was  imposed,  and  accept  the  benefit  which  was 
conferred  upon  them  ;  and  accordingly  there  was  judgment  in  the  court 
below  for  the  crown  upon  that  point,  namely,  that  the  allegation  that 
the  charter  was  accepted  in  part  was  a  bad  allegation. 

Judgment  affirmed. 


>"\Vr 


ELLIS   V.  MARSHALL. 
ELLIS  V.  MAESHALL. 

1807.     2  Massachusetts,  269.1 


/w    ,  ,       "^Ejectment.     The  plaintiff   claimed  under  a  sale  by  the  "Front 

Street  Corjyomtion  in  the  town  of  Boston,''^  established  by  a  law  of  the 
Commonwealth,  passed  March  6,  1804.^    By  this  statute  sundry  per- 
//V"  ^sons,  and  amongst  them  the  defendant,  Marshall,  described  as  ''being 

/Ly  1  K         owners  and  proprietors  of  the  lands  and  flats  over  which  the  said  street 

V  \  ^  \  ^'  •  '^^ill  pass,  and  of  the  lands  and  flats  adjoining  thereto^'  are  incorpo- 
rated for  the  purpose  of  making  a  street  in  the  town  of  Boston.,  By 
the  third  section  of  the  statute,  the  corporation  are  authorised  to  as- 
sess upon  all  the  owners  and  proprietors  of  said  land  and  flats,  accord- 
ing to  the  proportion  they  severally  hold  therein,  suph  sums  of  money 
as  shall  be  agreed  upon  by  the  said  proprietors,  or  the  major  part  of 
such  of  them  as  shall  be  assembled  at  any  legal  meeting  to  be  called 
for  that  purpose ;  and  if  any  of  the  said  proprietors  shall  neglect  or 
refuse  to  pay  the  sums  of  money  duly  assessed  upon  him  therefor,  for 
the  space  of  three  months,  the  proprietors  are  authorized  to  sell,  at 
'  publip  auction,  so  much  of  such  delinquents  share  of  said  lands  and 
I  ri)  ^''  I/*  '    -^^^^  ^^  shall  be  sufficient  to  pay  the  sums  so  assessed,  and  the  charges 

^  •  "  of  sale :  and  the  said  proprietors  may,  by  their  clerk  or  committee, 

execute  a  good  deed  to  the  purchaser  in  fee  simple. 

Marshall  was  not  one  of  the  petitioners  for  the  act  of  incorporation ; 

never  assented  to  the  petition  ;  and  never  attended  a  meeting  of  the 

.,-,    .corporation. 

\Ajj^     It  was  agi'eed,  "that,  on  the  tenth  day  of  October  last,  the  land  de- 

f  manded  in  this  action,  being  part  of  the  said  MarsliaW s  estate  adjoin- 

f   ''^ing  said  street,  was  sold  at  public  auction,  according  to  the  rules  and 

Q) '  regulations  of  the  Corporation,  and  the  powers  granted  in  said  act,  for 

the  purpose  of  raising  the  amount  of  the  assessment  taxed  on  him  by 

said  Corporation,  as  being  towards  his  proportionate  part  of  the  ex- 

yence  of  making  said  street,  which,  though  often  requested,  he  had 

refused  to  pay,  and  a  deed  of  conveyance  thereof  was  accordingly 

given  by  said  Corporation  to  said  JEllls,  to  hold  the  premises  demanded, 

to  him  in  fee  simple." 

"  If  on  the  foregoing  facts  the  court  should  be  of  opinion  that  the  said 
Corporation  could,  by  virtue  of  the  said  act,  legally  assess  the  said 
Marshall,  and  sell  his  lands  for  non-payment  thereof,  then  it  was 
agreed  that  the  defendant  should  be  defaulted,  and  judgment  should 
be  rendered  for  the  plaintiff ;  otherwise  the  plaintiff  was  to  become 
nonsuit,  and  judgment  be  rendered  for  the  defendant." 
Parsons  and  Dexter,  for  plaintiff. 
The  Attorney  General,  Sullivan,  and  Amory,  for  defendant. 

1  Statement  abridged.    Arguments  and  part  of  opinion  omitted.  —  Ed. 

2  3  Mass.  Special  Laws,  375. 


.-tv/^"""' 


(^      K)> 


ELLIS  ,».   MARSHALL.  Il5 

t     '         ^-       - 

Parker,  J.  From  the^-toregoing  facts  and  the  arguments  thereon 
by  the  counsel,  it  appears  that  all  the  proceedings  of  the  corporation 
relative  to  the  assessment  and  sale  were  correct;  so  that  if  Marshall 
were,  at  the  time  thereof,  a  member  of  the  corporation,  the  title  to  the 
demanded  premises  in  Ellis  could  not  be  disputed. 

We  are  therefore  necessarily  brought  to  the  question,  indeed  the 
only  one  in  the  case,  whether  Marshall,  by  virtue  of  the  act  aforesaid,   L     vv^L^^U/M 
became  a  member  of  the  said  corporation,  subject  to  its  rules  and    \     \ 
regulations,  and  liable  to  be  assessed  for  the  purpose  of  building  said     { 
street. 

The  counsel  for  the  plaintiff  have  contended 

1st.  That  by  virtue  of  the  act  itself,  Marshall  being  named  therein, 
he  became  ipso  facto  a  member  of  the  corporation,  the  Legislature 
having  competent  power  to  compel  him  thereto  : 

2dly.  That  should  this  not  be  the  case,  the  foregoing  facts  contain 
sufficient  evidence  of  his  consent,  tacit  at  least,  to  the  passing  of  said 
act,  and  the  insertion  of  his  name  therein. 

The  determination  of  the  first  point  requires  that  we  should  ascer- 
tain the  true  nature  and  character  of  this  legislative  proceeding.  If 
it  were  a  public  act,  predicated  upon  a  view  to  the  general  good,  the 
question  would  be  more  difficult.  If  it  be  a  private  act,  obtained  at 
the  solicitation  of  individuals,  for  their  private  emolument,  or  for  the 
improvement  of  their  estates,  it  must  be  construed,  as  to  its  effect  and 
operation,  like  a  grant.  We  are  all  of  opinion  that  this  was  a  grant  or 
charter  to  the  individuals  who  prayed  for  it,  and  those  who  should 
associate  with  them  ;  and  all  incorporations  to  make  turnpikes,  canals 
and  bridges  must  be  so  considered. 

Can  then  one,  whose  name  is  by  mistake  or  misrepresentation  in-  ^ 
serted  in  such  an  act,  refuse  the  privileges  it  confers,  and  avoid  the 
burthens  it  imposes  ?  If  he  cannot,  then  the  Legislature  may,  at  all 
times,  press  into  the  service  of  such  corporations  those  whose  lands 
may  be  wanted  for  such  objects,  whenever  they  may  be  prevailed  on 
to  insert  the  names  of  such  persons,  b}^  the  intrigue  or  mistake  of 
those  more  interested  in  the  success  of  the  object.  No  apprehension 
exists  in  the  community  that  the  Legislature  has  such  power.  That_ 
the  land  of  any  person^  over  or  through  which  a  turnpike  or  canal  may 
pass,  may  be  taken  for  that  purpose,  if  the  Legislature  deem  it  proper,' 
is  not  doubted.  The  constitution  gives  power  to  do  this,  provided 
compensation  is  made.  But  it  was  never  before  known,  that  they  have 
power  over  the  person,  to  make  him  a  member  of  a  corporation,  and 
subject  him  to  taxation,  nolens  volens,  for  the  promotion  of  a  private 
enterprise. 

That  a  man  may  refuse  a  grant,  whether  from  the  government  or  an 
individual,  seems  to  be  a  principle  too  clear,  to  require  the  support  of 
authorities.  That  he  may  decline  to  improve  his  land,  no  one  will 
doubt.  Although  the  Legislature  may  wisely  determine  that  a  certain 
use  of  his  property  will  be  highly  beneficial  to  him,  he  has  a  right  to 


\ 


116  STATE   V.   BULL. 

judge  for  himself  on  points  of  this  nature.  The  fact  therefore  in  the 
case,  that  Marshall  is  benefitted  equally  with  the  other  owners  by  the 
making  of  this  street,  is  of  no  importance. 

It  being  then  the  opinion  of  the  court  that  this  act  is  of  a  nature  to 

)require  the  assent  of  Marshall,  either  express  or  implied,  before  it  can 

operate  upon  him,  it  is  necessary  to  enquire  into  the  second  point,  viz., 

whether  the  facts  agreed  on  in  this  case  furnish  evidence  of  such 

assent. 

Upon  the  whole,  therefore,  we  are  of  opinion  that  the  act  under 
which  the  plaintiff  sets  up  his  title,  could  not  bind  Marshall  without 
his  assent :  that  he  having  uniformly,  whenever  opportunity  occurred, 
signified  his  dissent,  is  not  a  member  of  the  corporation  it  created,  was 
not  liable  to  their  assessments,  and  therefore  that  the  sale  of  his  land 
was  without  authority  of  law  and  is  void. 

yi^y-  Plaintiff  nonsuit. 


1 


A 


vi 


f\  '  STATE  V.   BULL. 

ISU.     16  Connecticut,  179.1 

Information  in  the  nature  of  a  qtio  ivarranto,  to  test  the  right  to 
exercise  certain  corporate  franchises. 

In  1833,  the  legislature  passed  an  act  to  authorize  the  formation  of 

a  corporation  to  carry  on  the  business  of  insurance.     Among  the  pro- 

"'(j   '  '  visions  of  the  act  are  the  following :  the  capital  is  to  be  $100,000, 

divided  into  shares  of  $20  each  ;  subscriptions  to  the  stock  shall  l^e 

opeiied Under  the  superintendence  of  seven  commissioners,  named  in 

tjie  act,  at  such  times  and  places  as  they  shall  appoint ;  there  shall  be 

;  '  paid  to  the  commissioners  at  the  time  of  subscription  $1.00  on  each 

share  subscribed ;  the  subscriptions  shall  continue  open  three  days  ;  in 

case  the  subscriptions  shall  not  amount  to  $100,000,  the  subscriptions 

to  complete  said  sum  may  remain  open,  or  be  opened  anew,  at  some 

^;^  ^  subsequent  time  or  times  as  the  commissioners  shall  determine,  and 

'^  further  subscriptions  may  then  be  made  to  complete  the  amount ; 

after  the  stock  shall  have  been  fully  taken  up,  the  subscribers,  their 

successors  and  assigns,  shall  be,  and  are  hereby,  created  a  corporation 

f  {  by  the  name  of  the  Connecticut  Life  and  Fire  Insurance  Company, 

C]  In  June,  1833,  the  commissioners  opened  subscriptions,  giving  due 

notice  of  the  time  and  place,  and  the  subscriptions  were  kept  open 

for  the  time  prescribed  in  the  act.     The  subscriptions  amounted  to 

only  .$15,000.     The  subscriptions   were   thereupon   closed;  and   the 

commissioners   then,  or  soon  after,  refunded  to  the  subscribers  the 

sum  of  one  dollar  which  they  had  paid  on  each  share. 

1  Statnmcnt  abridged.     Arguments  and  part  of  opinion  omitted.  —  Ep-     ,         *v 


STATE  V.  BULL.  117 

Nothing  further  was  attempted  to  be  done  under  the  act,  until 
March  16,  1844,  when  the  commissioners,  without  giving  any  public 
notice,  opened  subscriptions  anew.  Three  persons  then  subscribed 
for  the  entire  capital  stock.  Thereafter  the  holders  of  the  shares  so 
last  subscribed  met,  elected  directors,  claimed  to  be  a  corporation,  and 
proposed  to  engage  in  the  business  of  insurance. 

To  the  information  setting  out,  in  substance,  the  foregoing  facts, 
there  was  a  general  demurrer. 

T.  C.  Perkins,  in  support  of  the  demurrer. 

Hungerford  and  Touceij,  contra. 

Church,  J.  The  commissioners  appointed  under  this  charter,  to 
receive  subscriptions  to  the  stock  of  the  proposed  Insurance  Com- 
pany, were  the  agents  of  the  state,  empowered  to  offer  an  act  of  in- 
corporation to  such  as  would  accept  it,  upon  the  terms  and  conditions 
proposed. 

The  legislature  was  influenced  in  granting  the  charter,  by  what  it 
supposed  the  public  interest,  at  that  time,  required.  We  cannot  pre- 
sume, that  it  was  enacting  a  supernumerary  charter,  to  be  laid  away 
among  the  state  records,  to  await  either  the  convenience  or  necessity 
of  future  times.  Nor  can  we,  without  great  disrespect,  suppose  it 
intended  to  give  opportunity  for  the  exercise  of  favouritism,  or  to 
prevent  competition  in  subscriptions. 

[The  learned  Judge  then  held,  that  public  and  general  notice  should 
have  been  given  whenever  the  books  for  subscription  were  opened 
anew.     The  opinion  then  proceeds.] 

The  foregoing  considerations  are  decisive  of  our  opinion  on  this 
subject.  But  there  are  others,  which  confirm  it.  The  commission' 
ers,  who  had  been  appointed,  in  view  of  the  state  of  things  then 
existing,  performed  the  duty  required  of  them.  They  offered  the 
charter  for  public  acceptance ;  and  it  was  declined.  They  restored 
to  the  subscribers  all  they  had  advanced,  and  abandoned  the  project. 
In  the  meantime,  perhaps,  other  corporations  may  have  been  created, 
to  supply  the  public  necessities,  which  once  were  supposed  to  exist ; 
and  the  legislature  Jiave  not  again  spoken  on  the  subject.  Under 
these  circumstances,  and  because  this  charter  was  not  accepted  within 
a  reasonable  time,  we  think  the  trust  conferred  upon  the  commission- 
ers must  be  considered  as  having  been  surrendered ;  and  that  it  can- 
not be  resumed,  now,  without  a  renewed  expression  of  the  will  of  the 
legislature. 

We  hold  the  information  to  be  sufficient. 

~~^-  ~ Demurrer  overruled. 


^':. 


I,  ' 


118  PEOPLE   V.  MONTECITO  WATER  CO. 

'^    .\  SECTION   III. 


PEOPLE   V.   MONTECITO   WATER   CO. 

1893.    97  California,  276. 


xjdonditions  precedent  to  Incorporation  De  Jure.    "  One  Man  Company." 

'O       \  [In  Department  Two.^]     Appeal  from  a  judgment  of  the  Superior 

Court  of  Los  Angeles  Count}'. 
The  facts  are  stated  in  the  opinion. 

John  J.  JBoyce,  Richards  &  Carrier,  and  George  H.  Goidd^  for 
appellant. 

IF.  C.  Stratton.,  for  respondents. 

Temple,  C.  Plaintiff  appeals  from  a  judgment  entered  upon  demur- 
rer to  complaint.  The  demurrer  was  general,  and  on  the  ground  of 
insufflcienc}'  of  the  facts.  It  is  a  proceeding  taken  by  the  attorney 
general  of  the  state,  in  the  nature  of  a  quo  warranto,  to  deprive  the 
defendant  corporation  of  its  corporate  charter,  and  procure  its  dissolu- 
(^  tion  on  two  grounds  —  First,  for  want  of  a  substantial  compliance  with 
^.^vx.-  !     the  statutor}^  requirements  in  its  formation  ;  and  second^ for  abandon- 

ment and  misuse  of  its  corporate  franchise  and  powers,  and  for  alleged 
A>-'^^'^  )    violations  of  law. 

In  answer  to  the  first  point  the  respondent  raises  the  preliminary 
objection  that,  by  making  the  corporation  a  defendant,  its  corporate 
-jj  character  is  admitted,  and  cannot  be  questioned  in  this  proceeding.    As 

P  ,    ^mJl^  authority  for  this  proposition  the  case  of  the  People  v.  Stanford,  77 

Cal.  360,  18  Pac.  Rep.  85,  and  19  Pac.  Rep.  693,  is  chiefly  relied  upon. 
,  In  that  case  it  was  alleged  in  the  complaint  that  the  assumed  corpora- 

/xV^  <  tion  had  never  been  a  corporation.  If  it  were  not  a  corporation  of  any 
character,  it  had  no  legal  existence,  and  could  not  be  sued.  By  mak- 
ing it  a  partv,  plaintiff  conceded  that  it  was  a  person  that  could  be  sued. 
It  was  said  that  the  corporation  could  not  be  treated  as  a  person  which 
could  be  sued  simpl}'  to  obtain  a  judgment ;  that  it  was  not  and  never 
had  been  such  a  person.  There  is  no  such  inconsistency  here.  It  is 
averred  that  the  corporate  defendant  is  a  corporation  de  facto,  but  it  is 
claimed  that  it  did  not  become  a  corporation  de  jin-e,  because  the  per- 
sons who  attempted  the  incorporation  did  not  compl}'  with  the  condi- 
tions which  tlie  statute  makes  conditions  precedent  to  its  rightful 
',  incorporation.  Under  such  circumstances,  although  the  association 
is  a  legal  entity,  which  may  be  sued,  its  riglit  to  corporate  exist- 
ence may  be  questioned  by  the  state  in  a  proceeding  of  this  character. 
Section  358,  Civil  Code.     This  court  said  in  People  v.  La  Rue,  67 

^  Ah  to  tlif!  Dfpartnionts  of  the  Supreme  Court,  and  as  to  Supreme  Court  Commi* 
doners,  bcc  I'reface  to  97  California,  pp.  v-vil 


■^I^ttc 


^.^' 


V.   MONTECITO   WATER   CO.  119 


\ 


Cal.  -SSOj  8  Pac.  Rep.  84,  and  repeated  the  language  in  First  Bap« 
^  tist  Cliurch  V.  Branliam,  90  Cal.  22,  27  Pac.  Rep.   60:    "A  corpo^ 
,A  ration   de   facto -may  legall}^  do   and   perform   every  act  and   thing 
\    wJKch  the  same  entit}'  could  do  or  perform  were  it  a  de  jure  corpora- 
|j^^;|(^y  As  to  all  the  world,  except  the  paramount  authority  under  which 
\     it  acts,  and  from  which  it  receives  its  charter,  it  occupies  the  same  posi- 
j    tion  as  though  in  all  respects  valid  ;   and  even  as  against  the  state, 
except  in  direct  proceedings  to  arrest  its   usurpation  of  power,  it  is 
submitted  its  acts  are  to  be  treated  as  efficacious,."     lender  such  cir- 
cumstances it  seems  clear  that  the  corporation  is  not  only  a  proper,  but 
a  necessary  part}-.     People  u.  Flint,  64  Cal.  49,  28  Pac.  Rep.   495; 
People  V.  Gunn,  85  Cal.  244,  24  Pac.  Rep.  718.  /j*tfc<^^7^*^ 

It  is  contended  that  the  corporation  is  not  rightfully  such  because,       \  .    7 

while  five  incorporators  signed  the  articles  of  incorporation,  only  four  ac-  /  A^L't^^HJU" 
knowledged  the  same.  Section  292  of  the  Civil  Code  reads  as  follows  :  J  /  ^%.\,(^^  Ji- 
"  The  articles  of  incorporation  must  be  subscribed  by  five  or  more  per-  ) 
sons,  a  majority  of  whom  must  be  residents  of  this  state,  and  acknowl 
edged  by  each  before  some  officer  authorized  to  take  and  certify 
acknowledgments  of  conve3-ances  of  real  propert}'."  It  was  said  in 
People  V.  Selfridge,  52  Cal.  331  :  "  The  right  to  be  a  corporation  is 
in  itself  a  franchise  ;  and,  to  acquire  a  franchise  under  a  general  law, 
the  prescribed  statutory  conditions  must  be  complied  with."  Still,  a 
substantial,  rather  than  a  literal,  compliance  will  suffice.  PebpIe'vT 
Stockton  &  V.  R.  Co.,  45  Cal.  313.  Was  there  substantial  compli- 
ance in  this  case?  Because  a  substantial  compliance  will  do,  it  does 
not  follow  that  any  positive  statutory  requirement  can  be  omitted,  on 
the  ground  that  it  is  unimportant.  They  are  conditions  precedent  to 
acquiring  a  statutory  right,  and  none  can  be  dispensed  with  by  the 
court.  What  is  a  substantial,  rather  than  a  literal,  compliance,  may  be 
illustrated  from  the  cases.  In  Ex  parte  Spring  Valley  Waterworks, 
17  Cal.  132,  the  certificate  stated  the  place  of  business,  but  did  not 
describe  it  as  the  "  principal  place  of  business,"  as  required.  The 
court  said  :  "  The  statement  that  San  Francisco  was  the  place  of  busi- 
ness would  seem  to  imply  that  it  was  not  only  the  principal,  but  the 
onl}',  place  of  business."  In  People  v.  Stockton  &  V.  R.  Co.,  45  Cal. 
306,  the  affidavit  required  in  such  cases  to  be  attached  to  the  certificate 
stated  that  10  per  cent  of  the  amount  subscribed  had  been  actuall}' 
paid  in,  omitting  the  words  "  in  good  faith,"  which  the  statute  required. 
In  the  certificate  it  was  stated  that  more  than  10  per  cent  had  been 
actually  in  good  faith  paid  in..  It  was  held  sufficient,  and  it  would 
seem  that,  if  it  was  actually  paid  in  cash,  it  must  have  been  paid  in 
good  faith  ;  and  it  was  further  held  that  payment  by  checks  drawn 
against  sufficient  funds  in  a  bank,  which  was  ready  to  accept  and  pay 
the  checks,  was  substantially  payment  in  cash.  In  People  v.  Cheese- 
man,  7  Colo.  376,  the  acknowledgment  taken  by  the  notar}'  omitted  to 
state  that  the  persons  whose  acknowledgments  were  taken  Were  person- 
ally known  to  the  n9t^ry.     The  certificate  did  state  that  the  persons 


1^ 


-»        W4A4AW       VLIW      ^\jX.  i3\JKk»3        « 


r     r  ^ 


c\ 


120  /     '       PEOPLE   i\   MONTECITO   WATER   CO. 

,    d^^        Twho  signed  appeared  before  him  and  acknowledged  it.    The  statute  did 
A/5^   I  ftu         *^°^  prescribe  what  the  acknowledgment  should  contain,  and  it  was  held 

i  A  ^  a  substantial  compliance  with  the  requirement,  although  the  form  pre- 

scribed for  acknowledgments  to  deeds  was  not  followed.  It  was  ac- 
knowledged. In  all  these  cases  it  will  be  seen  that  the  thing  required 
was  done,  but  not  literall}'  as  directed  ;  but  there  was  no  omission  of 
any  requirement.  No  case  has  been  cited  where  the  entire  omission  of 
a  thing  prescribed  has  been  excused,  unless  it  be  the  case  of  Larrabee 
V.  Baldwin,  35  Cal.  155.  That  was  not  an  action  instituted  by  the 
state  to  disincorporate  on  the  ground  of  noncompliance.  As  we  have 
seen,  unless  the  state  complains,  a  de  facto  corporation  must  be  consid- 
ered, under  our  Code,  as  possessing  a  corporate  character ;  and  the 
stockholders,  when  sued  upon  their  individual  liability,  should  not  be 
allowed  to  make  the  point  that  they  did  not  comply  with  the  law.  In 
that  case  the  certificate  was  signed  by  five  directors,  but  two  failed  to 
acknowledge  it.  Other  questions  are  discussed  at  great  length  in  the 
opinion,  but  in  regard  to  the  point  made  on  the  certificate  it  was  simply 
remarked:  "  It  is  not  clear  that  an}'  fatal  defect  exists  in  the  certifi- 
»  ,  vfV^ate  of  incorporation.  If  so,  it  is  cured  b}'  the  act  of  April  1,  1864." 
Plainly  it  was  unnecessary  to  consider  the  question.  The  curative  act  re- 
ferred to  declares  :  "  All  associations  or  companies  heretofore  organized, 
and  acting  in  the  form  and  manner  of  corporations,  and  that  have  filed 
certificates  for  the  purpose  of  being  incorporated,  but  whose  certificates 
are  in  some  manner  defective,  or  have  been  improperly  acknowledged 

r  before  a  person  not  authorized  by  law  to  take  such  acknowledgments, 

^'  are  hereby  declared  to  be,  and  to  have  been,  corporations  from  the 

date  of  the  filing  of  such  certificates,  in  the  same  manner  and  to  the 
same  effect  and  intent  as  if  such  certificates  were  without  fault,  and 
properly  acknowledged  before  the  proper  oflficer ;  and  all  such  certifi- 
/iV-  Gates  are  hereby  validated,  and  declared  to  be  legal,  and  shall  have  the 

,  same  force  and  effect  as  if  such  certificates  were  free  from  all  fault  or 

defect,  and  were  properly  acknowledged,"  etc.     St.  1863-64,  p.  303. 
/    Section  292  of  the  Civil  Code  requires  the  articles  to  be  subscribed  and 
\    acknowledged  by  each.     As  this  is  an  express  condition  precedent  to  a\ 
I    valid  incorporation,   it  is  not  of  consequence  to  the  court  whether  it 
\  be  a  wise  or  necessary  requirement  or  not.     Still,  it  is  eas}'  to  see  a 
I  reason  for  it.    The  certificate  secures  the  state,  and  all  concerned, 
against  the  possibility  of  any  fictitious  names  being  subscribed  to  the 
articles,  and  furnishes  proof  of  the  genuineness  of  the  signatures.     If 
the  acknowledgment  can  be  dispensed  with  as  to  one,  wh}'  not  as  to  two 
or  three,  or  all?    Ordinarily,  no  doubt,  the  state  would  not  be  expected 
to  institute  a  proceeding  of  this  character  for  such  a  defect  alone,  and 
we  must  presume  that  the  attorne}'  general  would  not  have  instituted 
this  infjuiry  if  he  were  not  convinced  that  there  were  reasons  sufficient 
to  justify  it.     Otlier  reasons  are  alleged  ;  but,  as  the  statute  authorizes 
a  proceeding  to  forfeit  the  charter  where  the  statute  has  not  been  com- 
plied with,  although  the  corporation  is  acting  in  good  faith,  and  is  a 


WEWCOMB   V.   REED.  121 

de  facto  corporation,  the  complaint  must  be  held  to  state  a  cause  of 
action,  and  the  demurrer  should  be  overruled.  The  judgment  should 
be  reversed,  and  the  cause  remanded,  with  directions  to  overrule  the 
demurrer. 

Haynes,  C,  and  Belcher,  C,  concurred. 

For  the  reasons  given  in  the  foregoing  opinion,  the  judgment  is  re- 
versed, and  the  cause  remanded,  with  directions  to  overrule  the 
demurrer.  ■<^,- 

De  HaveN;  J.,  McFarland,  J.,  Fitzgerald,  J.  ^  ^ 


y 


NEWCOMB  V.  REED. 

1866.     12  Allen,  362. 

Contract,  in  which  the  plaintiff  sought  to  charge  the  officers  of  the 
Boston  Mechanical  Bakery  Company  with  a  debt  contracted  in  the 
name  of  the  corporation,  in  consequence  of  their  neglect  to  file  cer- 
tificates and  statements  of  the  condition  of  the  corporation.  At  the  «  p^ 
trial  in  the  superior  court,  before  Ames,  J.,  without  a  jur}-,  the  judge  V  " 
found  for  the  defendants  upon  facts  which  are  stated  in  the  opinion ; 
and  the  plaintiff  alleged  exceptions. 

C.  B.  Goodrich  &  E.  Avery,  for  the  plaintiff. 

E.  3fericin,  for  the  defendants. 

Hoar,  J.  The  defence  to  this  action  rests  wholly  upon  the  assump- 
tion that  the  corporation,  whose  officers  the  plaintiff  seeks  to  charge 
with  a  statute  liability  for  its  debts,  never  had  a  legal  existence.  The 
only  defect  suggested  in  the  organization  of  the  corporation  is,  that  the 
call  for  the  first  meeting  was  signed  by  only  one  of  the  persons  named 
in  the  act  of  incorporation,  and  not  by  a  majority  of  them,  as  required 
by  St.  1855,  c.  140. 

The  case  of  Utley  v.  Union  Tool  ComjMny,  11  Gray,  139,  is  the 
authority  on  which  the  defendants  chiefly  rely.  That  case  decided 
that  in  order  to  charge  as  stockholders  of  a  manufacturing  corporation 
persons  who  had  been  summoned  in  an  action  against  it  under  St. 
1851,  c.  315,  the  plaintiff  must  prove  the  legal  existence  of  the  cor- 
poration. The  alleged  corporation  had  no  charter  or  act  of  incorpora- 
tion from  the  legislature,  but  was  an  association  which  had  undertaken 
to  assume  corporate  powers  under  a  general  act  for  the  formation  of 
joint  stock  companies,  St.  1851,  c.  133.  That  statute  authorized  three 
or  more  persons  who  had  entered  into  "  articles  of  agreement  in  writ- 
ing" for  the  transaction  of  certain  kinds  of  business,  to  organize  in  a 
manner  prescribed,  and  thereby  to  become  a  corporation ;  and  the 
court  were  of  opinion  that  written  articles  of  agreement  were  essential 
to  constitute  a  corporation,  and  that  these  articles  must  fix  the  amount 
of  the  capital  stock,  and  set  forth  distinctly  the  purpose  for  which  ani^ 


V 


!>'  K 


122  KKWCOMB   V.    EEED. 

the  place  in  which  the  corporation  was  established.  The  court  say, 
"  There  is  an  obvious  reason  for  making  such  organization  by  written 
articles  of  agreement  a  condition  precedent  to  the  exercise  of  corpo- 
rate rights.  It  is  the  basis  on  which  all  subsequent  proceedings  are  to 
rest,  and  is  designed  to  take  the  place  of  a  charter  or  act  of  incorpora- 
tion, bv  which  corporate  rights  and  privileges  are  usually  granted." 
And  the}'  add  that  "it  is  not  a  case  of  a  defective  organization  under 
a  charter  or  act  of  incorporation,  nor  of  erroneous  proceedings  after  the 
necessar}'  steps  were  taken  to  the  assumption  of  corporate  powers, 
but  there  is  an  absolute  want  of  proof  that  any  corporation  was  ever 
called  into  being,  which  had  the  power  of  contracting  debts  or  of  ren- 
dering persons  liable  therefor  as  stockholders." 

We  think  these  reasons  have  no  application  to  the  case  now  before 
us.  In  this,  there  was  an  act  of  incori)oration  from  the  legislature. 
There  is  no  question  that  the  corporate  powers  which  it  conferred  were 
assumed  b}'  the  persons  by  whom  it  was  intended  that  they  should  be 
enjoyed,  so  far  as  the}'  chose  to  avail  themselves  of  them.  The  organ- 
ization was  not  strictly  regular,  but  can  hardly  be  considered  even  as 
defective.  I 

And  if  the  object  of  the  statute  is. regarded,  by  which  it  is  required  / 
that   the   first   meeting  shall  be  called  by  a  majority  of  the  persons  / 
named  in  the  act  of  incorporation,  it  will  be  evident  that  it  is  directory  \ 
merely,  and  only  designed  to  secure  the  rights  conferred  b}'  the  charter   / 
to  those  to  whom  it  was  granted,  among  themselves,  b}'  providing  an  ( 
orderly  method  of  organization..     Thus,  if  all  the  persons  interested  j 
should  come  together  without_any_notice_or  call  whatever,  and  proceed    >^ 
to  accept  the  charter,  and  do  the  other  acts  necessary  to  constitute  the 
corporation,  we  cannot  doubt  that  their  action  would  be  valid,  and  that 
neither  the  public,   nor  any  persons  not  belonging  to  the  association, 
would  have  any  interest  to  question  their  proceedings. 

The  purpose  of  the  statute  was  probabl}'  to  avoid  such  difficulties  as 
were  disclosed  in  the  case  of  Lechmere  Bank  v.  Boynton,  11  Cush. 
369,  where  two  parties  had  attempted  to  organize  separately  under  the 
same  charter,  each  claiming  to  be  the  corporation. 

There  is  nothing  in  the  facts  found  and  reported  to  show  that  all 
persons  interested  were  not  actually  notified  of  the  meeting  for  organ- 
ization. On  the  contrary,  it  would  seem  that  the}'  were.  No  one  has 
questioned  the  regularity  of  the  proceedings,  orx;laimed,  as  in  Lech- 
mere Bank  v.  Boynton,  a  right  to  organize  in  a  different  manner. 
The  evidence  was  ample  to  show  that  the  persons  named  in  the  act  of 
incorporation  with  their  associates,  or  at  least  all  of  them  who  desired 
to  do  so,  have  accepted  the  act,  organized  under  it,  issued  stock, 
elected  officers  who  have  acted  and  served  in  that  capacity,  carried  on 
business,  contracted  debts,  and  exercised  all  the  functions  of  corporate 
existence.  It  is  therefore  too  late  to  deny  that  the  corporation  ever 
had  any  legal  existence,  or  for  these  officers  to  avoid  the  liabihties 
which  the  statutes  of  the  Commonwealth  impose. 


CHERAW   AND   CHESTER   RAILROAD   CO.   V.   WHITE. 


123 


The  defendant  Brackett,  who  was  treasurer  in  February  1861,  ap- 
pears to  have  been  liable  with  the  directors  under  the  provisions  of 
Gen.  Sts.  c.  60,  §§  18,  20,  31.  Exceptions  sustained. 


.v^ 


M 


J^ 


CHERAW   &   CHESTER  R.   CO.   v.   WHITE. 

1880.     14  Soicth  Carolina,  51,^  '     ,    ,-)  '^''^ 

WiLLARD,  C.  J.  This  action  was  brought  to  recover  the  amount  6f 
subscription  to  the  capital  stock  of  the  plaintiff  company,  alleged  t 
have  been  made  by  the  defendant,  and  not  duly  complied  with  on  hi 
part.     The  defendant  demurred  to  the  complaint  on  various  grounds.  ^  ^ 

This   demurrer   was   overruled   by  the   Circuit   Court,    and   leave   to  "   \y « 
answer  granted   on   terms.     From   this   decision   the   defendant   nowy^  ^ 
appeals. 

The  first  ground  of  demurrer  is,  that  the  plaintiff  has  no  capacity  to 
sue.  Several  propositions  are  stated  under  this  ground  of  demurrer 
'that,  in  substance,  involve  the  general  proposition  that  the  plaintiffs 
have  received,  by  law,  only  authority  to  become  a  corporation  upon 
the  performance  of  certain  conditions  precedent,  and  that  the  com- 
plaint contains  no  allegations  showing  that  such  conditions  have  been 
performed. 

The  act  to  charter  the  plaintiff  company,  passed  February  27th, 
1873,  (15  Stat.  442,)  confers  corporate  powers  on  the  corporators 
named,   in  terms  importing  an  immediate  grant,  with  the  following 


(CUju^ 


proviso  annexed  :  "  Provided  that  said  persons  shall  commence  opera- 
tions upon  said  road  within  two  j'ears  after  the 
and  complete  the  same  within  five  years."  The 
is  stated  b}-  Section  6  at  seven  years,  but  this  conflict  of  time  is  not 
material  to  the  present  question.  The  question  is  whether  the  proviso 
can  have  the  effect  to  convert  a  grant  of  the  corporate  franchise,  made 
in  terms  that  import  an  immediate  grant,  into  one  taking  effect  only 
upon  the  happening  of  a  certaiiTcontingencj'.,  If  the  purpose  intended 
by  the  proviso  cannot  be  fnll^'  accomplished  without  a  limitation  of  the 
broad  sense  of  the  language  conferring  the  franchise,  then  such  effect 
can  be  accomplished  consistently  with  the  rules  of  construction,  for,  in 
that  case,  the  proviso  would  be  necessaril}-  interpreted  as  a  condition 
in  substance  and  effect.  As  a  condition  subsequent  this  is  undoubt- 
edly the  effect  of  the  proviso,  but  does  it  contain,  in  itself,  anything 
that  imports  a  necessit}-  tliat  it  should  operate::^a&Jbjco^ 


passage  of  this  act,   \      i  i       , 

period  of  completion  |7J\M-^  ^'^^'^^ 


)   Ur 


1  Statement    omitted.     Only    so    much    of    opinion   is  given  as   relates  to  ona 
point.  —  Ed. 


124  CHEEAW   AND   CHESTER   RAILROAD   CO.   V.   "WHITE. 

deutP  Two  things  are  to  be  considered  in  this  respect :  ^irst.  What 
"Is  essential  to  the  full  efficacy  of  the  matter  of  the  proviso  itself? 
/Second.  What  would  be  the  effect  of  allowing  it  to  stand  as  a  condition 
precedent  on  the  completeness  of  the  powers  granted  for  the  purpose 
intended  b}'  the  grant,  and  to  which  the  terms  of  the  proviso  stand  as 
a  condition?  It  certainly  was  intended  that  the  corporators  should 
have  all  the  powers  and  capacity  properh'  incident  to  a  railroad  corpo- 
ration for  the  purpose  of  enabling  it  to  commence  and  complete  the 
road  in  the  times  prescribed  b}'  the  law,  for  it  must  be  assumed  that  the 
construction  of  the  road  was  deemed  a  public  benefit,  and  that  the  acqui- 
sition of  that  benefit  to  the  public  was  the  true  consideration  of  the  grant, 
and,  in  this  light,  the^proyiso  must  be  i-egarded  as  directly  intended  as^ 
a  means  of  hastening  its  construction.  This  view  also  excludes  the 
idea  that  the  proviso  was  intended  to  limit  the  capacity  or  powers  of 
the  companj'  to  construct  the  road  within  the  times  prescribed  for  that 
purpose.  It  must  certainl}'  be  assumed  that  the  possession  of  corpo- 
rate powers  during  the  time  that  the  company  was  organizing  and 
acquiring  the  capital  and  credit  requisite  to  construct  the  road  was  a 
material  aid  toward  the  accomplishment  of  that  result.  It  is  fair,  then, 
k  ^/^  to  assume  that  the  grant,  in  terms   irpporting   immediate   corporate 

C JCV^^^-^^^^"^^  I  capacity,  was  intended  to  operate  as  such  for  the  purpose  of  conferring 
on  the  corporation  the  most  perfect  means  for  accomplishing  that  which 
it  was  the  purpose  of  the  proviso  to  secure.  So  far  then  from  its  being 
essential  to  the  efficacy'  of  the  proviso  that  the  sense  of  the  terms  grant- 
ing, directh',  the  corporate  franchise  should  be  narrowed,  the  purpose 
of  the  proviso  is  best  subserved  by  holding  these  powers  intact  accord- 
ing to  the  terms  in  which  they  were  granted.  If,  at  the  end  of  two 
3ears,  the  corporation  had  not  commenced  to  construct  the  road,  every 
object  intended  to  be  secured  to  the  state  and  to  the  public,  b}'  the 
limitation,  would  be  full}'  attained,  even  if  the  compan}-  had  at  once, 
upon  the  granting  of  the  charter,  become  a  corporation.  The  ex- 
tinguishment of  the  franchise  of  building  and  operating  a  raih'oad 
would  have  followed,  and  the  right  to  exercise  the  functions  of  a  cor- 
poration would  have  fallen  with  it  as  an  accessor}'.  On  the  other 
hand  if  the  grant  is  held  to  be  subject  to  a  condition  precedent,  by 
reason  of  the  limitation  as  to  commencing  work  in  two  years,  the  argu- 
ment that  would  produce  that  result  would  go  a  step  further  and  make 
the  completion  of  the  road  a  condition  precedent.  In  that  case  the 
anomaly  would  be  presented  of  a  company  undertaking  the  construc- 
tion and  completion  of  a  work  of  such  magnitude  without  tlie  powers  of 
a  corporation,  and  only  hoping  to  obtain  such  powers  when  the  work 
had  been  accomplished.  Such  an  intention  cannot  be  ascribed  to  the 
statute.  It  is  clear  that  the  demurrer  was  properly  overruled  as  it 
regards  the  ground  just  considered. 

•  ••••••• 

Judgment  affirmed- 


JOHNSON  V.   KESSLEE.  125 


JOHNSON  V.    KESSLER. 

1888.    76  Iowa,  411. 

Appeal  from  Bremer  District  Court. 

Action  in  chancery  to  restrain  the  collection  of  a  tax  voted  by  the 
electors  of  a  township  in  aid  of  the  construction  of  a  railroad.  Upon 
a  trial  on  the  merits  plaintiffs'  petition  was  dismissed.  They  now 
appeal  to  this  court. 

Boies,  Husted  &  Boies,  for  appellants. 

Gibson  &  Daivson,  for  appellees. 

Beck,  J.  I.  Counsel  for  plaintiffs  insist  that  the  tax  voted  is 
void  for  the  reason  that,  as  the  stock  authorized  by  the  articles  of  in- 
corporation of  the  company  to  whom  the  tax  was  voted  was  not  all 
subscribed  or  taken,  the  corporation  was  not  in  fact  in  existence.  j  » 

Counsel's  position,  expressed  in  their  own  language,  is  this  :  "  It  was  ("^JiAJpJ 
not  in  law  a  corporation  until  its  required  capital  stock  was  sub-  )  *1        Jt^" 

scribed."  The  ready  answer  to  this  objection  is  found  in  the  statute.  )  Ocrv^C5-voV-^r-»^ 
The  purposes  and  objects  of  an  incorporation  is  to  clothe  persons  who  ' 
associate  themselves  together  for  that  purpose  with  authority  and 
power  to  do  lawful  business  as  an  individual.  Code,  sec.  1058.  It  is 
enacted  that  an  incorporation  may  commence  business  as  soon  as  its 
articles  of  incorporation  are  filed  in  the  recorder's  office.  Id.  sec. 
1064.  The  corporation  may,  then,  lawfully  commence  business,  — 
that  is,  exercise  its  corporate  authority  and  power,  —  when  its  articles 
of  incorporation  are  filed.  Nowhere  is  there  an  intimation  in  the 
statute  that  this  authority  and  power  cannot  be  exercised  until  all  of 
its  stock  has  been  subscribed.  There  is  nothing  in  the  articles  of  in- 
corporation of  the  railroad  company  to  which  the  aid  was  voted,  pro- 
viding that  the  company  shall  not  begin  business  until  a  prescribed 
amount  of  stock  shall  have  been  subscribed.  Peoria  &  R.  I.  Ry.  Co. 
V.  Preston,  35  Iowa,  115,  cited  by  plaintiffs'  counsel,  interprets  the 
power  of  an  Illinois  corporation,  in  the  absence  of  any  statute  simi- 
lar to  our  own,  authorizing  corporations  to  commence  business  upon 
filing  articles  of  incorporation,  or  upon  the  happening  of  any  other 
prescribed  event. 

[Omitting  opinion  on  other  points.] 

Affirmed. 


126  ASPEN   WATER  AND   LIGHT   CO.   V.  CITY   OF  ASPEN. 


Gaines,  J.,  in  NATIONAL  BANK   OF  JEFFERSON   v.  TEXAS 
INVESTMENT   CO. 

1889.     74  Texas,  421,  pp.  435-436. 

But  it  is  also  insisted  that  the  company  was  never  legally  incorpo- 
rated because  the  capital  stock  was  not  subscribed  and  paid  for  by  the 
promoters  of  the  enterprise.  That  the  Legislature  contemplated  that 
corporations  organized  under  the  statute  under  consideration  should 
be  conducted  as  stock  companies,  having  their  capital  stock  divided 
into  shares,  we  think  there  can  be  no  doubt.  The  law  requires  that 
the  articles  of  incorporation  shall  show  "the  amount  of  capital  stock, 
if  any,  and  the  number  of  shares  into  which  [it]  is  divided."  Rev. 
Stats.,  art.  567 ;  see  also  arts.  590,  et  seq.  Article  591  provides  that 
the  stock  subscribed  for  shall  be  paid  in  such  manner  and  in  such 
installments  as  the  board  of  directors  may  order.  But  we  find  no  pro- 
vision in  the  law  making  the  existence  of  the  corporation  dependent 
upon  the  subscription  to  its  stock  or  the  payment  therefor.  On  the 
contrary  it  is  expressly  provided  that  "  the  existence  of  the  corpora- 
tion shall  date  from  the  filing  of  the  charter  in  the  office  of  the  Secre- 
tary of  State."     Rev.  Stats.,  art.  570. 

It  follows,  we  think,  that  when  the  company  filed  its  articles  of 
Incorporation  with  the  Secretary  of  State,  it  became  a  corporation  in 
law,  and  that  the  owners  of  its  stock  and  the  managers  of  its  busi- 
ness can  not  be  held  liable  as  partners  for  debts  contracted  by  it. 
This  ruling  is  supported  by  authority.  Laflin  &  Rand  Powder  Co.  v. 
Sinsheimer,  46  Md.  315  ;  Society  Pm'im  v.  Cleaveland,  43  Ohio  St., 
481 ;  First  Nat.  Bank  v.  Almy,  117  Mass.  476. 


;K 


\^     USPEN  WATER  AND  LIGHT  CO.  v.  CITY  OF  ASPEN. 

V,^  t^  ,.r^    ''^^  1894.     ^  Colorado  Appeals,  Vl.^ 

Appeal  from  District  Court  of  Pitkin  County. 
^    ^  The  statutes  of  Colorado  provide  that  any  three  or  more  persons 

^  who  may  desire  to  form  a  company  for  carrying  on  any  lawful  business, 

may  make,  sign  and  acknowledge  certificates  in  writing  in  which  shall 
be  stated  certain  specified  things  including  the  amount  of  capital 
stock,  the  number  of  shares  into  which  it  is  divided,  the  number  of 
the  directors  or  trustees  and  the  names  of  those  who  are  to  manage 
the  affairs  of  the  company  for  the  first  year  of  its  existence.     Such 

1  The  RtatemfMif  is  taken  from  a  note  in  12  Lewis'  Amer.  R.  R.  &  Corp.  Reports,  page  5Io. 
Onlv  part  of  the  opinion  is  given.  —  Eu. 


ASPEN   WATER   AND   LIGHT   CO.   V.  CITY   OF  ASPEN.  127 

certificate  is  to  be  filed  in  each  county  in  which  the  corporation  does 
business  and  in  the  office  of  the  secretary  of  state.  1  Mill's  Stats, 
§  473.  The  next  section  in  the  original  act  provides  that  when  the 
certificates  have  been  filed  as  aforesaid,  the  secretary  of  state  shall 
record  and  preserve  the  same  and  that  a  copy  thereof  duly  certified 
by  the  secretary  shall  be  evidence  of  the  existence  of  such  company. 
1  Mill's  Stats.  §  475.  A  subsequent  section  provides  that  the  corpo- 
rate powers  shall  be  exercised  by  a  board  of  directors  or  trustees  of  not 
less  than  three  nor  more  than  thirteen,  who  shall  respectively  be 
stockholders  in  said  company,  and  who  shall  (except  the  first  year) 
be  annually  elected  by  the  stockholders.  The  statute  is  silent  as  to 
how  or  when  the  subscription  to  the  stock  is  to  be  taken  and  also  as 
to  any  further  organization  of  the  company,  except  that  provision  is 
made  for  the  election  of  a  president  by  the  directors  and  for  such 
other  officers  as  may  be  provided  for  in  the  by-laws.  Proceedings 
were  taken  to  form  the  Aspen  Water  and  Light  Company,  and  the 
statute  appears  to  have  been  complied  with  so  far  as  its  positive  re- 
quirements were  concerned.  But  no  stock  was  ever  subscribed  for  or 
issued.  The  company  obtained  a  grant  of  a  franchise  from  the  city  of 
Aspen  and  some  attempt  was  made  to  enter  upon  the  construction  of 
the  works.  But  the  city  attempted  to  revoke  or  annul  its  franchise 
and  forcibly  prevented  the  company  from  proceeding  with  its  work. 
Thereupon  the  company  brought  suit  for  damages. 

James  M.  Doivning,  Porter  Plumb,  and  Joseph  W.  Taylor,  for  ap- 
pellants. 

William  O^Brien  and  R.  G.  Withers,  for  appellee. 

BissELL,  P.  J.  ...  "  It  only  remains  to  determine  the  legal  con- 
sequenceswhich  flow  from  the  failure  to  complete  the  organization  by 
the  preparation,  issue  and  sale  of  stock.  In  some  states  the  General 
Incorporation  Act  provides  that  upon  the  filing  of  the  certificate  the 
persons  who  sign  it,  and  their  successors,  shall  become  a  body  cor- 
porate, and  be  invested  with  certain  powers.  But  even  in  a  case  like 
that  the  authorities  hold  that  it  only  thereby  becomes  a  quasi  cor- 
poration, invested  possibly  with  certain  powers  for  certain  limited 
purposes.  In  reality  it  becomes  a  corporation  only  in  name.  It  is 
universally  agreed  that  a  corporation  cannot  exist  without  stockholders 
or  members.  As  said  by  the  learned  Commissioner  Pattison  in  Arkan- 
sas River,  Town  &  Canal  Co.  v.  Farmers^  Loan  &  Trust  Co.,  13  Col. 
587  ;  32  Pac.  Pep.  954,  '  without  organization  and  members,  without 
officers  and  stockholders,  a  corporation  is  but  a  naked  body.'  1  Mor. 
Priv.  Corp.  §  33.  We  are  thus  confronted  with  this  situation :  Con- 
ceding, ex  gratia,  that  the  Aspen  Water  and  Light  Company  had  an 
existence  on  the  27th  of  February,  1885,  and  was  possessed  of  suf- 
ficient corporate  capacity  to  render  the  grant  contained  in  the  ordi- 
nance operative  to  vest  in  that  company  the  rights  expressed  when  the 
organization  should  be  complete,  it  remains  true  that  at  the  time  of 
the  alleged  breach,  and  the  bringing  of  the  suit,  the  grant  had  not 


1^8  PALMEK  V.  LAWRENCE. 

become  operative.  .  .  .  The  company  never  had  any  legal  president 
and  never  had  any  legal  secretary,  and  consequently  the  so-called  con- 
tract was  never  executed.  The  statute  provides  (Gen.  St.  1883, 
§§  242-244)  that  the  corporate  powers  shall  be  exercised  by  a  board 
of  directors  or  trustees,  who  must  be  stockholders  of  the  company,  and 
from  which  body  a  president  may  be  elected.  This  is  a  statutory 
limitation  upon  the  corporate  power,  and  the  governing  body  must, 
according  to  that  statute,  be  composed  of  shareholders,  and  the  presi- 
dent can  only  be  rendered  competent  by  possessing  the  same  statutory 
qualification.  Since  it  is  true  that  no  stock  was  ever  subscribed  for  or 
issued  by  this  company,  and  no  agreement  was  established  which  obli- 
gated the  promoters  for  the  stock  of  the  company  so  that  they  might 
jbe  taken  to  be  joint  owners  of  all  of  it,  it  follows  that  there  never  was 
any  board  of  directors  competent  to  make  a  contract,  nor  any  persons 
who  could  execute  an  agreement  for  the  company.  Under  these  cir- 
cumstances, one  of  the  first  essentials  of  a  valid  contract  is  absolutely 
wanting.  There  was  not  at  the  date  of  the  alleged  breach,  and  there 
is  not  at  the  present  time,  any  such  corporation  as  the  Aspen  Water 
and  Light  Company.  What  the  rights  of  the  promoters  may  be,  if 
any,  is  not  before  us  for  consideration.  The  suit  was  not  brought  by 
them,  or  in  their  behalf,  but  in  the  name  and  on  behalf  of  a  corpora 
tion  without  a  legal  existence." 
[Remainder  of  opinion  omitted.] 

Affirmed. 


\ 


b\^ 


DuER,  J.,  IN  PALMER  V.  LAWRENCE. 

1849.     3  Sandford's  New  York  Superior  Court,  161,  pp.  172-174. 

DuER,  J.  .  .  .  We  proceed  now  to  the  direct  consideration  of  the 
objections  that  are  relied  on ;  not  that  it  is  at  all  necessary  that  these 
objections  should  be  answered,  in  order  to  justify  the  decision  that  we 
propose  to  make,  but  that  the  same,  or  similar  objections,  may  not  be 
raised  in  any  future  case  that  we  may  be  required  to  determine.  The 
construction  of  the  general  banking  law,  upon  which  the  first  objection 
proceeds,  namely,  that  the  actual  payment  of  the  capital  must  precede 
the  making  and  filing  of  the  certificate,  we  have  no  difficulty  in  reject- 
ing. It  is  as  unreasonable  as  it  is  novel.  It  is  not  required  by  tlie 
terms  of  the  statute,  and  is  inconsistent  with  several  of  its  provisions. 
The  third  subdivision  of  the  fifteenth  section  declares,  that  the  certifi- 
cate of  the  associates  "  shall  specify  the  amount  of  the  capital  stock  of 
such  association ; "  and  it  is  upon  these  few  words  —  this  narrow 
foundation  —  that  the  ingenious  argument  of  the  defendant's  counsel 
was  exclusively  built;  yet  these  words  are  so  far  from  necessarily  im- 
I)lying  that  the  capital  has  been  paid  when  the  certificate  is  made,  that 
it  is  only  by  a  strained  and  violent  interpretation  that  such  a  meaning 


PALMER  V.  LAWRENCE.  129 

can  be  attributed  to  them.  The  terms  "  such  association  "  are  used 
throughout  the  law,  as  designating,  not  the  individuals  who  agree  to 
form  the  association,  but  the  association  itself  when  formed ;  an  asso- 
ciation clothed  with  all  the  powers  and  attributes  that  the  statute  con- 
fers ;  and  we,  therefore,  cannot  understand  how  such  an  association 
can  have  a  capital  before  it  exists.'  If  the  payment  of  its  capital  is  to 
precede  its  existence,  when,  how,  and  to  whom  is  it  to  be  paid  ?  From 
whom  is  the  authority  to  receive  it  to  be  derived  ?  Whose  property 
is  it  until  the  association  is  organized  ?  How  is  it  to  be  secured  in 
this  interval  ?  When,  how,  and  to  whom  is  it  to  be  paid  over  ?  Not 
one  of  these  questions  is  answered  by  the  law  as  it  stands,  but  we  find 
it  impossible  to  believe  that  any  one  of  them  would  have  been  left  un- 
answered, had  the  legislature  intended  that  the  payment  of  the  entire 
capital  should  be  a  condition  precedent  to  the  existence  of  the  asso- 
ciation. We  find  it  impossible  to  believe  that  such  an  intention,  in- 
stead of  being  plainly  and  fully  expressed,  would  have  been  left  to  be 
gathered,  by  a  remote  and  doubtful  implication.  There  are  numerous 
acts  of  incorporation,  many  of  which  were  quoted  by  the  defendant's 
counsel,  as  showing  the  general  policy  of  the  state,  in  which  the  pay- 
ment of  a  portion  of  the  capital  is  made  a  condition  precedent  to  the 
existence  of  the  corporation ;  but,  in  every  one  of  these  acts,  the  per- 
sons to  whom  the  payment  is  to  be  made  are  named  or  designated, 
and  the  time  and  mode  of  payment,  and  the  disposition  to  be  made 
of  the  moneys  paid,  are  carefully  prescribed ;  nor  can  we  doubt  that 
specific  regulations  of  such  manifest  propriety  woiild  have  been  found 
in  the  general  banking  law  had  the  legislature  meant  that  the  pay- 
ment of  the  whole,  or  of  any  portion  of  the  capital  of  an  association, 
should  precede  its  organization.  We  have  said  that  the  interpretation 
we  reject  is  inconsistent  with  several  provisions  in  the  law  ;  and  it 
plainly  is  so.  It  is  inconsistent  with  the  provision  in  section  19th, 
that  every  person  to  whom  shares  of  stock  are  transferred,  shall  suc- 
ceed to  the  rights  and  liabilities  of  the  original  stockholder.  It  would 
be  absurd  to  suppose  that  any  liabilities  are  here  meant,  except  such 
as  directly  relate  to  the  shares  themselves ;  and  if  the  shares  have  al- 
ready been  fully  paid  for,  none  such  can  exist.  It  is  inconsistent  with 
the  provision  in  section  26th,  that  the  semi-annual  statement  to  be 
made  to  the  comptroller  shall  *'  specify  the  amount  of  the  capital  paid 
in,  or  secured  to  be  jx^id ;"  for  if  the  whole  capital  has  been  paid,  no 
portion  can  remain  for  which  security  is  to  be  given.  If  the  whole 
capital  has  been  paid,  and  then  loaned  by  the  company,  each  loan  is 
an  investment  of  capital  paid,  not  a  security  for  its  future  payment ; 
and  every  such  investment  would  appear,  in  the  statement  to  the 
comptroller,  among  the  debts  due  to  the  association,  not  as  a  part  of 
its  unpaid  capital.  We  do  not  doubt  that  the  whole  capital  of  an  as- 
sociation must  be  paid,  or  secured  to  be  paid,  when  it  is  organized ; 
but  it  is  secured  to  be  paid,  in  the  sense  of  the  law,  by  force  of  tlie 
subscriptions  of  the  associates,  just  as  certainly  as  if  each  associate 


130  PEOPLE   V.   CHAMBERS. 

had  given  his  note  or  bond  for  the  amount  of  his  shares.  The  security 
may  not  be  adequate,  but  it  exists  ;  and  of  its  adequacy  the  public  has 
been  wisely  left  to  judge. 


PEOPLE  V.  CHAMBERS. 

1871.    42  California,  201.1 

Appeal  from  District  Court.     Decision  below  for  defendants. 

Action  of  quo  warranto  against  the  defendants,  claiming  to  com- 
pose the  "  Oroville  and  Virginia  City  Railroad  Company,"  in  which 
the  defendants  are  charged  with  usurping  the  functions  of  a  railroad 
company,  without  having  been  duly  and  properly  incorporated  as 
such. 

Section  1,  of  Act  of  May  20, 1861  (Statutes  of  1861,  p.  607),  requires 
as  a  preliminary  to  the  organization  of  the  company,  that  stock  to  the 
amount  of  at  least  $1000  per  mile  of  the  proposed  road  shall  be  sub- 
scribed "  and  ten  per  cent  in  cash  so  required  to  be  subscribed  shall 
be  actually  and  in  good  faith  paid  to  a  Treasurer  to  be  named  and 
appointed  by  said  subscribers  from  among  their  number."  In  the 
present  case,  the  greater  part  of  the  ten  per  cent  was  not  paid  in 
cash,  but  was  paid  in  a  check  drawn  by  one  Bolinger  on  the  Bank  of 
California.  Bolinger  had  not  sufficient  funds  on  deposit  in  that  Bank 
to  meet  the  check,  and  the  check  never  was  presented  for  payment. 

Van  Clief  &  Gear,  for  appellant. 

Haymond  &  Stratton,  for  respondents. 

Crockett,  J.  [After  discussing  the  facts  and  holding  that  the 
check  could  not  be  considered  as  payment  in  cash,  even  though  it  be 
conceded  that  the  check  would  have  been  ])aid  had  it  been  presented.] 

Counsel  insist,  however,  that  the  provision  in  respect  to  the  prior 
subscription  of  stock,  and  the  payment  of  the  ten  per  cent,  is  direc- 
tory only,  and  that  the  payment  is  not  a  condition  precedent,  the  per- 
formance of  which  is  essential  to  the  validity  of  the  act  of  incorpora- 
tion, and  in  support  of  this  proposition  we  are  referred  to  the  case 
of  Commonwealth  v.  Westchester  Railroad  Company,  3  Grant,  Pa.  200. 
But  that  decision  was  founded  on  a  special  statute,  in  many  respects 
essentially  different  from  ours,  and  does  not  sustain  the  position  here 
contended  for.  But  if  it  was  directly  in  point,  we  would  not  be  in- 
clined to  follow  it.  On  the  other  hand,  I  think  it  is  apparent  that 
v/ithout  a  substantial  compliance  with  this  provision  the  subscribers 
acquired  no  jurisdiction  to  organize  themselves  into  a  corporate  body, 
and  this  view  of  the  law  is  supported  by  the  following  authorities : 
Eaton  V.  Asjnnwall,  19  N.  Y.  119  ;  People  v.  Troy  House  Company,  44 
1  Statement  abridged.     Arguments  and  part  of  opinion  omitted.  —  Ed. 


BRODERIP   V.   SALOMON.  131 

Barb.  634  ;  Haviland  v.  Chase,  39  Barb.  283  ;  TaggaH  v.  Western  Md. 
Railroad  Company,  24  Md.  588 ;  People  v.  Rensselear  Insurance  Com- 
fany,  38  Barb.  323 ;  Patterson  v.  Arnold,  45  Pa.  St.  R.  415. 

If  these  views  be  correct,  the  act  of  incorporation  is  invalid,  and  • 
the  defendants  are  not  entitled  to  exercise  corporate  powers. 

Judgment  reversed  and  cause  remanded,  with  an  order  to  the  Dis^ 
trict  Court  to  enter  judgment  for  the  plaintiff  on  the  findings. 

Mr.  Justice  Temple  did  not  participate  in  the  foregoing  decision.  /V 


/f/^ 


/ 


^ 

^ 
f. 


BRODERIP  V.   SALOMON.  / \^ 

1895.     Law  Reports  (1895),  2  Chancery,  323.  V  •       '  ^ 

^  5^AL0M0N  V.   SALOMON   &   CO.,    LIMITED 

^  ^^  iO£7U.  .l^ttU/    ^LC^Kfl  ti>    \^A.LrUlJj     ^IJJ^"^'-^''      Ut*OCOj     itid>~ 

\  ~  I]»-1892,  Aron  Salomon  was  carrying  on  business  as  a  leather  mer- 
chant, &c.,  and  was  solvent.  July  28,  1892,  a  Limited  Company  was 
registered,  under  the  ComfTanies  Act  of  1862,  for  the  ostensible  pur- 
J-pose  of  taking  over  and  carrying  on  the  business  then  conducted  by 
Salomon. 

The  Act  of  1862  provides  (Section  6),  that  "  any  seven  or  more  per- 
sons, associated  for  a  lawful  purpose  may,  by  subscribing  their  names  \  / 
to  a  memorandum  of  association,  and  otherwise  complying  with  the 
provisions  of  the  Act  in  respect  of  registration,  form  a  company  with 
or  without  limited  liability."  "No  subscriber  shall  take  less  than  one 
share  "  (Section  8).  The  Act  prescribes  no  minimum  value  for  shares, , 
and  hence  the  shares  may  be  of  as  small  a  value  as  those  who  form  the*^' 
company  may  please.  Nor  does  the  Act  impose  any  limit  upon  the 
number  of  shares  which  a  single  member  may  subscribe  for.  Section 
30  provides  that  no  notice  of  any  trust  shall  be  entered  on  the  register. 
Upon  the  registration  of  the  memorandum  of  association,  and  of  the 
articles  (where  required),  the  registrar  shall  certify  that  the  company 
is  incorporated.  "The  subscribers  of  the  memorandum  of  association, 
together  with  such  other  persons  as  may  from  time  to  time  become 
members  of  the  company,  shall  thereupon  be  a  body  corporate  by  the 
name  contained  in  the  memorandum  of  association,  capable  forthwith 
of  exercising  all  the  functions  of  an  incorporated  company,  and  hav- 
ing perpetual  succession  and  a  common  seal,  with  power  to  hold 
lands."  .  .  .  (Section  18.) 

The  name  of   the  company  was  Aron  Salomon  &  Co.,   Limited. 

The  nominal  capital  was  40,000^.,  divided  into  40,000  shares,  of  \l. 

each.     The  memorandum  of  association  was  subscribed  by  Salomon, 

his  wife,  his  daughter,  and  his  four  sons,  each  subscribing  for  one 

1  Statement  rewritten.    Arguments  omitted ;  also  portions  of  opinions.  —  Ed. 


% 


132  BRODEEIP   V.  SALOMON. 

share.  Salomon  then  conveyed  his  business  and  its  assets  to  the 
company  for  an  agreed  price  of  about  39,000^.  In  consideration  of 
this  conveyance,  he  received  from  the  company  some  payments  in 
cash,  also  debentures  (a  charge  on  the  assets)  for  10,000Z.,  and  shares 
for  the  par  value  of  20,000/.^  No  other  shares  were  ever  allotted; 
and  it  was  never  intended  that  any  shares  should  be  allotted  to  any 
person  except  Salomon  and  the  six  members  of  his  family.  The 
practical  result  was,  that  Salomon  owned  |§.gg|  of  the  allotted  shares ; 
and  also  held  the  company's  debentures  for  10,000^.^ 

Subsequently,  Salomon,  upon  the  security  of  his  aforesaid  deben- 
tures, obtained  from  Broderip  a  loan  of  5000Z.,  which  sum  Salomon  re- 
loaned  to  the  company.  Thereafter,  in  Feb.  1893,  the  original  deben- 
tures, which  had  been  issued  to  Salomon  for  10,000Z.,  were  returned  to 
the  company  and  were  cancelled.  In  lieu  thereof,  with  the  consent 
of  Salomon  as  beneficial  owner,  fresh  debentures  of  the  company  to 
the  same  amount  were  issued  to  Broderip  in  order  to  secure  the  pay- 
ment of  his  aforesaid  loan  of  5000^. 

Default  having  been  made  in  the  payment  of  his  interest,  Broderip, 
in  the  autumn  of  1893,  instituted  an  action,  on  behalf  of  himself  and 
all  the  debenture  holders,  to  enforce  his  security.  Thereafter  a  wind- 
ing up  order  was  made  and  a  receiver  appointed. 

The  company  put  in  a  defence  and  counter-claim,  making  Salomon 
a  party  to  the  counter-claim.  At  the  time  of  the  company's  going 
into  liquidation,  11,264Z.  was  due  to  unsecured  creditors  whose  debts 
had  been  contracted  since  the  formation  of  the  company.  About 
7733Z.  of  this  was  due  to  trade  creditors,  the  rest  to  Salomon.  The 
liquidator  has  realized  the  assets,  by  arrangement  without  prejudice 
to  any  question  on  the  counter-claim.  He  has  paid  Broderip's  "  mort- 
gage debt  on  the  debentures,"  and  the  rest  of  the  proceeds  will  not 
be  sufficient  to  satisfy  what  remains  due  on  the  debentures.  Salomon 
claims  whatever  there  may  be  as  owner  of  the  debentures. 

The  action  was  tried  before  Vaughan  Williams  J.  [The  follow- 
ing is  an  abridgment  of  the  opinion  of  the  learned  Judge.] 

There  was  no  fraud  on  the  shareholders,  inasmuch  as  they  were  all 
perfectly  cognizant  of  the  conditions  under  which  the  company  was 
formed,  and  as  there  was  no  intention  to  allot  further  shares  at  a  later 
period  to  outsiders.  But  the  company  was  a  mere  nominee  of  Salo- 
mon's ;  and  the  case  is  to  be  dealt  with  as  if  the  nominee,  instead  of 

1  According  to  a  statement  in  the  opinion  of  Lord  Macnaghten,  it  would  seem  that,  as 
cash  came  in  to  the  company  from  the  business,  the  company  went  through  the  form  of 
lianding  this  cash  over  to  Salomon,  and  then  immediately  receiving  the  same  cash  back 
from  Salomon  in  exchange  for  the  20,000  shares  allotted  to  him  as  fulh-  paid  shares.  —  Ed. 

2  The  charge  given  to  the  debenture-holder  by  the  company  on  its  property  did  not 
operate  to  prevent  the  company,  wliile  solvent,  from  using  assets  to  pay  current  debts  ; 
but  it  gave  the  debenture-holder  a  ])reference  over  unsecured  creditors  m  the  event  of  in- 
solvency. See  14  Law  Quarterly  Review,  339;  Davey  v.  Williamson,  L.  R.  (1898),  2  Q.  B. 
194.  Buckley  on  Companies  Acts,  7th  edition,  186;  Kay,  L.  J.  in  L.  R.  (1895),  2  Chan.  p. 
343.  — Ed. 


BRODERIP  V.    SALOMON.  133 

being  the  company,  had  been  some  individual  agent  of  Salomon's  to 
Avhom  he  had  purported  to  sell  this  business.  In  that  case  the  trustee 
in  bankruptcy  of  the  agent  would  have  had  a  right  to  make  Salomon 
indemnify  the  agent  against  the  debts  that  he  had  contracted  by  the 
direction  of  his  principal.  The  right  of  the  liquidator  in  the  present 
case  is  precisely  the  same,  notwithstanding  the  debentures  which  were 
a  mere  form,  intended  to  give  an  appearance  of  reality  to  a  sale  which, 
in  fact,  was  no  sale  at  all,  because  it  was  a  sale  by  a  man  to  an  agent 
for  his  own  profit.  This  business  was  Salomon's  business,  and  no  one 
else's.  The  creditors  pf  the  company  could,  in  my  opinion,  have  sued 
Salomon.  Their  right  to  do  so  would  depend  on  the  circumstances  of 
the  case,  whether  the  company  was  a  mere  alias  of  the  founder  or  not. 
The  relationship  of  principal  and  agent  existed  between  Salomon  and 
the  company.  The  moment  the  creditors  succeed  in  establishing  the 
identity  of  Salomon  with  the  company,  the  creditors  of  the  company 
thereupon  are  shown  to  be  the  creditors  of  Salomon ;  and  although  it 
is  necessary,  in  order  to  get  rid  of  the  priority  given  to  Salomon  by 
these  debentures,  that  one  should  fall  back  upon  the  lien  of  the  com- 
pany as  his  agent,  whom  he  was  bound  to  indemnify,  I  do  not  mean 
to  exclude  from  my  judgment  that  the  debentures  were  given  to  Salo- 
mon by  his  agent,  the  company,  and  that  the  necessary  effect  of  Salo- 
mon as  principal,  taking  these  debentures  from  his  agent,  the  com- 
pany, was  that  his  creditors  —  for,  according  to  my  view,  the  creditors 
of  the  company  were  his  creditors  —  were  defeated  and  delayed  by 
the  debentures. 

His  Lordship  made  the  following  order  :  — 

Declare  that  the  plaintiffs,  A.  Salomon  &  Co.  Limited,  or  the  liqui- 
dator thereof  are,  or  is  entitled  to  be  indemnified  by  the  defendant 
A.  Salomon  against  the  sum  of  7733Z.  8s.  3d.  .  .  . 

Order  and  adjudge  that  the  plaintiffs,  A.  Salomon  &  Co.  Limited, 
do  recover  against  defendant  A.  Salomon  the  said  sum  of  7733?.  8s.  3d. 

Declare  that  plaintiffs,  A.  Salomon  &  Co.  Limited,  are  entitled  to  a 
lien  for  the  said  sum  of  7733Z.  8s.  3d.,  upon  all  sums  which  would  be 
payable  to  defendant  A.  Salomon  out  of  the  assets  of  the  plaintiffs 
A.  Salomon  &  Co.  Limited,  in  respect  of  the  debentures  issued  by 
the  said  company  to  the  defendant  E.  Broderip  in  the  pleadings  men- 
tioned or  otherwise,  and  that  the  defendant  A.  Salomon  is  not  enti- 
tled to  make  any  claim  against  the  assets  of  the  plaintiffs  A.  Salomon 
&  Co.  Limited,  until  the  said  sum  of  11331.  8s.  3d.  has  been  satisfied. 

Aron  Salomon  gave  notice  of  appeal.  The  company  gave  a  counter- 
notice  of  contention  that  [_inter  alia"]  they  were  entitled  to  have  the 
agreement  for  the  sale  of  Salomon's  business  and  property  to  the 
company  rescinded. 

Buckley,  Q.  C.  and  Muir  Mackenzie  (McCall,  Q.  C.  with  them),  for 
Salomon. 

Farwell,  Q.  C.  and  Theobald,  for  the  company. 


134  BRODERIP  V.    SALOMON. 

LiNDLET  L.  J.  This  is  an  appeal  by  Mr.  Aron  Salomon  against 
an  order  made  by  Vaughan  Williams  J.,  and  which,  in  effect,  directs 
;Mr.  A.  Salomon  to  indemnify  a  limited  company  formed  by  him 
against  the  unsecured  debts  and  liabilities  incurred  by  or  in  the  name 
of  the  company  whilst  it  carried  on  business. 

The  appeal  raises  a  question  of  very  great  importance,  not  only  to 
the  persons  immediately  affected  by  the  decision,  but  also  to  a  large 
number  of  persons  who  form  what  are  called  "  one-man  companies." 
Such  companies  were  unheard  of  until  a  comparatively  recent  period, 
but  have  become  very  common  of  late  years. 

The  material  facts  of  this  case  are  as  follows  :  [His  Lordship,  after 
stating  the  facts  of  the  case  to  the  same  effect  as  above,  and  adding 
that  as  to  the  20,000  shares  allotted  to  Aron  Salomon  he  (Aron  Salo- 
mon) contended  he  had  paid  for  them  though  no  call  had  ever  been 
made ;  that  the  liquidator,  on  the  other  hand,  claimed  20,000Z.  from 
A.  Salomon  in  respect  of  these  shares  ;  that  A.  Salomon  had  received 
moneys  from  the  company,  but  that  it  did  not  appear  whether  he  had 
paid  the  company  for  his  shares,  and  that  this  was  a  matter  which  it 
was  unnecessary  to  pursue  further  on  the  present  occasion,  proceeded 
as  follows  :  — ] 

I  proceed  to  examine  the  legal  aspect  of  this  case,  which,  as  I  have 
said,  is  one  of  great  general  importance.  There  can  be  no  doubt  that  in 
this  case  an  attempt  has  been  made  to  use  the  machinery  of  the  Com- 
panies Act,  1862,  for  a  purpose  for  which  it  never  was  intended.  The 
legislature  contemplated  the  encouragement  of  trade  by  enabling  a 
comparatively  small  number  of  persons  —  namely,  not  less  than  seven 
—  to  carry  on  business  with  a  limited  joint  stock  or  capital,  and  with- 
out the  risk  of  liability  beyond  the  loss  of  such  joint  stock  or  capital. 
But  the  legislature  never  contemplated  an  extension  of  limited  lia- 
bility to  sole  traders  or  to  a  fewer  number  than  seven.  In  truth,  the 
legislature  clearly  intended  to  prevent  anything  of  the  kind,  for  s.  48 
takes  away  the  privilege  conferred  by  the  Act  from  those  members  of 
limited  companies  who  allow  such  companies  to  carry  on  business  with 
less  than  seven  members ;  and  by  s.  79  the  reduction  of  the  number  of 
members  below  seven  is  a  ground  for  winding  up  the  company.  Al- 
though in  the  present  case  there  were,  and  are,  seven  members,  yet  it 
is  manifest  that  six  of  them  are  members  simply  in  order  to  enable 
the  seventh  himself  to  carry  on  business  with  limited  liability.  The 
object  of  the  whole  arrangement  is  to  do  the  very  thing  which  the 
legislature  intended  not  to  be  done ;  and,  ingenious  as  the  scheme  is, 
it  cannot  have  the  effect  desired  so  long  as  the  law  remains  unaltered. 
This  was  evidently  the  view  taken  by  Vaughan  Williams  J. 

The  incorporation  of  the  company  cannot  be  disputed.  (See  s.  18 
of  the  Companies  Act,  1862.)  Whether  by  any  proceeding  in  the  na- 
ture of  a  scire  facias  the  Court  could  set  aside  the  certificate  of  incor- 
jjoration  is  a  question  which  has  never  been  considered,  and  on  which 
I  express  no  opinion ;  but,  be  that  as  it  may,  in  such  an  action  as  this 


BRODERIP   V.   SALOMON.  135 

the  validity  of  the  certificate  cannot  be  impeached.  The  company 
must,  therefore,  be  regarded  as  a  corporation,  but  as  a  corporation! 
created  for  an  illegitimate  purpose.  Moreover,  there  having  alwaysj 
been  seven  members,  although  six  of  them  hold  only  one  11.  share 
each,  Mr.  Aron  Salomon  cannot  be  reached  under  s.  48,  to  which  I 
have  already  alluded.  As  the  company  must  be  recognized  as  a  cor- 
poration, I  feel  a  difficulty  in  saying  that  the  company  did  not  carry 
on  business  as  a  principal,  and  that  the  debts  and  liabilities  contracted 
in  its  name  are  not  enforceable  against  it  in  its  corporate  capacity. 
But  it  does  not  follow  that  the  order  made  by  Vaughan  Williams  J.  is 
wrong.  A  person  may  carry  on  business  as  a  principal  and  incur  debts 
and  liabilities  as  such,  and  yet  be  entitled  to  be  indemnified  against 
those  debts  and  liabilities  by  the  person  for  whose  benefit  he  carries 
on  the  business.  The  company  in  this  case  has  been  regarded  by 
Vaughan  Williams  J.  as  the  agent  of  Aron  Salomon.  I  should  rather 
liken  the  company  to  a  trustee  for  him  —  a  trustee  improperly  brought 
into  existence  by  him  to  enable  him  to  do  what  the  statute  prohibits. 
It  is  manifest  that  the  other  members  of  the  company  have  practically 
no  interest  in  it,  and  their  names  have  merely  been  used  by  Mr.  Aron 
Salomon  to  enable  him  to  form  a  company,  and  to  use  its  name  in 
order  to  screen  himself  from  liability.  This  view  of  the  case  is  quite 
consistent  with  In  re  George  Neivman  &  Co}  In  a  strict  legal  sense 
the  business  may  have  to  be  regarded  as  the  business  of  the  company ; 
but  if  any  jury  were  asked.  Whose  business  was  it  ?  they  would  say 
Aron  Salomon's,  and  they  would  be  right,  if  they  meant  that  the  bene- 
ficial interest  in  the  business  was  his.  I  do  not  go  so  far  as  to  say 
that  the  creditors  of  the  company  could  sue  him.  In  my  opinion, 
they  can  only  reach  him  through  the  compan3^  Moreover,  Mr.  Aron 
Salomon's  liability  to  indemnify  the  company  in  this  case  is,  in  my 
view,  the  legal  consequence  of  the  formation  of  the  company  in  order 
to  attain  a  result  not  permitted  by  law.  The  liability  does  not  arise 
simply  from  the  fact  that  he  holds  nearly  all  the  shares  in  the  com- 
pany. A  man  may  do  that  and  yet  be  under  no  such  liability  as  Mr. 
Aron  Salomon  has  come  under.  His  liability  rests  on  the  purpose  for 
which  he  formed  the  company,  on  the  way  he  formed  it,  and  on  the 
use  which  he  made  qf  it.  There  are  many  small  companies  which  will 
be  quite  unaffected  by  this  decision.  But  there  may  possibly  be  some 
which,  like  this,  are  mere  devices  to  enable  a  man  to  carry  on  trade 
with  limited  liability,  to  incur  d^bts  in  the  name  of  a  registered  com- 
pany, and  to  sweep  off  the  company's  assets  by  means  of  debentures 
which  he  has  caused  to  be  issued  to  himself  in  order  to  defeat  the 
claims  of  those  who  have  been  incautious  enough  to  trade  with  the 
company  without  perceiving  the  trap  which  he  has  laid  for  them. 

It  is  idle  to  say  that  persons  dealing  with  companies  are  protected 
by  s.  43  of  the  Companies  Act,  1862,  which  requires  mortgages  of  lim- 
ited companies  to  be  registered,  and  entitles  creditors  to  inspect  the 

1  [1895]  1  Ch.  674. 


'r 


136  BRODEEIP  V.   SALOMON. 

register.  It  is  only  when  a  creditor  begins  to  fear  lie  may  not  be  paid 
that  he  thinks  of  looking  at  the  register  ;  and  until  a  person  is  a  cred- 
itor he  has  no  right  of  inspection.  As  a  matter  of  fact,  persons  do  not 
ask  to  see  mortgage  registers  before  they  deal  with  limited  companies ; 
and  this  is  perfectly  well  known  to  every  one  acquainted  with  the 
actual  working  of  the  Companies  Acts  and  the  habits  of  business  men. 
Mr.  Aron  Salomon  and  his  advisers,  who  were  evidently  very  shrewd 
people,  were  fully  alive  to  this  circumstance. 

If  the  legislature  thinks  it  right  to  extend  the  principle  of  limited 
liability  to  sole  traders  it  will  no  doubt  do  so,  with  such  safeguards, 
if  any,  at  it  may  think  necessary.  But  until  the  law  is  changed  such 
attempts  as  these  ought  to  be  defeated  whenever  they  are  brought  to 
light.  They  do  infinite  mischief ;  they  bring  into  disrepute  one  of  the 
anost  useful  statutes  of  modern  times,  by  perverting  its  legitimate  use, 
and  by  making  it  an  instrument  for  cheating  honest  creditors. 

Mr.  Aron  Salomon's  scheme  is  a  device  to  defraud  creditors. 

Agreeing  as  I  do  in  substance  with  Vaughan  Williams  J.,  I  do  not 
think  it  necessary  to  investigate  the  question  whether  the  so-called 
sale  of  the  business  to  the  company  ought  to  be  set  aside.  The  only 
object  of  setting  it  aside  is  to  obtain  assets  wherewith  to  pay  the  cred- 
itors, and  this  object  can  be  attained  on  sound  legal  principles  by  the 
order  which  he  has  made.  In  the  event,  however,  of  this  case  going 
further,  I  will  add  that  I  regard  the  so-called  sale  of  the  business  to 
the  company  as  a  mere  sham,  and  that  in  my  opinion  it  might,  if  neces- 
sary, be  set  aside  by  the  company  in  the  interest  of  its  creditors,  al- 
though all  the  shareholders,  such  as  they  were,  knew  of  and  assented 
to  the  arrangement.  They  were  simply  assisting  Mr.  Aron  Salomon 
to  carry  out  his  scheme.  I  cannot  regard  In  re  British  Seamless  Pa- 
per Box  Co}  as  an  authority  against  a  rescission  of  such  a  transaction 
as  this. 

We  have  carefully  considered  the  proper  form  of  order  to  be  made 
on  this  appeal,  and  the  order  of  the  Court  will  be  as  follows  :  The 
Court,  being  of  opinion  that  the  formation  of  the  company,  the  agree- 
ment of  August,  1892,  and  the  issue  of  debentures  to  Aron  Salomon 
pursuant  to  such  agreement,  were  a  mere  scheme  to  enable  him  to  carry 
on  business  in  the  name  of  the  company  with  limited  liability,  contrary 
to  the  true  intent  and  meaning  of  the  Companies  Act,  1862,  and,  fur- 
ther, to  enable  him  to  obtain  a  preference  over  other  creditors  of  the 
company  by  procuring  a  first  charge  on  the  assets  of  the  company  by 
means  of  such  debentures,  dismiss  the  appeal  of  Aron  Salomon  with 
costs  ;  and,  it  being  unnecessary  to  make  any  order  on  the  liquidators' 
cross-notice  of  appeal,  discharge  the  order  directing  the  liquidator  to 
I)ay  costs  of  the  counter-claim,  and  give  him  those  costs. 

Loi'Ks  L.  J,  This  is  a  case  of  very  great  importance,  and  I  wish 
shortly  to  state  my  reasons  for  concurring  in  the  judgment  just  de- 
livered.    I  do  not  propose  to  restate  the  facts  so  fully  and  clearly 

1  17  Ch.  D.  467. 


BRODEEIP  V.   SALOMON.  137 

detailed  by  Lindley  L.  J. :  I  shall  content  myself  with  shortly  stating 
the  impression  they  have  produced  on  my  mind.  The  incorporation 
of  the  company  was  perfect  —  the  machinery  by  which  it  was  formed 
Avas  in  every  respect  perfect,  every  detail  had  been  observed  ;  but,  not- 
withstanding, the  business  was,  in  truth  and  in  fact,  the  business  of 
Arou  Salomon ;  he  had  the  beneficial  interest  in  it ;  the  company  was 
a  mere  nominis  umbra,  under  cover  of  which  he  carried  on  his  business 
as  before,  securing  himself  against  loss  by  a  limited  liability  of  1^. 
per  share,  all  of  which  shares  he  practically  possessed,  and  obtaining  a 
priority  over  the  unsecured  creditors  of  the  company  by  the  deben- 
tures of  which  he  had  constituted  himself  the  holder. 

It  would  be  lamentable  if  a  scheme  like  this  could  not  be  defeated. 
If  we  were  to  permit  it  to  succeed,  we  should  be  authorizing  a  perver- 
sion of  the  Joint  Stock  Companies  Acts.  We  should  be  giving  vi- 
tality to  that  which  is  a  myth  and  a  fiction.  The  transaction  is  a 
device  to  apply  the  machinery  of  the  Joint  Stock  Companies  Act  to  a 
state  of  things  never  contemplated  by  that  Act  —  an  ingenious  device 
to  obtain  the  protection  of  that  Act  in  a  way  and  for  objects  not  au- 
thorized by  that  Act,  and  in  my  judgment  in  a  way  inconsistent  with 
and  opposed  to  its  policy  and  provisions.  It  never  was  intended  that 
the  company  to  be  constituted  should  consist  of  one  substantial  person 
and  six  mere  dummies,  the  nominees  of  that  person,  without  any  real 
interest  in  the  company.  The  Act  contemplated  the  incorporation  of 
seven  independent  bona  fide  members,  who  had  a  mind  and  a  will  of 
their  own,  and  were  not  the  mere  puppets  of  an  individual  who,  adopt- 
ing the  machinery  of  the  Act,  carried  on  his  old  business  in  the  same 
way  as  before,  when  he  was  a  sole  trader.  To  legalize  such  a  trans- 
action would  be  a  scandal. 

But  to  what  relief  is  the  liquidator  entitled  ?  In  the  circumstances 
of  this  case  it  is,  in  my  opinion,  competent  for  the  Court  to  set  aside 
the  sale  as  being  a  sale  from  Aron  Salomon  to  himself  —  a  sale  which 
had  none  of  the  incidents  of  a  sale,  was  a  fiction,  and  therefore  in- 
valid ;  or  to  declare  the  company  to  be  a  trustee  for  Aron  Salomon, 
whom  Aron  Salomon,  the  cestui  que  trust,  was  bound  to  indemnify ; 
or  to  declare  the  formation  of  the  company,  the  agreement  of  August, 
1892,  and  the  issue  of  the  debentures  to  Aron  Salomon  pursuant  to 
such  agreement,  to  be  merely  devices  to  enable  him  to  carry  on  busi- 
ness in  the  name  of  the  company  with  limited  liability,  contrary  to  the 
true  intent  and  meaning  of  the  Companies  Act,  1862,  and  further,  to 
enable  him  to  obtain  a  preference  over  other  creditors  of  the  company 
by  obtaining  a  first  charge  on  the  assets  of  the  company  by  means  of 
such  debentures.  I  wish  to  add  that  I  am  inclined  to  think  that  a 
scire  facias  would  go  to  repeal  the  certificate  of  incorporation  ;  but  I 
express  no  decided  opinion  on  the  point.  The  appeal  will  be  dismissed 
with  costs. 

[Kay  L.  J.  delivered  a  concurring  opinion.] 


188  BRODERIP  V.   SALOMON. 

From  the  above  decision,  Salomon  appealed  to  the  House  of  Lords. 
His  appeal  was  brought  in  forma  j^auperis.  The  company  brought  a 
cross  appeal  against  the  part  of  the  order  refusing  rescission  of  the 
contract  for  the  sale  of  Salomon's  business  to  the  company.  [The 
decision  on  these  appeals  is  reported  under  the  name  of  Salomon  v. 
Salomon  &  Co.  Limited.^ 

Cohen,  Q.  C,  Buckley,  Q.  C,  McCall,  Q.  C,  and  Muir  Mackenzie, 
for  Aron  Salomon. 

Fartvell,  Q.  C,  and  Theobald,  for  the  company. 

Lord  Halsbury,  Lord  Chancellor.  My  Lords  :  The  important 
question  in  this  case,  and  I  am  not  certain  that  it  is  not  the  only  ques- 
tion, is  whether  the  respondent  company  was  a  company  at  all;  whether, 
in  truth,  that  artificial  creation  of  the  Legislature  had  been  validly  con- 
stituted in  this  instance ;  and,  in  order  to  determine  that  question,  it 
is  necessary  to  look  at  what  the  statute  itself  has  determined  in  that 
respect.  I  have  no  right  to  add  to  the  requirements  of  the  statute,  nor 
to  take  from  the  requirements  thus  enacted.  The  sole  guide  must  be 
the  statute  itself . 

I  must  pause  here  to  point  out  that  the  statute  enacts  nothing  as  to 
the  extent  or  degree  of  interest'which  may  be  held  by  each  of  the  seven, 
or  as  to  the  proportion  of  interest  or  influence  possessed  by  one  or  the 
majority  of  the  shareholders  over  the  others.  One  share  is  enough. 
Still  less  is  it  possible  to  contend  that  the  motive  of  becoming  share- 
holders, or  of  making  them  shareholders,  is  a  field  of  inquiry  which 
the  statute  itself  recognizes  as  legitimate.  If  they  are  shareholders 
they  are  shareholders  for  all  purposes,  and,  even  if  the  statute  was 
silent  as  to  the  recognition  of  trusts,  I  should  be  prepared  to  hold  that 
if  six  of  them  were  the  cestui  que  trusts  of  the  seventh,  whatever  might 
be  their  rights  inter  se,  the  statute  would  have  made  them  /lareholders 
to  all  intents  and  purposes  with  their  respective  rights  and  liabilities  ; 
and  dealing  with  them  in  their  relation  to  the  company,  the  only  rela- 
tions which  I  believe  the  law  would  sanction  would  be  that  they  were 
corporators  of  the  corporate  body. 

I  will,  for  the  sake  of  argument,  assume  the  proposition  that  the 
Court  of  Appeal  lays  down,  that  the  formation  of  the  company  was 
a  mere  scheme  to  enable  Aron  Salomon  to  carry  on  business  in  the 
name  of  the  company.  I  am  wholly  unable  to  follow  the  proposition 
that  this  was  contrary  to  the  true  intent  and  meaning  of  the  Com- 
X)anies  Act.  I  can  only  find  the  true  intent  and  meaning  of  the  Act 
from  the  Act  itself,  and  the  Act  appears  to  me  to  give  a  company  a 
legal  existence  with,  as  I  have  said,  rights  and  liabilities  of  its  own, 
whatever  may  have  been  the  ideas  or  schemes  of  those  who  brought 
it  into  existence. 

I  observe  that  the  learned  judge  (Williams,  J.,)  held  that  the  busi- 
ness was  Mr.  Salomon's  business  and  no  one  else's,  and  that  he  chose 


BRODERIP   V.   SALOMON.  139 

to  employ  as  agent  a  limited  company.  And  he  proceeded  to  argue 
that  he  was  employing  that  limited  company  as  agent,  and  that  he 
was  bound  to  indemnify  that  agent  —  the  company.  I  confess  it  seems 
to  me  that  that  very  learned  judge  becomes  involved  by  this  argumeat 
in  a  very  singular  contradiction.  Either  the  limited  company  was  a 
legal  entity  or  it  was  not.  If  it  was,  the  business  belonged  to  it  and 
not  to  Mr.  Salomon ;  if  it  was  not,  there  was  no  person  and  no  thing 
to  be  an  agent  at  all ;  and  it  is  impossible  to  say  at  the  same  time 
that  there  is  a  company  and  there  is  not. 

The  learned  judges  appear  to  me  not  to  have  been  absolutely  certain 
in  their  own  minds  whether  to  treat  the  company  as  a  real  thing  or 
not.  If  it  was  a  real  thing,  if  it  had  a  legal  existence,  and  if,  conse- 
quently, the  law  attributed  to  it  certain  rights  and  liabilities  in  its 
constitution  as  a  company,  it  appears  to  me  to  follow  as  a  consequence 
that  it  is  impossible  to  deny  the  validity  of  the  transactions  into 
which  it  has  entered. 

Williams,  J.  appears  to  me  to  have  disposed  of  the  argument  that 
the  company,  which  for  this  purpose  he  assumed  to  be  a  legal  entity, 
was  defrauded  into  the  purchase  of  Aron  Salomon's  business,  because, 
assuming  that  the  price  paid  for  the  business  was  an  exorbitant  one, 
as  to  which  I  am  myself  not  satisfied,  bvit  assuming  that  it  was,  the 
learned  judge  most  cogently  observes  that  when  all  the  shareholders 
are  perfectly  cognizant  of  the  conditions  under  which  the  company  is 
formed  and  the  conditions  of  the  purchase,  it  is  impossible  to  contend 
that  the  company  is  being  defrauded. 

The  truth  is  that  the  learned  judges  have  never  allowed  in  their 
own  mind  the  proposition  that  the  company  has  a  real  existence. 
They  have  been  struck  by  what  they  considered  the  inexpediency  of 
permitting  one  man  to  be,  in  influence  and  authority,  the  whole  com- 
pany, and  assuming  that  such  a  thing  could  not  have  been  intended 
by  the  Legislature,  they  have  sought  various  grounds  upon  which  they 
might  insert  into  the  Act  some  prohibition  of  such  a  result.  Whether 
such  a  result  be  right  or  wrong,  politic  or  impolitic,  I  say,  with  the 
utmost  deference  to  the  learned  judges,  that  we  have  nothing  to  do 
with  that  question  if  this  company  has  been  duly  constituted  by  law, 
and,  whatever  may  be  the  motives  of  those  who  constitute  it,  I  must 
decline  to  insert  into  that  Act  of  Parliament  limitations  which  are 
not  to  be  found  there. 

I  have  dealt  with  this  matter  upon  the  narrow  hypothesis  pro- 
pounded by  the  learned  judges  below,  but  it  is,  I  think,  only  justice 
to  the  appellant  to  say  that  I  see  nothing  whatever  to  justify  the 
imputations  which  are  implied  in  some  of  the  observations  made  by 
more  than  one  of  the  learned  judges.  The  appellant,  in  my  opinion, 
is  not  shown  to  have  done,  or  to  have  intended  to  do,  anything  dis- 
honest or  unworthy,  but  to  have  suffered  a  great  misfortune  without 
any  fault  of  his  own. 


140  BRODEKIP   V.   SALOMON. 

The  result  is  that  I  move  your  Lordships  that  the  judgment  ap- 
pealed from  be  reversed,  but  as  this  is  a  pauper  case  I  regret  to  say- 
it  can  only  be  with  such  costs  in  this  House  as  are  appropriate  to 
that  condition  of  things,  and  that  this  appeal  be  dismissed  with  costs 
to  the  same  extent. 

Lord  Watson. 

The  allegations  of  the  company,  in  so  far  as  they  have  any  relation 
to  the  amended  claim,  their  pith  consisting  in  the  averments  made  on 
amendment,  were  meant  to  convey  a  charge  of  fraud,  and  it  is  unfortu- 
nate that  they  are  framed  in  such  loose  and  general  terms.  A  relevant 
charge  of  fraud  ought  to  disclose  the  specific  facts  necessitating  the 
inference  that  a  fraud  was  perpetrated  upon  some  person  specified. 
Whether  it  was  a  fraud  upon  the  company  and  its  members,  or  upon 
persons  who  had  dealings  with  the  company,  is  not  indicated,  although 
there  may  be  very  different  considerations  applicable  to  those  two 
cases.  The  res  gestce  which  might  imply  that  it  was  the  appellant, 
and  not  the  company,  who  actually  carried  on  its  business  are  not  set 
forth.  Any  person  who  holds  a  preponderating  share  in  the  stock  of 
a  limited  company  has  necessarily  the  intention  of  taking  the  lion's 
share  of  its  profits,  without  any  risk  beyond  loss  of  the  money  which 
he  has  paid  for  or  is  liable  to  pay  upon  his  shares,  and  the  fact  of  his 
acquiring  and  holding  debentures  secured  upon  the  assets  of  the  com- 
pany does  not  diminish  that  risk.  What  is  meant  by  the  assertion 
that  the  company  "  was  the  mere  nominee  or  agent "  of  the  appellant, 
I  cannot  gather  from  the  record,  and  I  am  not  sure  that  I  understand 
precisely  in  what  sense  it  was  interpreted  by  the  learned  judges  whose 
decisions  we  have  to  consider. 

The  Lords  Justices  of  Appeal,  in  disposing  of  the  amended  claim, 
have  expressly  found  that  the  formation  of  the  company,  with  limited 
liability,  and  the  issue  of  10,000Z.  worth  of  its  debentures  to  the  ap- 
pellant, were  "contrary  to  the  true  intent  and  meaning  of  the  Com- 
panies Act  1862."  I  have  had  great  difficulty  in  endeavouring  to 
interpret  that  finding.  I  am  unable  to  comprehend  how  a  company, 
which  has  been  formed  contrary  to  the  true  intent  and  meaning  of  a 
statute,  and  (in  the  language  of  Lindley,  L.  J.)  does  the  very  thing 
which  the  Legislature  intended  not  to  be  done,  can  yet  be  held  to  have 
been  legally  incorporated  in  terms  of  the  statute.  "  Intention  of  the 
Legislature  "  is  a  common,  but  very  slippery  phrase,  which,  popularly 
understood,  may  signify  anything  from  intention  embodied  in  positive 
enactment  to  speculative  opinion  as  to  what  the  Legislature  probably 
would  have  meant,  although  there  has  been  an  omission  to  enact  it. 
In  a  court  of  law  or  equity,  Avhat  the  Legislature  intended  to  be  done 
or  not  to  be  done  can  only  be  legitimately  ascertained  from  that  which 
it  has  chosen  to  enact,  either  in  express  words  or  by  reasonable  and 
necessary  imjjlication.     Accordingly,  if  the  words  "  intent  and  mean- 


BRODERIP  V.   SALOMON.  141 

ing,"  as  they  occur  in  the  finding  of  the  Appeal  Court,  are  used  in  their 
proper  legal  sense,  it  follows,  in  my  opinion,  that  the  company  has  not 
been  well  incorporated ;  that,  there  being  no  legal  corporation,  there 
can  be  no  liquidation  under  the  Companies  Acts,  and  that  the  counter- 
claim preferred  by  its  liquidator  must  fail.  In  that  case  its  creditors 
would  not  be  left  without  a  remedy,  because  its  members,  as  joint 
traders  without  limitation  of  their  liability,  would  be  jointly  and  sever- 
ally responsible  for  the  debts  incurred  by  them  in  the  name  of  the  com- 
pany. I  can  conceive  that  there  might  be  a  limited  company  formed 
and  registered  by  a  person  who  had  the  sole  interest  in  it,  the  other 
subscribing  members  being  persons  who  were  his  aliases,  and  having 
no  real  existence ;  and  in  that  case  also  (which  does  not  occur  here) 
there  would  be  no  legal  company,  and  the  real  owner  of  the  concern 
■would  be  liable  for  its  debts  to  the  full  extent  of  his  means. 

It  seems  doubtful  whether  a  liquidator,  as  representing  and  in  the 
name  of  the  company,  can  sue  its  members  for  redress  against  a  fraud 
which  was  committed  by  the  company  itself  and  by  all  its  sharehold- 
ers. However,  I  do  not  think  it  necessary  to  dwell  upon  that  point, 
because  I  am  not  satisfied  that  the  charge  of  fraud  against  creditors 
has  any  foundation  in  fact. 

Lord  Hebschell.  [After  stating  the  facts,  and  reciting  the  pre- 
vious proceedings.] 

It  is  to  be  observed  that  both  courts  treated  the  company  as  a  legal 
entity  distinct  from  Salomon  and  the  then  members  who  composed  it, 
and  therefore  as  a  validly  constituted  corporation.  This  is,  indeed, 
necessarily  involved  in  the  judgment  which  declared  that  the  company 
was  entitled  to  certain  rights  as  against  Salomon.  Under  these  cir- 
cumstances, I  ain  at  loss  to  understand  what  is  meant  by  saying  that  A. 
Salomon  and  Company  Limited  is  but  an  alias  for  A.  Salomon.  It  is 
not  another  name  for  the  same  person ;  the  company  is  ex  hypothesi  a 
distinct  legal  persona.  As  little  am  I  able  to  adopt  the  view  that  the 
company  was  the  agent  of  Salomon  to  carry  on  his  business  for  him. 
In  a  popular  sense  a  company  may  in  every  case  be  said  to  carry  on 
business  for  and  on  behalf  of  its  shareholders,  but  this  certainly  does 
not  in  point  of  law  constitute  the  relation  of  principal  and  agent  be- 
tween them  or  render  the  shareholders  liable  to  indemnify  the  company 
against  the  debts  which  it  incurs.  Here,  it  is  true,  Salomon  owned  all 
the  shares  except  six,  so  that  if  the  business  were  profitable  he  would 
be  entitled  substantially  to  the  whole  of  the  profits.  The  other  share- 
holders, too,  are  said  to  have  been  ''  dummies,"  the  nominees  of  Salo- 
mon. But  when  once  it  is  conceded  that  they  were  individual  members 
of  the  company  distinct  from  Salomon,  and  sufficiently  so  to  bring  into 
existence  in  conjunction  with  him  a  validly  constituted  corporation,  I 
am  unable  to  see  how  the  facts  to  which  I  have  just  referred  can  affect 
the  legal  position  of  the  company,  or  give  it  rights  as  against  its  mem- 
bers which  it  would  not  otlierwise  possess. 


142  BRODERIP  V.   SALOMON. 

The  Court  of  Appeal  based  their  judgment  on  the  proposition  that 
the  formation  of  the  company,  and  all  that  followed  it,  was  a  mere 
scheme  to  enable  the  appellant  to  carry  on  business  in  the  name  of  the 
company,  with  limited  liability,  contrary  to  the  true  intent  and  meaning 
of  the  Companies  Act  1862.  The  conclusion  which  they  drew  from 
this  premiss  was,  that  the  company  was  a  trustee  and  Salomon  their 
cestui  que  trust.  I  cannot  think  that  the  conclusion  follows  even  if 
the  premiss  be  sound.  It  seems  to  me  that  the  logical  result  would 
be  that  the  company  had  not  been  validly  constituted,  and  therefore 
had  no  legal  existence.  But,  apart  from  this,  it  is  necessary  to  ex- 
amine the  proposition  on  which  the  court  have  rested  their  judgment, 
as  its  effect  would  be  far  reaching.  Many  industrial  and  banking 
concerns  of  the  highest  standing  and  credit  have,  in  recent  years, 
been,  to  use  a  common  expression,  converted  into  joint  stock  compa- 
nies, and  often  into  what  are  called  "  private  "  companies,  where  the 
whole  of  the  shares  are  held  by  the  former  partners.  It  appears  to 
me  that  all  these  might  be  pronounced  "  schemes  to  enable  "  them  "  to 
carry  on  business  in  the  name  of  the  company,  with  limited  liability," 
in  the  very  sense  in  which  those  words  are  used  in  the  judgment  of 
the  Court  of  Appeal.  The  profits  of  the  concern  carried  on  by  the 
company  will  go  to  the  persons  whose  business  it  was  before  the 
transfer,  and  in  the  same  proportions  as  before,  the  only  difference 
being  that  the  liability  of  those  who  take  the  j)rofits  will  no  longer  be 
unlimited.  The  very  object  of  the  creation  of  the  company,  and  the 
transfer  to  it  of  the  business,  is  that,  whereas  the  liability  of  the  part- 
ners for  debts  incurred  was  without  limit,  the  liability  of  the  members 
for  the  debts  incurred  by  the  company  shall  be  limited.  In  no  other 
respect  is  it  intended  that  there  shall  be  any  difference ;  the  conduct 
of  the  business  and  the  division  of  the  profits  are  intended  to  be  the 
same  as  before.  If  the  judgment  of  the  Court  of  Appeal  be  pushed 
to  its  logical  conclusion  all  these  companies  must,  I  think,  be  held  to 
be  trustees  for  the  partners  who  transferred  the  business  to  them,  and 
those  partners  must  be  declared  liable,  without  limit,  to  discharge  the 
debts  of  the  company.  For  this  is  the  effect  of  the  judgment  as  re- 
gards the  respondent  company.  The  position  of  the  members  of  a 
company  is  just  the  same  whether  they  are  declared  liable  to  pay  the 
debts  incurred  by  the  company,  or  by  way  of  indemnity  to  furnish 
the  company  with  the  means  of  paying  them.  I  do  not  think  that 
the  learned  judges  in  the  court  below  have  contemplated  the  applica- 
tion of  their  judgment  to  such  cases  as  I  have  been  considering,  but  I 
can  see  no  solid  distinction  between  those  cases  and  the  present  one. 
It  is  said  that  the  respondent  company  is  a  "  one-man  "  company, 
and  that  in  this  respect  it  differs  from  such  companies  as  those  to 
which  I  have  referred.  But  it  has  often  happened  that  a  business 
transferred  to  a  joint  stock  company  has  Ijeen  the  property  of  three 
or  four  persons  only,  and  that  the  other  subscribers  of  the  memo- 
randum have  been  clerks  or  other  persons  who  possessed  little  or  no 


BRODERIP  V.   SALOMON.  143 

interest  in  the  concern.  I  am  unable  to  see  how  it  can  be  lawful  for 
three  or  four  or  six  persons  to  form  a  company  for  the  purpose  of  em- 
ploying their  capital  in  trading,  with  the  benefit  of  limited  liability, 
and  not  for  one  person  to  do  so,  provided  in  each  case  the  require- 
ments of  the  statute  have  been  complied  with,  and  the  company  has 
been  validly  constituted.  How  does  it  concern  the  creditor  whether 
tlie  capital  of  the  company  is  owned  by  seven  persons  in  equal  shares, 
with  the  right  to  an  equal  share  of  the  profits,  or  whether  it  is  almost 
entirely  owned  by  one  person  who  practically  takes  the  whole  of  the 
profits  ?  The  creditor  has  notice  that  he  is  dealing  with  a  company 
the  liability  of  the  members  of  which  is  limited,  and  the  register  of 
shareholders  informs  him  how  the  shares  are  held,  and  that  they  are 
substantially  in  the  hands  of  one  person,  if  this  be  the  fact.  The 
creditors  in  the  present  case  gave  credit  to  and  contracted  with  a 
limited  company  ;  the  effect  of  the  decision  is  to  give  them  the  benefit 
as  regards  one  of  the  shareholders,  of  unlimited  liability.  I  have  said 
that  the  liability  of  persons  carrying  on  business  can  only  be  limited 
provided  the  requirements  of  the  statute  be  complied  with,  and  this 
leads  naturally  to  the  inquiry  what  are  those  requirements  ? 

The  Court  of  Appeal  has  declared  that  the  formation  of  the  respond- 
ent company  and  the  agreement  to  take  over  the  business  of  the  appel- 
lant, were  a  scheme  "  contrary  to  the  true  intent  and  meaning  of  the 
Companies  Act."  I  know  of  no  means  of  ascertaining  what  is  the 
intent  and  meaning  of  the  Companies  Act  except  by  examining  its 
provisions  and  finding  what  regulations  it  has  imposed  as  a  condition 
of  trading  with  limited  liability.  The  memorandum  must  state  the 
amount  of  the  capital  of  the  company  and  the  number  of  shares  into 
which  it  is  divided,  and  no  subscriber  is  to  take  less  than  one  share. 
The  shares  may,  however,  be  of  as  small  a  nominal  value  as  those  who 
form  the  company  please ;  the  statute  prescribes  no  minimum,  and 
though  there  must  be  seven  shareholders,  it  is  enough  if  each  of  them 
holds  one  share,  however  small  its  denomination.  The  Legislature 
therefore  clearly  sanctions  a  scheme  by  which  all  the  shares,  except 
six,  are  owned  by  a  single  individual,  and  these  six  are  of  a  value 
little  more  than  nominal. 

It  was  said  tliat  in  the  present  case  the  six  shareholders  other  than 
the  appellant  were  mere  dummies,  his  nominees,  and  held  their  shares 
in  trust  for  him.  I  will  assume  that  this  was  so.  In  my  opinion  it 
makes  no  difference.  The  statute  forbids  the  entry  in  the  register  of 
any  trust,  and  it  certainly  contains  no  enactment  that  each  of  the 
seven  persons  subscribing  the  memorandum  must  be  beneficially  en- 
titled to  the  share  or  shares  for  which  he  subscribes.  The  persons 
who  subscribe  the  memorandum  or  who  have  agreed  to  become  mem- 
bers of  the  company,  and  whose  names  are  on  the  register,  are  alone 
regarded  as,  and,  in  fact,  are,  the  shareholders.  They  are  subject  to 
all  the  liability  which  attaches  to  the  holding  of  the  share.  They  can 
be  compelled  to  make  any  payment  which  the  ownership  of  a  share 


144  BRODERIP  V.   SALOMON. 

involves.  Whether  they  are  beneficial  owners  or  bare  trusts  -s  is  a 
matter  with  which  neither  the  company  nor  creditors  have  a^  yihing 
to  do  ;  it  concerns  only  them  and  their  cestui  que  trust  if  thef  have 
any.  If,  then,  in  the  present  case  all  the  requirements  of  the  statute 
were  complied  with,  and  a  company  was  effectually  constituted,  and 
this  is  the  hypothesis  of  the  judgment  appealed  from,  what  t* arrant 
is  there  for  saying  that  what  was  done  was  contrary  to  the  try  »  intent 
and  meaning  of  the  Companies  Act  ? 

It  may  be  that  a  company  constituted  like  that  under  consideration 
was  not  in  the  contemplation  of  the  Legislature  at  the  time  Tvhen  the 
Act  authorizing  limited  liability  was  passed  ;  that  if  what  ijs  possible 
under  the  enactments  as  they  stand  had  'been  foreseen,  a  minimum 
sum  would  have  been  fixed  as  the  least  denomination  of  share  per- 
missible, and  it  would  have  been  made  a  condition  that  e&cK  of  tli^ 
seven  persons  should  have  a  substantial  interest  in  the  compa"4y.  But 
we  have  to  interpret  the  law,  not  to  make  it ;  and  it  must  bt.  remem- 
bered that  no  one  need  trust  a  limited  liability  company  unli>5S  he  so 
please,  and  that  before  he  does  so  he  can  ascertain,  if  he  uj  please- 
what  is  the  capital  of  the  company,  and  how  it  is  held. 

Lord  Macxaghten.  My  Lords :  I  cannot  help  thinking  tlmt  the 
appellant,  Aron  Salomon,  has  been  dealt  with  somewhat  Lardly  in 
this  case. 

[The  opinion  then  discusses  the  evidence  as  to  the  formation  of  the 
company.] 

The  company  had  a  brief  career  ;  it  fell  upon  evil  daya.  Shortly 
after  it  was  started  there  seems  to  have  come  a  period  of  grtat  depres- 
sion in  the  boot  and  shoe  trade.  There  were  strikes  of  wovkmen  too, 
and  in  view  of  that  danger,  contracts  with  public  bodies,  uhich  were 
the  principal  source  of  Mr.  Salomon's  profit,  were  split  up  and  divided 
between  different  firms.  The  attempts  made  to  push  the  business  on 
behalf  of  the  new  company  crammed  its  warehouses  with  unsaleable 
stock.  Mr.  Salomon  seems  to  have  done  what  he  could ,  both  he  and 
his  wife  lent  the  company  money,  and  then  he  got  his  ().ebentures  can- 
celled and  reissued  to  a  Mr.  Broderip,  who  advanced  ht^  5000^,  which 
he  immediately  handed  over  to  the  company  on  loan.  The  temporary 
relief  only  hastened  ruin.  Mr.  Broderip's  interest  w»<,i3  not  paid  when 
it  became  due.  He  took  proceedings  at  once  and  gt  't  a  receiver  ap- 
pointed. Then,  of  course,  came  liquidation  and  a  forced  sale  of  the 
company's  assets.  They  rea,lized  enough  to  pay  Mr.  Broderip,  but 
not  enough  to  pay  the  debentures  in  full,  and  the  unsecured  creditors 
were  consequently  left  out  in  the  cold. 

The  order  of  the  learned  judge  appears  to  me  to  be  founded  on  a 
misconception  of  the  scope  and  effect  of  the  Companies  Act,  1862.  In 
order  to  form  a  company  limited  by  shares,  the  Act  requires  that  a 
memorandum  of  association  should  be  signed  by  seven  persons,  who 


BRODERIP   V.   SALOMON.  145 

are  each  to  take  one  share  at  least.  If  those  conditions  are  complied 
with,  what  can  it  matter  whether  the  signatories  are  relations  or  stran- 
gers ?  There  is  nothing  in  the  Act  requiring  that  the  subscribers  to 
the  memorandum  should  be  independent  or  unconnected,  or  that  they 
or  any  one  of  them  should  take  a  substantial  interest  in  the  undertak- 
ing, or  that  they  should  have  a  mind  and  will  of  their  own,  as  one  of 
the  learned  Lords  Justices  seems  to  think,  or  that  there  should  be  any- 
thing like  a  balance  of  power  in  the  constitution  of  the  company.  In 
almost  every  company  that  is  formed,  the  statutory  number  is  eked 
out  by  clerks  or  friends,  who  sign  their  names  at  the  request  of  the 
promoter  or  promoters  without  intending  to  take  any  further  part  or 
interest  in  the  matter. 

When  the  memorandum  is  duly  signed  and  registered,  though  there 
be  only  seven  shares  taken,  the  subscribers  are  a  body  corporate 
*'  capable  forthwith,"  to  use  the  words  of  the  enactments,  "  of  exercis- 
ing all  the  functions  of  an  incorporated  company."  Those  are  strong 
words.  The  company  attains  maturity  on  its  birth.  There  is  no 
period  of  minority  ;  no  interval  of  incapacity.  I  cannot  understand 
how  a  body  corporate  thus  made  "  capable  "  by  statute  can  lose  its 
individuality  by  issuing  the  bulk  of  its  capital  to  one  person,  whether 
he  be  a  subscriber  to  the  memorandum  or  not.  The  company  is  at  law 
a  different  person  altogether  from  the  subscribers  to  the  memorandum, 
and,  though  it  may  be  that  after  incorporation  the  business  is  precisely 
the  same  as  it  was  before,  and  the  same  persons  are  managers,  and  the 
same  hands  receive  the  profits,  the  company  is  not  in  law  the  agent  of 
the  subscribers  or  trustee  for  them.  Nor  are  the  subscribers  as  mem- 
bers liable  in  any  shape  or  form,  except  to  the  extent  and  in  the  man- 
ner provided  by  the  Act.  That  is,  I  think,  the  declared  intention  of 
the  enactment.  If  the  view  of  the  learned  judge  were  sound,  it  would 
follow  tliat  no  common  law  partnership  could  register  as  a  company 
limited  by  shares  without  remaining  subject  to  unlimited  liability. 

Among  the  principal  reasons  which  induce  persons  to  form  private 
companies  as  is  stated  very  clearly  by  Mr.  Palmer  in  his  treatise  on 
the  subject,  are  the  desire  to  avoid  the  risk  of  bankruptcy,  and  the  in- 
creased facility  afforded  for  borrowing  money.  By  means  of  a  private 
company,  as  Mr.  Palmer  observes,  a  trade  can  be  carried  on  with 
limited  liability  and  without  exposing  the  persons  interested  in  it  in 
the  event  of  failure  to  the  harsh  provisions  of  the  bankruptcy  law.  A 
company  too  can  raise  money  on  debentures,  which  an  ordinary  trader 
cannot  do ;  any  member  of  a  company  acting  in  good  faith  is  as  much 
entitled  to  take  and  hold  the  company's  debentures  as  any  outside 
creditor.  Every  creditor  is  entitled  to  get  and  to  hold  the  best  secur- 
ity the  law  allows  him  to  take. 

If,  however,  the  declaration  of  the  Court  of  Appeal  means  that  Mr. 
Salomon  acted  fraudulently  or  dishonestly,  I  must  say  that  I  can  find 
nothing  in  the  evidence  to  support  such  an  imputation.     The  purpose 


146  BKODERIP   V.   SALOMON. 

for  which  Mr.  Salomon  and  the  other  subscribers  to  the  memorandum 
were  associated  was  "  lawf uL"  The  fact  that  Mr.  Salomon  raised 
5000Z.  for  the  company  on  debentures  that  belonged  to  him  seems  to 
me  strong  evidence  of  his  good  faith  and  of  his  confidence  in  the 
company.  The  unsecured  creditors  of  A.  Salomon  and  Co.  Limited 
may  be  entitled  to  sympathy,  but  they  have  only  themselves  to  blame 
for  their  misfortunes.  They  trusted  the  company,  I  suppose,  because 
they  had  long  dealt  with  Mr.  Salomon  and  he  had  always  paid  his 
Avay ;  but  they  had  full  notice  that  they  were  no  longer  dealing  with 
an  individual,  and  they  must  be  taken  to  have  been  cognisant  of  the 
memorandum  and  of  the  articles  of  association. 

It  has  become  the  fashion  to  call  companies  of  this  class  "  one-man 
companies."  That  is  a  taking  nickname,  but  it  does  not  help  one 
much  in  the  way  of  argument.  If  it  is  intended  to  convey  the  mean- 
ing that  a  company  which  is  under  the  absolute  control  of  one  person 
is  not  a  company  legally  incorporated,  although  the  requirements  of 
the  Act  of  1862  may  have  been  complied  with,  it  is  inaccurate  and 
misleading ;  if  it  merely  means  that  there  is  a  predominant  partner 
possessing  an  overwhelming  influence  and  entitled  practically  to  the 
whole  of  the  profits,  there  is  nothing  in  that  that  I  can  see  contrary 
to  the  true  intention  of  the  Act  of  1862,  or  against  public  policy,  or 
detrimental  to  the  interests  of  creditors.  If  the  shares  are  fully 
paid  up,  it  cannot  matter  whether  they  are  in  the  hands  of  one  or 
many.  If  the  shares  are  not  fully  paid  it  is  as  easy  to  gauge  the  sol- 
vency of  an  individual  as  to  estimate  the  financial  ability  of  a  crowd. 

Lord  Morris.  My  Lords  :  I  quite  concur  in  the  judgment  which 
has  been  announced,  and  in  the  reasons  which  have  been  so  fully 
given  for  it. 

Lord  Davey.  My  Lords  :  It  is  possible,  and  (I  think)  probable, 
that  the  conclusion  to  which  I  feel  constrained  to  come  in  this  case 
may  not  have  been  contemplated  by  the  Legislature,  and  may  be  due 
to  some  defect  in  the  machinery  of  the  Act.  But,  after  all,  the  inten- 
tion of  the  Legislature  must  be  collected  from  the  language  of  its 
enactments  ;  and  I  do  not  see  my  way  to  holding  that  if  there  are 
seven  registered  members,  the  association  is  not  a  company  formed  in 
compliance  with  the  provisions  of  the  Act,  and  capable  of  carrying  on 
business  with  limited  liability  either  because  the  bulk  of  the  shares 
are  held  by  some  only,  or  even  one  of  the  members,  and  the  others 
are  what  is  called  "  dummies,"  holding,  it  may  be,  only  one  share  of 
11.  each  ;  or  because  there  are  less  than  seven  persons  who  are  benefi- 
cially entitled  to  the  shares. 

I  think  tliat  this  result  follows  from  the  absence  of  any  provision 
fixing  a  minimum  nominal  amount  of  a  share,  the  provision  in  sect.  8, 
that  no  subscriber  shall  take  less  than  one  share,  and  the  provision  in 
sect.  30,  that  no  notice  of  any  trust  shall  be  entered  on  the  register. 


BRODEEIP   V.   SALOMON.  147 

With  regard  to  the  latter  provision,  it  would,  in  my  opinion,  be  im- 
possible to  work  the  machinery  of  the  Act  on  any  other  principle, 
and  to  attempt  to  do  so  would  lead  only  to  confusion  and  uncertainty. 
The  learned  counsel  for  the  respondents  (wisely,  as  I  think),  did  not 
lay  any  stress  on  the  members,  other  than  the  appellant,  being  trus- 
tees for  him  of  their  shares.  Their  argument  was  that  they  were 
"  dummies,"  and  did  not  hold  a  substantial  interest  in  the  company 
—  i.  e.,  what  a  jury  would  say  is  a  substantial  interest.  In  the  lan- 
guage of  some  of  the  judges  in  the  court  below,  any  jury,  if  asked 
the  question,  would  say  the  business  was  Aron  Salomon's,  and  no  one 
else's. 

It  was  not  argued  in  this  case  that  there  was  no  association  of 
seven  persons  to  be  registered,  and  that  the  registration  therefore 
operated  nothing,  or  that  the  so-called  company  was  a  sham  and 
might  be  disregarded.  And,  indeed,  it  would  have  been  difficult  for 
the  learned  counsel  for  the  respondents  appearing,  as  they  did,  at 
your  Lordships'  bar  for  the  company  who  had  been  permitted  to  liti- 
gate in  the  courts  below  as  actors  on  their  counter-claim,  to  contend 
that  their  clients  were  non-existent.  I  do  not  say  that  such  an  argu- 
ment ought  to  or  would  prevail ;  I  only  observe  that,  having  regard 
to  the  decisions,  it  is  not  certain  that  sect.  18,  making  the  certificate 
of  the  registrar  conclusive  evidence  that  all  the  requisitions  of  the 
Act  in  respect  of  registration  had  been  complied  with,  would  be  an 
answer  to  it. 

We  start,  then,  with  the  assumption  that  the  respondents  have  a 
corporate  existence  with  power  to  sue  and  be  sued,  to  incur  debts  and 
be  wound-up,  and  to  act  as  agents  or  as  trustees,  and  I  suppose,  there- 
fore, to  hold  property. 

I  am  at  a  loss  to  see  how  in  either  view  taken  in  the  courts  below 
the  conclusion  follows  from  the  premises,  or  in  what  way  the  com- 
pany became  an  agent  or  trustee  for  the  appellant,  except  in  the  sense 
in  which  every  company  may  loosely  and  inaccurately  be  said  to  be 
an  agent  for  earning  profits  for  its  members,  or  a  trustee  of  its  profits 
for  the  members  amongst  whom  they  are  to  be  divided.  There  was 
certainly  no  express  trust  for  the  appellant,  and  an  implied  or  con- 
structive trust  can  only  be  raised  by  virtue  of  some  equity.  I  took 
the  liberty  of  asking  the  learned  counsel  what  the  equity  was,  but 
got  no  answer.  By  an  alias  is  usually  understood  a  second  name  for 
one  individual,  but  here,  as  one  of  your  Lordships  has  already  ob- 
served, we  have,  ex  hypothesi,  a  duly  formed  legal  persona,  with  cor- 
porate attributes,  and  capable  of  incurring  legal  liabilities.  Nor  do  I 
think  it  legitimate  to  inquire  whether  the  interest  of  any  member  is 
substantial  when  the  Act  has  declared  that  no  member  need  hold 
more  than  one  share,  and  has  not  prescribed  any  minimum  amount  of 
a  share.  If,  as  was  said  in  the  Court  of  Appeal,  the  company  was 
formed  for  an  unlawful  purpose,  or  in  order  to  achieve  an  object  not 


148  BRODERIP  V.   SALOMON. 

permitted  by  the  provisions  of  the  Act,  the  appropriate  remedy  (if 
any)  would  seem  to  be  to  set  aside  the  certificate  of  incorporation,  or 
to  treat  the  company  as  a  nullity,  or,  if  the  appellant  has  committed 
a  fraud  or  misdemeanor  (which  I  do  not  think  he  has),  he  may  be 
proceeded  against  civilly  or  criminally  ;  but  how  either  of  these  states 
of  circumstances  creates  the  relation  of  cestui  qiie  trust  and  trustee, 
or  principal  and  agent,  between  the  appellant  and  respondents,  is  not 
apparent  to  my  understanding. 

I  am,  therefore,  of  opinion  that  the  order  appealed  from  cannot  be 
supported  on  the  grounds  stated  by  the  learned  judges. 

But  Mr.  Farwell  also  relied  on  the  alternative  relief  claimed  by  his 
pleadings,  which  was  quite  open  to  him  here,  viz.,  that  the  contract 
for  purchase  of  the  appellant's  business  ought  to  be  set  aside  for 
fraud.  The  fraud  seems  to  consist  in  the  alleged  exorbitance  of  the 
price,  and  the  fact  that  there  was  no  independent  board  of  directors 
with  whom  the  appellant  could  contract.  I  am  of  opinion  that  the 
fraud  was  not  made  out.  I  do  not  think  the  price  of  the  appellant's 
business  (which  seems  to  have  been  a  genuine.one,  and  for  some  time 
a  prosperous  business)  was  so  excessive  as  to  afford  grounds  for  re- 
scission, and  as  regards  the  cash  portion  of  the  price  it  must  be 
observed  that  as  the  appellant  held  the  bulk  of  the  shares,  or  (the 
respondents  say)  was  the  only  shareholder,  the  money  required  for 
the  payment  of  it  came  from  himself  in  the  form  either  of  calls  on 
his  shares  or  profits  which  would  otherwise  be  divisible.  Nor  was 
the  absence  of  any  independent  board 'material  in  a  case  like  the  pre- 
sent. I  think  it  an  inevitable  inference  from  the  circumstances  of 
t^e  case  that  every  member  of  the  company  assented  to  the  purchase, 
and  the  company  is  bound  in  a  matter  intra  vires  by  the  unanimous 
agreement  of  its  members.  In  fact,  it  was  impossible  'to  say  who 
was  defrauded. 

In  the  original  appeal,  order  appealed  from  reve7'sed. 
In  the  cross  appeal,  order  appealed  from  affirmed. 


^ 


''\&W 


FINNEGAN 


^> 


^^t1fe>>. 


'^ 


A>/ 


CHA 


CORPOEATIONS  HE  ^AQTO. 


HE  ^ 


<.^" 


:/ 


^'"\V/ 


FINNEGAN  v.   NOERENBERG. 

1893.     52  J//»neso<a,  239.1  \  V -^ 

GiLFiLLAN,  C.  J.  Eight  persons  signed,  acknowledged,  and  caused 
to  be  filed  and  recorded  in  the  office  of  the  cit}-  clerk  in  Minneapolis, 
articles  assuming  and  purporting  to  form,  under  Laws  1870,  ch.  29, 
a  corporation,  for  the  purpose,  as  specified  in  them,  of  "  buying,  own- 
ing, improving,  selling,  and  leasing  of  lands,  tenements,  and  heredita- 
ments, real,  personal,  and  mixed  estates  and  property-,  including  the  ; 
construction  and  leasing  of  a  building  in  the  city  of  Minneapolis,  Minn., 
as  a  hall  to  aid  and  carr}'  out  the  general  purposes  of  the  organization 
known  as  the  '  Knights  of  Labor.' "  The  association  received  sub-  - 
scriptions  to  its  capital  stock,  elected  directors  and  a  board  of  man- 
agers, adopted  bN'-laws,  bought  a  lot,  erected  a  building  on  it,  and, 
when  completed,  rented  different  parts  of  it  to  different  parties.  The 
plaintiff  furnished  plumbing  for  the  building  during  its  construction, 
amounting  to  $599.50,  for  which  he  brings  this  action  against  several 
subscribers  to  the  stock,  as  copartners  doing  business  under  the  firm 
name  of  the  "  K.  of  L.  Building  Association."  The  theory-  upon  which 
the  action  is  brought  is  that,  the  association  having  failed  to  become  a 
corporation,  it  is  in  law  a  partnership,  and  the  members  liable  as 
partners  for  the  debts  incurred  by  it. 

It  is  claimed  that  the  association  was  not  an  incorporation  because 
—  Firsts  the  act  under  which  it  attempted  to  become  incorporated,  to 
wit.  Laws  1870,  ch.  29,  is  void,  because  its  subject  is  not  properly 
expressed  in  the  title  ;  second.,  the  act  does  not  authorize  the  formation 
of  corporations  for  the  purpose  or  to  transact  the  business  stated  in  the 
articles;  third,  the  place  where  the  business  was  to  be  carried  on  was 
not  distinctly  stated  in  the  articles,  and  they  had,  perhaps,  some  other 
minor  defects. 

It  is  unnecessary  to  consider  whether  this  was  a  dejure  corporation, 
so  that  it  could  defend  against  a  quo  icarranto,  or  an  action  in  theV 

1  Statemeut  and  arguments  omitted. —  Ed. 


\  ( 


h^: 


^ 


\>- 


150  FINNEGAN   V.   NOERENBEEG. 

nature  of  quo  rvarranto,  in  behalf  of  the  state ;  for,  although  an  asso- 
ciation may  not  be  able  to  justify  itself  when  called  on  by  the  state 
to  show  by  what  authority  it  assumes  to  be,  and  act  as,  a  corporation, 
it  may  be  so  far  a  corporation  that,  for  reasons  of  public  policy,  no  one 
but  the  state  will  be  permitted  to  call  in  question  the  lawfulness  of  its 
organization.  Such  is  what  is  termed  a  corporation  de  facto,  —  that 
is,  a  corporation  from  the  fact  of  its  acting  as  such,  though  not  in  law 
or  of  right  a  corporation.  What  is  essential  to  constitute  a  body  of 
men  a  de  facto  corporation  is  stated  by  Selden,  J.,  in  Methodist^  etc.^ 
Church  V.  Pickett,  19  N.  Y.  482,  as  "  (1)  the  existence  of  a  charter  or 
some  law  under  which  a  corporation  with  the  powers  assumed  might 
lawfully  be  created  ;  and  (2)  a  user  by  the  part}"  to  the  suit  of  the 
rights  claimed  to  be  conferred  by  such  charter  or  law."  This  state- 
ment was  apparentl}'  adopted  by  this  court  in  East  Norway  Church  v. 
FroisUe,  37  Minn.  447,  (35  N.  W.  Rep.  260  ;)  but,  as  it  leaves  out  of 
account  an}'  attempt  to  organize  under  the  charter  or  law,  we  think 
the  statement  of  what  is  essential  defective.  The  definition  in  Taylor 
on  Private  Corporations  (page  145)  is  more  nearly  accurate :  "When  a 
body  of  men  are  acting  as  a  corporation,  under  color  of  apparent 
organization,  in  pursuance  of  some  charter  or  enabUng  act,  their  author- 
it}'  to  act  as  a  corporation  cannot  be  questioned  collateral]}'." 

To  give  a  body  of  men  assuming  to  act  as  a  corporation,  where  there 
has  been  no  attempt  to  comply  with  the  provisions  of  any  law  authoriz- 
ing them  to  become  such,  the  status  of  a  de  facto  corporation  might 
open  the  door  to  frauds  upon  the  public.  It  would  certainly  be  impoli- 
tic to  permit  a  number  of  men  to  have  the  status  of  a  corporation  to 
any  extent  merely  because  there  is  a  law  under  which  they  might  have 
become  incorporated,  and  they  have  agreed  among  themselves  to  act, 
and  they  have  acted,  as  a  corporation.  That  was  the  condition  in 
Johnson  v.  Corser^  34  Minn.  355,  (25  N.  W.  Rep.  799,)  in  which  it 
was  held  that  what  had  been  done  was  ineffectual  to  hmit  the  individ- 
ual liability  of  the  associates.  They  had  not  gone  far  enough  to  become 
ft  de  facto  corporation.  They  had  merely  signed  articles,  but  had  not 
attempted  to  give  them  publicity  by  filing  for  record,  which  the  statute 
required. 

"  Color  of  apparent  organization  under  some  charter  or  enabling 
act "  does  not  mean  that  there  shall  have  been  a  full  compliance  with 
what  the  law  requires  to  be  done,  nor  a  substantial  compliance.  A 
substantial  compliance  will  make  a  cori^oration  de  jure.  But  there 
must  be  an  apparent  attempt  to  perfect  an  organization  under  the  law. 
There  being  such  apparent  attempt  to  perfect  an  organization,  the 
failure  as  to  some  substantial  requirement  will  prevent  the  body  being 
a  corporation  de  jure  ;  but,  if  there  be  user  pursuant  to  such  attempted 
organization,  it  will  not  prevent  it  being  a  corporation  de  facto, 

[The  Court  then  held,  that  the  subject  of  tlie  act  was  properly 
expressed  in  the  title,  and  that  the  statute  authorized  the  formation  of 
corporations  for  the  purposes  stated  in   the  articles  signed  by  these 


JONES  V.   ASPEN   HARDWARE   CO.  151 

defendants.  The  opinion  then  proceeds  as  follows  :]  The  omission 
to  state  distinctly  in  the  articles  the  place  within  which  the  business 
is  to  be  carried  on,  though  that  might  be  essential  to  make  it  a  de 
jure  corporation,  would  not  prevent  it  becoming  one  de  facto.  \      v 

The  foundation  for  a  de  facto  corporation  having  been  laid  by  the  Y^ 

attempt  to  organize  under  the  law,  the  user  shown  was  sufficient.  j 

Judgment  [for  defendants']  affirmed.  ' 


^y^  1895.    21  Coforac/o,  263.1      ,  J^  W^        /^ 


JONES  V.  ASPEN   HAEDWAEE  CO. 


f\^''"  Error  to  the  District  Court  of  Pitkin  County.       VN'^"         YC^AW^'^^ jJ'^ 

The  Aspen  Hardware  Company  instituted  this  suit  in  the  court       I    •y^     "1^ 
below  for  the  purpose  of  recovering  a  stock  of  goods  seized  by  theuj-^     /KiJ\i    J 
United  States  marshal  under  a  writ  of  attachment  issued  out  of  the        '0         ^^i}t^  *r 
circuit  court  of  the  United  States  at  the  suit  of  Joseph  A.  Thatcher, t'^   ''  /^  \  a  J\^ 
plaintiff,  against  one  A.  B.  Eads.     The  only  question  in  the  case  has/j/..'/^    ^       1< 
reference  to  the  corporate  cajiacity  of  defendant  in  error,  it  not  hav-^    L|^         (A"^^ 
ing  filed,  prior  to  the  attachment  levy,  its  certificate  of  incorpora--'  '  jLr^>       (^ 
tion  with  the  secretary  of  state,  as  required  by  statute.    Session  Lawsyv.^"^    /  ',ajL^       »  ' 
of  1887,  p.  406.     In  the  district  court  judgment  was  entered  in  favoii    .^^  ^  /    '  X^"'^^ 
of  the  company.     The  statute  reads  as  follows :  •  -jjt/'v       rf^^^^^^^ 

"  Every  corporation  .  .  .  incorporated  by  or  under  any  general  oi^  .W"  U/^ 


special  law  of  this  state,  .  .  .  shall  pay  to  the  secretary  of  state  foi^.  ,    />^      /W^^ 
the  use  of  the  state,  a  fee   [proportioned  to  the  amount  of  capital^VK-'*    .  --  z^*"'        iTi 
stock].  .  .  .  The  said  fee  shall  be  due  and  payable  upon  the  filing  ofj     .  C^''         IJU^''^^ 
the  certificate  of  incorporation,  articles  of  association,  or  charter  of^'^     Jy^  ^'^'iv^ 
said  corporation,  ...  in  the  office  of  the  secretary  of  state ;  and  no!/    Q'^        'JLZ 
such  corporation  .  .  .  shall  have  or  exercise  any  corporate  powers  or  "i^     ^p^ti^"    i 
be  permitted  to  do  any  business  in  this  state  until  the  said  fee  shall '^      '"ji/^^ 
have  been  paid;  and  the  secretary  of  state  shall  not  file  any  certifi-/^,,^  v^^  \    ^jA 
cate  of  incorporation,  articles  of  association,  charter  or  certificate  of       nJ^^^'^^    .  V*^' 
the  increase  of  capital  stock,  .  .  .  until  said  fee  shall  have  been  paid  f\ 
to  him.  ..."  .    c'-" 

In  1889,  Bowles,  Eads,  and  Kettler  formed  an  organization  known 
as  the  Aspen  Hardware  Company.     They  intended  that  the  company  U-        \    ^^'      *\ 
should  be  legally  incorporated.     To  this  end  they  caused  to  be  exe-/yv\>^     v*-*'"'*'*^ 
cuted  articles  of  incorporation,  on  Nov.  16,  1889,  in  due  form  ;  and    rK/^ 
immediately  filed  the  same  with  the  clerk  and  recorder  of  Pitkin        ,  ^  : 
County.     For  some  reason  not  explained  by  the  evidence,  the  articles 
were  not  filed  in  the  office  of  the  secretary  of  state  until  after  the  ,.. 
levy  of  the  writ  of  attachment  hereinafter  referred  to,  and  not  until 
the  day  upon  which  this  suit  in  replevin  was  instituted,  but  whether 
1  rStatement  abridged.     Part  of  opinion  omitted.  —  Ed. 


(a 


V 


M^ 


1^2  JONES   V.   ASPEN   HARDWARE  CO. 

before  or  after  the  commencement  of  this  action  does  not  clearly 
appear  from  the  evidence. 

After  the  articles  were  filed  with  the  county  clerk,  the  directors 
therein  named,  of  whom  Eads  was  one,  held  a  meeting,  elected  offi- 
cers, caused  capital  stock  to  be  issued,  &c.  Eads,  thereupon,  for  a 
valuable  consideration,  sold  and  transferred  to  the  new  organization 
the  stock  in  trade  of  a  hardware  business  ;  and  Bowles  from  that  time 
conducted  the  business  for  the  Aspen  Hardware  Company,  selling 
goods  and  purchasing  new  goods  in  the  corporate  name. 

The  business  was  thus  continued  until  July  31,  1890,  when  a  suit 
was  commenced  by  Thatcher  against  Eads,  and  the  property  in  ques- 
tion levied  upon  as  the  property  of  the  defendant  in  that  suit ;  and 
this  action  of  replevin  was  immediately  instituted  to  recover  posses- 
sion of  the  property,  or  its  value. 

A.  B.  McKinleij,  Hugh  Butler,  and  Wilson  &  Salmon,  for  plaintiff 
in  error. 

H.  W.  Clark,  and  W.  W.  Cooley,  for  defendant  in  error. 

Hayt,  C.  J.  .  .  .  The  controversy  in  this  case  is  narrowed  to  the 
single  question  of  the  capacity  of  defendant  in  error  to  take  title  to  the 
property  in  controversy  as  a  corporation  at  the  time  of  the  attempted 
transfer  by  Eads,  it  not  having  at  that  time  filed  its  articles  of  incor- 
poration with  the  secretary  of  state,  or  paid  the  fee  for  such  filing,  as 
provided  by  the  statute  of  1887.     Session  Laws  of  1887,  p.  406. 

The  language  of  the  act  is  plain  and  unambiguous.  It  reads,  "  no 
such  corporation  .  .  .  shall  have  or  exercise  any  corporate  powers. 
.  .  ."  The  taking  of  title  to  property  was  certainly  the  exercise  of  a 
corporate  power,  and  as  such  prohibited  by  the  express  terras  of  the 
statute.  This  is  not  controverted  by  counsel  for  appellee,  but  it  is 
contended  that  Eads  having  assisted  in  the  organization  of  the  cor- 
poration, and  having  sold  to  it  the  hardware  stock,  is  estopped  from 
denying  the  corporate  existence  of  the  company,  and  that  the  attach- 
ing creditor  took  the  property  subject  to  the  same  estoppel. 

The  doctrine  of  estoppel  cannot  be  successfully  invoked,  we  think, 
unless  the  corporation  has  at  least  a  de  facto  existence.  The  rule  is 
stated  as  follows  by  Morawetz  on  Private  Corporations,  sec.  750,  it 
having  been  first  announced  in  the  case  of  Broutver  v.  Appleby, 
1  Sandf.  158 :  "  A  defendant  who  has  contracted  with  a  corporation 
de  facto  is  never  permitted  to  allege  any  defect  in  its  organization  as 
affecting  its  capacity  to  contract  or  sue,  but  that  all  such  objections,  if 
valid,  are  only  available  on  behalf  of  the  sovereign  power  of  the  state." 

It  is  also  well  settled  that  to  constitute  a  de  facto  corporation  there 
must  be  either  a  charter  or  a  law  authorizing  the  creation  of  such  a 
corporation,  with  an  attempt  in  good  faith  to  comply  with  its  terms, 
and  also  a  user  or  attempt  to  exercise  corporate  powers  under  it. 
J)u(j(jan  v.  The  Colo.  Mort.  &  Inv.  Co.,  11  Colo.  113;  Bates  et  al,  v. 
Wilson  et  al,  14  Colo.  140. 


JONES   V.   ASPEN    HAEDWARE   CO.  153 

K  de  facto  corporation  can  never  be  recognized  in  violation  of  a. 
positive  Jaw.  This  principle,  which  seems  to  be  supported  by  all  the 
authorities7~is  thus  stated  by  Morawetz  on  Private  Corporations, 
sec.  758 :  "  If  the  formation  of  a  corporate  association  is  not  only 
prohibited  by  this  general  rule  of  the  common  law,  but  is  also  in  vio- 
lation of  some  principle  of  morality  or  public  policy,  or  a  jyositive 
statutory  prohibition,  the  parties  forming  such  association  will  not  be 
legally  bound  by  their  agreement  of  membership,  and  the  courts  will 
not  recognize  the  association,  either  as  among  its  members  or  against 
third  parties."  To  recognize  the  defendant  as  a  de  facto  corporation,  ^ 
would,  as  we  have  seen,  be  in  direct  conflict  with  the  express  language 
of  the  act,  which  declares  that  without  the  payment  of  the  fee  the 
corporation  shall  have  no  corporate  power. 

One  object  of  this  statute  is  to  restrict  the  organization  of  "  wild- 
cat "  corporations,  it  being  supposed  that  the  increased  fee  required 
by  the  act  would,  in  a  measure  at  least,  prevent  the  overcapitalization 
of  companies.  The  legislature  being  of  the  opinion  that  this  purpose 
would  be  advanced  by  requiring  the  fee  to  be  paid  as  a  condition 
precedent  to  the  exercise  of  any  corporate  power,  it  is  the  duty  of 
the  courts  to  give  effect  to  this  intent  as  the  same  is  manifest  from 
the  plain  language  of  the  act. 

The  taking  of  title  to  the  property  in  controvery  being  the  exercise 
of  a  corporate  power,  and,  as  such,  forbidden  until  the  fee  for  filing 
has  been  paid,  it  follows  that  the  title  of  The  Aspen  Hardware  Com- 
pany as  a  corporation  cannot  be  upheld.  Having  failed  to  comply 
with  the  statute.  The  Aspen  Hardware  Company  at  the  time  of  the 
transfer  was  neither  a  de  jure  nor  a  de  facto  corporation,  but  simply  a 
voluntary  association  of  individuals  in  the  nature  of  a  copartnership. 

There  is  a  broad  distinction  between  those  acts  made  necessary  by 
the  statute  as  a  prerequisite  to  the  exercise  of  corporate  powers  and 
those  acts  required  of  individuals  seeking  incorporation,  but  not 
made  prerequisites  to  the  exercise  of  such  powers. 

"  In  respect  to  the  former,  any  material  omission  will  be  fatal  to  the 
existence  of  the  corporation,  and  may  be  taken  advantage  of  collat- 
erally, in  any  form  in  which  the  fact  of  incorporation  can  properly  be 
called  in  question.  In  respect  to  the  latter,  the  incorporation  is 
responsible  only  to  the  government  in  a  direct  proceeding  to  forfeit 
the  charter."  Abbott  v.  Omaha  Svielting  &  Refining  Covrpanij,  4  Neb. 
416.  The  omission  in  this  case  is  of  acts  of  the  former  class,  and 
consequently  there  was  no  corporation  in  esse  at  the  time  of  the  levy 
of  the  writ,  while  the  evidence  leaves  it  in  doubt  if  this  omission 
had  been  supplied  prior  to  the  institution  of  the  present  action. 

But  although  it  could  not  at  the  time  exercise  any  corporate  power, 
this  did  not  prevent  The  Aspen  Hardware  Company  from  taking  title 
to'  the  property  as  a  copartnership.  In  other  words,  under  the  con- 
ceded facts,  the  company  was  not  at  the  time  a  corporation,  but  this 
will  not  preclude  it  from  maintaining  the  action  as  a  copartnership. 


154  McLENNAN  V.   HOPKINS. 

The  plaintiff  sues  as  The  Aspen  Hardware  Company,  and  the  facts 
alleged  show  that  such  company  was  a  copartnership  and  not  a  corpo- 
ration. There  is  nothing  in  the  name  of  the  association  to  conflict 
with  this,  as  at  common  law  partners  may  carry  on  business  under 
any  name  they  choose.  They  are  bound  rather  by  their  acts  than  by 
the  style  which  they  give  to  themselves.  Cook  on  Stock  and  Stock- 
holders, sec.  233 ;   Chaffee  v.  Ltideling,  27  La.  Ann.  607. 

This  principle  has  been  applied  in  many  cases  where  parties  have 
set  up  the  defense  of  individual  nonliability  by  reason  of  having 
directed  an  incorporation  to  be  had,  but  where  none  in  fact  was  con- 
summated. Cook  on  Stock  and  Stockholders,  sees.  233,  234;  Abbott 
V.  Omaha  Smelting  &  Refining  Co.,  supra ;  Empire  Mills  v.  Alston 
Grocerij  Co.,  15  S.  W.  Rep.  505  (Texas). 

The  law  having  cast  this  liability  upon  the  members  of  the  associ- 
tion,  we  think  they  must  be  given  the  advantages  accorded  a  copart- 
nership. So,  in  this  case,  while  we  feel  compelled  under  the  statute  to 
deny  plaintiff's  right  of  recovery  as  a  corporation,  we  think  they  may 
maintain  the  action  as  a  copartnership.  The  cause  will  accordingly 
be  reversed  and  remanded,  with  directions  to  the  district  court  to 
allow  the  parties  to  amend  their  pleadings  as  they  may  be  advised. 

Reversed. 


A 


\  0"  Garver,   J.   IN   McLENNAN  v.   HOPKINS. 

I.- 

p!  1895.     2  Kansas  Court  of  Apjieals,  260,  pp.  265-268.i 

Garver  J.  .  ,  . 

The  question  still  remains,  was  the  Bank  of  Dorrance  a  corporation 

^         r    ■      de  facto  ?     We  think  not.     It  is  difficult,  and  perhaps  unnecessary,  to 

attempt  to  reconcile  the  many  decisions  bearing  on  this  question. 

l>etween  some  of  them  there  is  an  irreconcilable  conflict,  so  that,  when 

,  we  come  to  determine  what  is  a  de  facto  corporation,  we  are  met  by  a 

diversity  of  authority.     The  rule  recognized  by  the  Supreme  Court 

V/         Vi''^  '  ^^  ^^^^  state  is  thus  stated  by  Mr.  Justice  Brewer  in  Fape  v.  Capital 

■  '         Bank,  20  Kan.  440 :  "  When  parties  have  associated  themselves  to- 

'^  gether  for  the  purpose  of  organizing  a  corporation  under  a  general 

law,  and  have  proceeded  in  good  faith  to  take  all  the  steps  supposed 

necessary  to  complete  such  incorporation,  and  on  the  faith  thereof 

engage  in  business  as  a  corporation  for  a  series  of  years,  a  party  who 

has  repeatedly  dealt  with  them  as  such  corporation  will  not,  when 

sued  on  a  note  and  mortgage  held  by  it,  be  permitted  to  show,  as  a 

defense  to  the  action,  that  there  was  some  mere  technical  omission  in 

the  steps  prescribed  for  incorporation.     The  corporation  is  one  de 

^  facto ;  and  only  the  state  can  then  inquire  —  and  that  in  a  direct  pfo- 

^     J  The  extracts  from  the  opinion  are  reprinted  from  41  Pacific  Reporter,  pp.  1062,  1063. 


^ 


^^' 


Mclennan  v.  hopkins.  155 

ceeding  —  whether  it  be  one  de  jure.  .  .  .  There  must  in  such  cases 
be  a  law  under  which  the  incorporation  can  be  had.  There  must  also 
be  an  attempt  in  good  faith  on  the  part  of  the  incorporators  to  incor- 
porate under  such  law.  And  when,  after  this,  there  has  been  for  a  se- 
ries of  years  an  actual,  open,  and  notorious  exercise,  unchallenged  by 
the  state,  of  the  powers  of  a  corporation,  one  who  is  sued  on  a  note  held 
by  such  corporation  will  not  be  permitted  to  question  the  validity  of 
the  incorporation  as  a  defense  to  the  action.  Ko  mere  matters  of 
technical  omission  in  the  incorporation,  no  acts  of  forfeiture  from 
misuser  after  the  incorporation,  are  subjects  of  inquiry  in  such  an 
action."  The  attempt  to  incorporate,  referred  to  in  that  case,  must 
be  something  more  than  the  mere  physical  organization,  or  formal 
arrangement  into  a  working  force,  of  the  promoters  of  the  enterprise. 
Something  must  be  done  beyond  the  mere  transaction  of  business  in 
the  manner  and  form  usually  adopted  by  corporations.  There  must 
also  be  something  more  tangible  and  effective  than  a  mere  mental 
operation  in  the  direction  of  what  is  intended.  The  steps  taken  and 
the  attempt  made  must,  to  some  extent  and  in  some  degree,  have  re- 
sulted in  the  effecting  of  those  things  which  the  law  designates  as  a 
prerequisite  to  a  corporate  existence,  however  informal  and  irregular 
such  proceedings  and  results  may  be.  Had  the  articles  of  incorpora- 
tion been  prepared  and  recorded  or  filed  as  required  by  the  statute, 
and  the  organization  had  been  otherwise  effected  as  shown  in  this 
case,  no  question  could  be  thus  raised  as  to  the  fact  of  a  corporate 
existence  because  of  defects  and  irregularities  in  the  attempted 
organization,  or  in  the  articles  of  incorporation.  But,  an  entire 
failure  on  the  part  of  the  officers  of  the  bank  to  prepare  and  exe- 
cute the  certificate  or  articles  of  incorporation  required  by  law, 
and  an  entire  failure  to  file  a  certificate  or  statement  of  any  kind 
whatever  in  the  office  of  the  register  of  deeds  of  the  county,  or  in 
the  office  of  the  secretary  of  state,  left  the  organizers  of  this  bank 
without  a  shadow  of  legal  corporate  existence.  There  was  no  sub- 
stantial compliance  with  the  law,  and  there  could  be  no  de  facto  cor- 
poration. We  are  supported  in  this  conclusion  by  the  following  cases  : 
Bigelow  v.  Gregory,  73  111.  197 ;  Kaiser  v.  Bank,  oQ  Iowa,  104,  8  N. 
W.  772 ;  Sheble  v.  Strong,  128  Pa.  St.  315, 18  Atl.  397 ;  Hill  v.  Beach, 
12  IN".  J.  Eq.  31 ;  Stout  v.  Zulick,  48  N.  J.  Law,  599,  7  Atl.  362 ; 
Abbott  v.  Smelting  Cy.,  4  Neb.  416 ;  Society  Perun  v.  Cleveland,  43 
Ohio  St.  481,  3  X.  E.  357 ;  Railroad  Co.  v.  Cary,  26  N.  Y.  77 ;  Hurt  v. 
Salisbury,  55  Mo.  310 ;  Smelting  Co.  v.  Richards,  95  ]\ro.  106.  8  S.  W. 
246 ;  Whipple  v.  Parker,  29  Mich.  369.  In  the  cases  cited,  there  was 
a  failure  on  the  part  of  the  organizers  of  the  claimed  corporation  to 
do  some  act,  generally  the  neglect  to  file  the  articles  of  association  or 
incorporation,  made  by  the  statute  a  prerequisite  to  corporate  exist- 
ence ;  and  the  rule  clearly  and  forcibly  laid  down  is  that  in  such  case 
there  is  no  de  facto  corporation,  and  that  the  claimed  corporate  exist- 
ence may  be  attacked  collaterally.     An  exception  to  this  rule  exists 


156  DAVIS   V.   STEVENS. 

in  cases  where  one  is  sued  by  the  alleged  corporation  vipon  a  contract 
in  which  the  corporate  capacity  is  recognized.  To  this  effect  are 
Jones  V.  Foundry  Co.,  14  Ind.  89 ;  Meikel  v.  Fund  Soc,  16  Ind.  181 ; 
Irrigation  Co.  v.  Warner,  72  Cal.  379,  14  Pac.  37 ;  Massey  v.  Building 
Ass'n,  22  Kan.  379.  In  those  cases  another  principle  is  invoked, 
which  does  not  permit  a  party  to  avoid  the  obligation  of  his  contracts 
upon  the  mere  technical  objection  that  the  party  with  whom  he  con- 
tracted had  not  the  legal  capacity  to  enter  into  the  contract  of  which 
he  has  had  the  benefit.  The  distinction  between  that  class  of  cases 
and  the  case  under  consideration  is  obvious.  It  is  equally  well  set- 
tled that  a  substantial,  though  imperfect  and  irregular,  compliance 
with  the  law,  in  a  bona  fide  attempt  to  incorporate,  followed  by  a  user 
of  corporate  rights,  will  create  a  de  facto  corporation,  and  the  corpo- 
rate existence  cannot  be  collaterally  questioned  by  one  dealing  with  it 
as  a  corporation.  To  this  effect  are  Baker  v.  Neff,  73  Ind.  68 ;  Wil- 
liamson V.  Asshi,  89  Ind.  389 ;  Rice  v.  Railroad  Co.,  21  111.  93 ;  Rail- 
road Co.  v.  Cary,  26  N.  Y.  75 ;  Mining  Co.  v.  Woodbury,  14  Cal.  424 ; 
Oroville,  etc.,  R.  Co.  v.  Plumas  Co.,  37  Cal.  361 ;  Sivartwout  v.  Rail- 
road Co.,  24  Mich.  389. 

We  think  the  facts  shown  by  the  record  justified  the  trial  court  in 
holding  the  plaintiffs  in  error  liable  as  partners  for  the  debts  of  the 
bank. 


DAVIS  V.  STEVENS. 

1900.     104  Federal  Reporter,  235.1 

In  the  U.  S.  District  Court  for  the  District  of  South  Dakota. 

On  March  21,  1900,  creditors  of  the  Bank  of  Plankinton  filed  a  pe- 
tition, praying  that  the  Bank  of  Plankinton  be  adjudged  bankrupt,  as 
a.  private  banking  institution,  and  a  co-partnership  consisting  of  the 
above-named  defendants.  In  their  answer  defendants  deny  generally 
the  allegations  of  the  petition,  and,  further  answering,  allege  that  the 
Bank  of  Plankinton  was  during  the  times  alleged  in  the  petition,  and 
now  is,  a  corporation  duly  organized  under  the  laws  of  the  territory  of 
Dakota  and  the  state  of  South  Dakota.  It  appears  from  the  testi- 
mony and  admission  of  the  parties  to  this  proceeding  that  on  the  27th 
day  of  November,  1885,  articles  of  incorporation,  duly  signed  and  ac- 
knowledged by  Edwin  S.  Rowley,  Fred  L.  Stevens,  Charles  A.  John- 
son, Joseph  D.  McCormick,  and  William  M.  Smith,  were  duly  filed  in 
the  office  of  the  secretary  of  the  territory  of  Dakota,  wherein  it  was 
stated  that  the  business  of  the  proposed  corporation,  which  was  to  be , 

1  Statement  abridged.  Only  so  much  of  the  opinion  is  given  as  relates  to  a  single  point, 
^Ed. 


DAVIS  V.   STEVENS.  157 

called  the  Bank  of  Plankinton,  should  be  a  general  banking,  real 
estate,  and  loan  business.  Upon  the  filing  of  said  articles  there  was 
issued  by  the  secretary  of  the  territory  of  Dakota  a  certificate  of  cor- 
porate existence  to  the  parties  above  named,  wherein  it  was  certified 
that  said  parties,  their  associates  and  successors,  had  become  a  body 
politic  and  corporate  under  the  corporate  name  of  Bank  of  Plankinton. 
...  It  further  appears  that  the  Bank  of  Plankinton  did  business  as  a 
banking  corporation  from  the  time  of  its  alleged  incorporation  until 
about  Jan.  10, 1900,  when  it  closed  its  doors  and  ceased  to  do  business. 

Garland,  District  Judge.  [After  stating  the  case.]  It  is  claimed 
by  the  petitioners  that,  as  there  was  no  law  of  the  territory  of  Dakota 
which  authorized  the  incorporation  of  individuals  to  do  a  banking 
business,  the  defendants  in  this  proceeding,  who  are  alleged  to  have 
owned  stock  in  this  corporation,  were  simply  partners,  and  as  sucb 
were  doing  business  as  a  private  bank,  and  thus  subject  to  be  adjudi- 
cated a  bankrupt  as  a  private  bank.  It  is  contended  by  the  defend- 
ants that  whether  or  not  the  Bank  of  Plankinton  was  a  corporation 
cannot  be  inquired  into  collaterally,  and  that  the  state  of  South  Da- 
kota is  the  only  power  which  could,  by  proceedings  in  the  nature  of  a 
quo  warranto,  inquire  into  the  legal  organization  of  this  corporation. 
If  the  Bank  of  Plankinton  was  a  de  facto  corporation,  this  position 
would  be  unassailable.  But,  in  order  that  there  maybe  a,  de  facto  goy- 
poration,  it  must  have  been  possible  for  the  territory  of  Dakota  to  have 
chartered  a  dejure  corporation,  and  as  there  was  no  law  of  the  terri- 
tory of  Dakota  permitting  the  incorporation  of  banking  corporations 
at  the  time  the  Bank  of  Plankinton  received  its  certificate  of  corporate 
existence,  it  results  that  there  cannot  be  a  de  facto  cori^oration.  The 
limitation  of  the  doctrine  that  the  validity  of  corporate  existence  can- 
not be  litigated  collaterally  is  that,  where  there  is  no  law  under  which 
a  corporation  might  exist,  then  the  validity  of  corporate  existence  may 
be  attacked  collaterally.  Heastony.  Railroad  Co.,  16  Ind.  275;  Krutz 
V.  Town  Co.,  20  Kan.  397 ;  Eaton  v.  Walker,  76  Mich.  579,  43  N.  W. 
638,  6  L.  R.  A.  102 ;  1  Thomp.  Corp.  §  505.  As  is  said  in  section  502, 
1  Thomp.  Corp.  : 

''  We  must  not  get  too  far  away  from  the  primal  proposition  that  the 
legislature  alone  can  create  a  corporation,  and  that  a  collection  of  in- 
dividuals cannot  make  themselves  a  corporation  by  merely  resolving 
to  be  such,  or  calling  themselves  such.  The  three  tailors  of  Tooley 
street  did  not  make  themselves  the  people  of  England  by  passing  a 
resolution  in  which  they  styled  themselves  such.  There  must  be  some 
basis  for  the  operation  of  the  rule,  and  accordingly  we  find  a  better 
statement  of  it  in  the  proposition  that  where  a  corporation  exists  de 
facto,  and  in  fact  exercises  corporate  powers,  the  question  whether  it 
exercises  such  powers  lawfully  cannot  be  litigated  in  a  collateral  pro- 
ceeding between  private  parties,  or  between  a  private  party  and  the 
corporation.  The  question  can  only  be  litigated  between  the  corpora- 
tion and  the  state." 


158  MONTGOMEKY  V.   FORBES. 

Defendants  invoke  section  2892  of  the  Compiled  Laws  of  Dakota, 
which  is  in  the  following  language : 

"The  due  incorporation  of  any  company  claiming  in  good  faith  to 
be  a  corporation  under  this  chapter  and  doing  business  as  such,  or  its 
right  to  exercise  corporate  powers,  shall  not  be  inquired  into  collater- 
ally in  any  private  suit  to  which  such  de  facto  corporation  may  be  a 
party,  but  such  inquiry  may  be  had  and  action  brought  at  the  suit  of 
the  territory  in  the  manner  prescribed  in  the  Code  of  Civil  Procedure." 

This  section,  as  I  understand  it,  simply  declares  the  law  in  the  same 
manner  that  the  courts  declare  it.  It  presupposes  that  there  is  a  de 
facto  corporation,  which  cannot  exist  if  there  could  have  existed  no  de 
jure  corporation.  In  the  case  of  Oroville  &  V.  E.  Co.  v.  Sujyervisors 
of  Plumas  Co.,  37  Cal.  354,  it  was  held  by  the  Supreme  Court  of  Cali- 
fornia that  a  similar  provision  in  the  laws  of  that  state  did  not  go  to 
the  extent  of  precluding  private  persons  from  denying  the  existence 
dejure  or  de  facto  of  the  alleged  corporation. 

As  the  claims  of  the  creditors  who  are  petitioners  in  this  action 
arise  from  simply  depositing  money  with  the  Bank  of  Plankinton, 
there  is  no  such  relation  between  the  bank  and  the  creditors  as  would 
allow  the  principle  of  estoppel  to  be  urged.  I,  therefore,  am  of  the 
opinion  that  the  parties  interested  in  the  Bank  of  Plankinton  were  co- 
partners. 

[Petition  dismissed  for  other  reasons.]  ^ 


MONTGOMERY  v.  FORBES. 

1889.     148  Mass.  249. 

Contract,  to  recover  the  price  of  goods  sold  and  delivered. 

At  the  trial  in  the  Superior  Court,  before  Dewey,  J.,  the  only  ques- 
tion was  whether  the  goods  were  sold  to  a  corporation  called  the  Forbes 
Woolen  Mills,  or  to  the  defendant  as  doing  business  under  that  name. 
The  plaintiffs  introduced  evidence  tending  to  show  that  subsequently 
to  May,  1885,  they  received  an  order  for  the  goods  by  a  letter,  written 
upon  paper  with  the  printed  heading,  "  Incorporated  1885.     Forbes 

1  If  the  statute  which  purports  to  authorize  incorporation,  and  under  which  there  has 
been  a  bona  fide  attein[)t  to  orgjinize,  is  sulisecjuentl}'  lield  to  be  unconstitutional,  does  this 
prevent  the  orj^anization  from  occupying  the  position  of  a  de  facto  corporation  ? 

For  an  affirmative  answer,  see  Eaton  v.  Walker,  76  Michigan,  579  (and  compare  Branden- 
stein  V.  Jloke,  101  California,  131;  the  case  of  a  Levee  District). 

For  cases  holding  tliat  shareholders  and  persons  contracting  with  sucli  an  organization 
are  precluded  from  denying  its  corporate  existence,  see  Winget  v.  Quinrij,  (fc.  Association, 
128  Illinois,  07,  p.  84;  BuiUlinr/,  tfc.  Association  v.  Chamberlain,  4  South  Dakota,  271 ;  Rich- 
ards v.  Minnesota  Savinos  Bank,  75  Minn.  196,  pp.  205-206,  ;  Gardner  v.  Minneapolis,  ^c. 
It.  Co.T.\  :\Iinn.  517,  pp.  526-528.  — Eu. 


MONTGOMEKY   V.  FORBES.  159 

Woolen  Mills.  George  E.  Forbes,  Treasurer,"  and  signed,  "Forbes 
Woolen  Mills  by  Geo.  ¥..  Forbes,  Treasurer";  that  they  thereupon 
shipped  the  goods  to  the  Forbes  Woolen  Mills  and  received  in  payment 
therefor  three  promissory  notes,  together  equal  to  the  price  of  the  goods, 
signed  "Forbes  AVoolen  Mills  by  Geo.  E.Forbes,  Treasurer";  that 
when  they  sold  the  goods  and  took  the  notes,  they  understood  from 
their  correspondence  with  tlie  defendant,  as  well  as  from  information 
gained  from  a  commercial  agenc}',  that  the  Forbes  Woolen  Mills  were 
a  corporation,  and  made  all  charges  on  their  books  against  them  as  a 
corporation,  and  took  the  notes  from  the  defendant  as  the  notes  of  a 
corporation  ;  and  that  after  they  sold  the  goods  and  received  the  notes 
they  became  satisfied  there  was  no  such  corporation  as  the  Forbes 
Woolen  Mills  ;  and  contended  that  they  were  entitled  to  recover  the 
price  of  the  goods  from  the  defendant  personally. 

The  defendant  contended  that  the  Forbes  Woolen  Mills  was  a  cor- 
poration, and  testified  that  he  purchased  the  goods  as  treasurer  of  the 
Forbes  Woolen  Mills,  but  admitted  that  they  had  not  been  paid  for 
except  by  the  notes,  which  themselves  had  not  been  paid ;  that  in  Ma}', 
1885,  for  the  purpose  of  limiting  his  personal  responsibilit}',  and  because 
the  tax  laws  of  New  Hampshire  were  more  favorable  to  corporations 
than  the  Massachusetts  laws,  he  went  to  Nashua,  New  Hampshire,  to 
form  a  corporation  for  the  manufacture  of  woollen  goods  ;  that  he  em- 
ployed an  attorney  at  law  of  Nashua  to  incorporate  the  compan}'  in  a 
legal  and  proper  manner,  under  the  laws  of  that  State,  and  subse- 
quently paid  him  for  his  services  and  disbursements  in  the  premises  ; 
that  he  went  to  Nashua  again,  and  with  the  attorney'  and  three  other 
persons,  selected  and  secured  by  the  attorney,  signed  and  executed  an 
agreement  of  association,  which  was  dated  Ma}-  6,  1885,  and  was  duly 
recorded  in  the  office  of  the  Secretary  of  State  of  New  Hampshire  on 
May  12,  1885,  and  in  the  office  of  the  clerk  of  the  city  of  Nashua  on 
Ma}'  13,  1885,  and  recited  that  the  subscribers  associated  themselves 
for  the  purpose  of  forming  a  corporation,  to  be  called  the  Forbes 
Woolen  Mills,  the  amount  of  the  capital  stock  to  be  twenty  thousand 
dollars,  divided  into  four  hundred  shares  of  fifty  dollars  each  ;  and  that 
the  object  of  the  corporation  was  to  manufacture  and  sell  woollen  and 
other  goods,  and  the  places  of  business  were  Nashua  in  New  Hamp- 
shire,  and  East  Brookfield  in  Massachusetts. 

The  defendant  further  testified  that,  subsequently  to  the  execution 
of  the  agreement  of  association,  one  or  more  meetings  were  held  by 
the  signers,  at  which  he  was  elected  president  and  treasurer  of  the  cor- 
poration, and  such  other  officers  and  directors  were  elected  as  were 
necessary  under  the  laws  of  New  Hampshire  ;  that  the  attorney  had 
been  recommended  to  him  as  a  reputable  and  reliable  man  and  attornev, 
and  he  left  everything  in  his  hands,  and  supposed  he  did  everything 
necessary  and  proper  to  establish  the  corporation  in  a  legal  manner ; 
that  records  of  the  meetings  were  kept  by  the  attorney,  and  that  there 
was  a  stock-book  and  certificates  of  stock  were  issued ;  that  ill  the 


160  MONTGOMERY  V.   FORBES. 

stock  was  issued  to  the  defendant,  and  that  no  other  person  was  inter- 
ested in  it ;  that  fift}-  per  cent  of  the  capital  stock  of  the  corporation 
was  actually  paid  in  by  him  in  cash  and  supplies ;  that  after  the  or- 
ganization of  the  corporation  he  hired,  as  treasurer  of  the  corporation, 
a  mill  in  East  Brookfield  belonging  to  his  mother,  Roxanna  Forbes, 
and  himself,  and  began  the  manufacture  of  woollen  goods ;  that  he  pur- 
chased the  necessary  supplies,  including  those  named  in  the  plaintiff's 
account,  and  placed  them  under  the  direction  of  a  superintendent,  em- 
ployed to  supervise  the  manufacture  of  the  goods ;  that  there  was  no 
manufacturing  done  in  Nashua,  nor  any  other  business  except  th& 
holding  of  corporate  meetings,  and  possibly  the  sale  now  and  then  of 
a  bill  of  goods  in  the  ordinar}^  course  of  business  ;  and  that  the  prin- 
cipal place  of  business  of  the  corporation  was  in  East  Brookfield  ;  that 
he,  as  president  and  treasurer  of  the  corporation,  continued  to  manu- 
facture woollen  goods  for  about  four  months,  and  sent  the  goods  to 
commission  houses  in  New  York  to  be  sold ;  and  that  at  the  end  of 
said  four  months  he  was  unable  to  continue  the  business  and  gave  it 
up,  and  no  further  business  was  done  by  him  or  by  the  corporation. 

The  following  sections  of  chapter  152  of  the  General  Laws  of  New 
Hampshire  of  1878,  were  introduced  in  evidence  : 

"  Sect.  1.  An}'  five  or  more  persons  of  lawful  age  may,  b}'  written 
articles  of  agreement,  associate  together,  for  agricultural,  educational, 
or  charitable  purposes,  or  for  carrying  on  an}'  lawful  business,  except 
l^anking  and  the  construction  and  maintenance  of  a  railroad ;  and  when 
such  articles  have  been  executed  and  recorded  in  the  office  of  the  clerk 
of  the  town  in  which  the  principal  business  is  to  be  carried  on,  and  in 
that  of  the  Secretary  of  State,  they  shall  be  a  corporation,  and  such 
corporation,  its  officers  and  stockholders,  shall  have  all  the  rights  and 
powers,  and  be  subject  to  all  the  duties  and  liabilities  of  similar  cor- 
porations, their  officers  and  stockholders,  except  so  far  as  the  same  are 
limited  or  enlarged  by  this  chapter. 

"  Sect.  2.  The  object  for  which  the  corporation  is  established,  the 
place  in  which  its  business  is  to  be  carried  on,  and  the  amount  of  capi- 
tal stock  to  be  paid  in,  shall  be  distinctly  set  forth  in  its  articles  of 
agreement." 

Upon  this  evidence,  the  defendant  asked  the  judge  to  rule  that  the 
plaintiffs  were  not  entitled  to  recover,  that  the  account  in  question  had 
been  paid  by  the  notes  of  the  Forbes  Woolen  Mills  as  a  corporation, 
and  that  there  was  no  evidence  to  authorize  the  jury  to  find  for  the 
plaintiffs. 

The  judge  declined  so  to  rule,  and  submitted  the  following  questions 
to  tlie  jury:  "1st.  Did  the  Forbes  Woolen  Mills  and  the  members  of 
said  alleged  corporation,  including  said  Forbes,  at  the  lime  of  its  at- 
tempted organization,  intend  to  carry  on  its  business  as  a  manufactur- 
ing corporation  (other  than  holding  meetings  of  its  members  and 
officers)  in  whole  or  in  part  in  the  city  of  Nashua,  New  IIain[)shire? 
(Jd.  Was  there  an  attempt  in  good  faith  on  the  part  of  the  defendant, 


MONTGOMERY   V.  FORBES.  161 

Forlbes,  to  organize  the  corporation  of  the  Forbes  Woolen  Mills? 
3d,  Did  said  Forbes,  at  and  prior  to  the  time  the  goods  in  controversy 
were  ordered,  namely,  at  all  times  after  May  12,  1885,  during  liis  deal- 
ings with  the  plaintiff,  believe  that  the  organization  of  said  Forbes 
Woolen  Mills  was  a  valid  corporation?" 

The  jury  answered  the  first  two  questions  in  the  negative,  and  the 
third  in  tlie  affirmative. 

The  judge,  being  of  the  opinion  that,  upon  the  findings  of  the  jur}' 
and  the  uncontradicted  evidence  in  the  case,  the  plaintiffs  were  entitled 
to  recover,  directed  the  jury  to  return  a  verdict  for  the  plaintiffs,  and 
reported  the  case  for  the  determination  of  this  court. 
W.  B.  Harding  &  II.  F.  Harris,  for  the  plaintiffs. 

B.  W.  Potter  k-  31  M.   Tat/lor,  for  the  defendant. 

C.  Allen,  J.  The  apparent  corporation  was  not  a  corporation. 
The  statute  of  New  Hampsliire  requires  five  associates,  and  the  articles 
of  agreement  must  be  recorded  in  the  town  in  which  the  principal 
business  is  to  be  carried  on,  and  the  place  in  which  the  business  is  to 
be  carried  on  must  be  distinct!}-  stated  in  the  articles ;  otherwise  there 
is  no  corporation.  The  defendant's  pretended  associates  were  asso- 
ciates only  in  name  ;  he  alone  was  interested  in  the  enterprise.  The 
articles  of  agreement  were  recorded  in  Nashua,  and  stated  that  the 
business  was  to  be  carried  on  there  ;  but  it  was  not  in  fact  carried  on 
there,  and  was  not  intended  to  be.  The  defendant  took  all  the  shares 
of  the  capital  stock,  and  paid  in  to  himself  as  treasurer  only  fifty  per 
cent  of  the  amount  thereof.  Tliis  is  not  a  case  where  there  has  been  a 
defective  organization  of  a  corporation  which  has  a  legal  existence 
under  a  valid  charter.  Here  there  was  no  corporation.  It  was  just 
the  same  as  if  the  defendant  had  done  nothing  at  all  in  the  way  of 
establishing  a  corporation,  but  had  conducted  his  business  under  the 
name  of  the  Forbes  Woolen  Mills,  calling  it  a  corporation.  The  busi- 
ness was  his  personal  business,  which  he  transacted  under  that  name. 
Fuller  V.  Hooper,  3  Gray,  334,  341.  Bryant  v.  Eastman,  7  Cush. 
111. 

The  jury  found  that  he  did  not  in  good  faith  attempt  to  organize  the 
corporation,  but  that  he  believed  it  to  be  a  valid  corporation.  His 
belief,  in  view  of  the  facts  of  the  case,  is  immaterial.  Under  this  state 
of  things,  the  defendant  bought  goods  of  the  plaintiffs  for  his  own  sole 
benefit,  adopting  the  name  of  the  apparent  corporation,  which  had  no 
real  existence,  and  which  represented  nobody  but  himself.  He  cannot 
escape  responsibility  for  his  purchases  by  the  device  of  putting  such  a 
mere  name  between  himself  and  the  plaintiffs.  The  purchase  was  in 
substance  by  and  for  himself  alone.  The  plaintiffs  might  have  repudi- 
ated the  transaction,  and  maintained  replevin,  if  they  had  learned  the 
facts  in  time.  They  may  also  treat  the  transaction  as  a  sale  to  the 
defendant  personally.  Fay  v.  Nohle,  7  Cush.  188,  194.  Kelner  v. 
Baxter,  L.  R.  2  C.  P.  174,  183,  185.     2  Kent  Com.  (13th  ed.)  630. 

Since  the  notes  represented  nothing,  the  plaintiffs  were  at  liberty  to 


162 


INDIANAPOLIS   FURNACE   CO.  V.   HEKKIMEK. 


treat  them  as  void,  and  recover  on  the  orighial  contract  for  goods  sold. 
Melledge  v.  Boston  Iron  Co.  5  Cush.  158,  171. 

Yerdict  to  stand. 


■(  ' 


INDIANAPOLIS   FURNACE  CO.   v.   HERKIMER. 

1873.       46  Indiana,  142.1 


From  the  Marion  Circuit  Court. 

Jlendncks,  Hard  &  Hendricks  and    Test^  Burns  <&  Wright,  for 
appellant. 
f '  <v.   J.  E.  McDonald  and  J.  31.  Butler,  for  appellee. 
i  WoRDEN,  J.     Complaint  by  the  appellant  against  the  appellee  on  the 

following  paper  subscribed  by  the  defendant. 

'' Articles  of  association  of  the  Indianapolis  Furnace  and  Mining 
Company,  organized  for  the  purpose  of  operating  in  the  counties  of 
'  ^"f  ^'^^^^^  ^"*-^  Clay,  in  the  State  of  Indiana. 

t^  \      "  Article  First.     The  name  of  said  company  shall  be  the  Indianapolis 
._>-^-«  Furnace  and  Mining  Compan}'. 

"Article  Second.  The  capital  stock  of  said  company  shall  be  one 
hundred  thousand  dollars,  and  be  divided  into  shares  of  fifty  dollars 
each,  to  be  paid  for  in  such  amounts  and  at  such  times  as  ma}'  be 
ordered  by  the  board  of  directors. 

"  Article  Third.  The  stockholders  shall  elect  directors,  who  shall 
from  their  number  elect  a  president,  secretary,  and  treasurer,  who  shall 
hold  their  office  for  one  year  and  until  their  successors  are  elected  and 
qualified. 

"  Article  Fourth.  The  board  of  directors  shall  have  the  control  and 
management  of  the  business  of  the  company,  except  as  they  may  ap- 
point some  one  or  more  persons  to  take  charge  of  the  same,  in  which 
case  the  record  of  the  action  of  the  board  in  appointing  them  shall  be 
evidence  of  their  authority  to  act  for  said  company. 

"Article  Fifth.  The  board  of  directors  shall  have  power  to  make 
assessments  on  stock,  collect  the  same,  issue  certificates  therefor,  and 
declare  and  pay  dividends,  which  shall  be  at  least  twice  a  year. 

"Article  Sixth.  All  the  expense  incurred  by  the  company  shall  be 
paid,  and  all  the  indebtedness  of  the  same  shall  likewise  be  discharged 
before  any  dividends  shall  be  paid  to  the  stockholders,  unless  the  direc- 
tors shall  direct  otherwise. 

"Article  Seventh.  We,  the  undersigned,  hereby  subscribe  to  all  the 
foregoing  articles,  provisions,  conditions,  and  stipulations,  and  agree 
to  the  organization  of  a  compan}-  as  therein  stated,  binding  ourselves 
to  take  and  pay  for  the  number  of  shares  of  stock  set  opposite  our 
uaiues  respectively',  and  pay  for  the  same  at  such  times  and  in  such 
^  Ouly  part  of  the  opiuiuu  is  giveu.  —  Ei>. 


INDIANAPOLIS   FURNACE   CO.   V.   HERKIMER.  163 

amounts  as  the  board  of  directors  maj-  order  the  same  to  be  paid  for, 
without  rehef  from  valuation  or  appraisement  laws. 

"  Subscribers'  Names.  No.  of  Shares. 

"  J.  D.  Herkimer,  by  D.  Root,  100." 

There  were  three  })aragraphs  in  the  complaint,  each  counting  upon 
the  same  instrument,  in  each  of  which  it  was  alleged  that  at  the  lime  of 
the  execution  of  the  instrument  by  the  defendant,  the  plaintiff  was  a 
duly  organized  corporation ;  but  it  is  not  alleged  in  either  paragraph 
that  after  the  execution  of  the  instrument  any  steps  were  taken  to  per- 
fect the  organization. 

The  defendant  demurred  to  each  paragraph,  assigning  for  cause  the 
want  of  a  statement  of  sufficient  facts,  but  the  demurrers  were  over- 
ruled, and  the  defendant  excepted. 

The  defendant  then  answered, 

1.  By  general  denial. 

2.  I^ul  tiel  corporation. 

3.  Nul  tiel  corporation.^  setting  out  specially  the  omission  of  the  per- 
formance of  the  acts  required  by  the  statute,  in  order  to  perfect  the 
corporate  organization. 

4.  A  denial  of  the  execution  of  the  instrument,  sworn  to. 

Trial  b}'  the  court,  finding  and  judgment  for  the  defendant,  the 
plaintiff  having  unsuccessfull}'  moved  for  a  new  trial. 

We  ma}'  properly  here  notice  another  proposition,  which,  though  not 
perhaps  directiv  involved,  is  in  some  measure  connected  with  the 
motion  for  a  new  trial.  We  are  of  opinion  that  a  radical  error  was 
committed  in  overruling  the  demurrers  to  the  several  paragraphs  of  the 
complaint.  The  articles  of  association  signed  b}'  the  defendant,  includ- 
ing his  subscription  for  stock,  were  ver}'  clearl}'  mere  preliminary 
articles,  contemplating  a  future  perfection  of  the  organization  as  a  cor- 
poration. The  defendant's  contract  did  not  purport  to  be  with  an  exist- 
ing corporation,  but  with  one  to  be  brought  into  existence  in  the  fulure. 
The  averment  in  the  complaint  that  the  plaintiff  was,  at  the  time  the 
sul)scription  was  made,  an  existing  corporation,  cannot  change  the 
nature  and  legal  effect  of  the  defendant's  contract.  That  contract 
was,  in  legal  effect,  that  the  defendant  would  take  and  pay  for  the 
stock  subscribed  for,  in  case  the  organization  should  be  perfected  and 
the  corporation  brought  into  legal  existence,  and  not  otherwise.  Such 
preliminar}-  subscriptions  seem  to  enure  to  the  benefit  of  the  corporation 
when  formed.     Heaston  v.  The  Cincinnati^  etc.,  Railroad  Co..,  siqjra. 

But  unless  the  subsequent  steps,  necessary-  to  bring  into  existence 
the  corporation,  were  taken,  there  was  no  corporation  to  whose  benefit 
the  contract  could  enure,  and  the  defendant  could  not  be  liable  ;  and  it 
should  have  been  averred  in  the  complaint  that  such  steps  had  been 
taken.      Wert  v.   The   Crawfordsville  and  Alatno   Turnpike  Co..,  19 


164  INDIANAPOLIS   FURNACE   CO.  V.   HERKIMER. 

Ind.  242  ;  Williams  v.  The  Franklin  Township  Academical  Associa- 
tion, 26  lud.  310. 

In  such  case,  the  estoppel  growing  out  of  a  contract  with  a  party  as 
an  existing  corporation  does  not  apply.  In  the  case  last  cited,  the 
court  say  : 

' '  This  rule  of  estoppel  does  not  apply  to  a  suit  brought  on  a  sub- 
scription made  with  a  view  to  the  organization  of  a  corporation,  and  as 
])reliminary  thereto,  where  other  acts  are  required  b}'  the  law  as  a  con- 
dition precedent  to  the  exercise  of  corporate  powers." 

[The  court  then  held,  that,  under  the  statute,  it  was  an  indispensable 
prerequisite  to  the  legal  existence  of  the  corporation  that  a  certificate 
should  be  filed  in  the  oifice  of  the  Secretary  of  State,  which  was  not 
done  in  the  present  case.] 

Now,  although  the  complaint  was  held  good,  the  pleas  of  nul  tiel 
corporation  put  in  issue  the  existence  of  the  corporation  ;  and  we  think, 
under  the  issues,  the  plaintiff  was  bound  to  prove  such  existence  by 
showing  a  compliance  with  the  statutory  requisites.  The  burthen  was 
on  the  plaintiff,  because  the  defendant  was  not  estopped  b}-  his  con- 
tract to  dispute  the  existence  of  the  corporation,  and  because  the  per- 
fection of  the  organization  was  a  condition  precedent  to  the  plaintiff's 
right  to  recover. 

"We  now  proceed  to  consider  the  ground,  upon  which  it  is  claimed  that 
a  new  trial  should  have  been  granted.  There  were  six  reasons  assigned 
for  a  new  trial.  [One  reason  was,  the  refusal  of  the  court  to  hear  the  tes- 
timony' of  Horace  W.  Hibbard,  to  the  effect  that  the  defendant  told  him 
that  he  had  five  thousand  dollars  of  the  stock  of  said  company,  and 
offered  to  trade  the  same  to  him.  As  to  this  Worden,  J.,  said] :  The 
evidence  of  Hibbard  was  properly  rejected,  because  such  recognition  by 
the  defendant  of  the  existence  of  the  corporation  could  not  estop  him  to 
controvert  the  fact ;  nor  could  it  supply  the  omission  of  an  act  which 
the  law  requires  to  be  performed  before  the  corporation  can  be  called 
into  being. 

Judgment  below  affirmed. 

1874.       ON   PETITION    FOR    A   REHEARING. 

Worden,  C.  J.  The  appellant  has  filed  a  petition  for  a  rehearing  in 
this  case,  claiming,  as  we  understand  the  argument,  that  as  it  was  shown 
bj'  averment  and  proof,  that  the  defendant's  contract  was  made  with 
an  existing  corporation,  it  should  be  treated  as  such ;  and  therefore  it 
was  unnecessary  for  the  plaintitf  to  show  that  the  proper  steps  had 
been  taken  to  perfect  the  organization  of  the  corporation. 

In  the  original  opinion,  we  set  out  in  full  the  contract  entered  into 
b}-  the  defendant.  That  contract  very  clearly  was  not  with  an  existin<y 
torporation.  It  contemplated  a  future  organization  of  the  corporation, 
to  wliich  he  was  to  become  liable  on  his  subscription.  To  treat  him  as 
liaving  iH-omised  to  pay  the  amount  of  his  subscription  to  a  corporation 


JOHNSON  V.   COESER. 


165 


which  then  existed,  would  be  to  make  a  new  contract  for  him  in  place 
of  the  one  which  he  made  for  himself.  There  may  have  been  a  cor- 
poration of  the  same  name,  and  organized  for  the  same  purpose,  in 
existence  at  the  time  the  defendant  made  his  contract ;  but  if  so,  the 
contract  set  out  was  not  made  with  such  existing  corporation.  That 
contract  was  to  pay  a  corporation  to  be  thereafter  organized  and 
brought  into  existence.  The  ground  upon  which  a  party  who  has  con- 
tracted with  a  corportion  as  such  is  estopped  to  deny  its  existence,  is, 
that  by  his  contract  he  has  recognized  the  existence  of  tlie  corporation. 

Tlie  contract  in  question,  instead  of  purporting  to  be  made  with  an 
existing  corporation,  utterly-  excludes  the  idea  of  its  present  existence, 
but  contemplates  the  future  organization  of  the  corporation,  to  which 
he  was  to  pa}-  the  amount  of  his  subscription. 

The  legal  effect  of  a  written  contract  cannot  be  thus  changed  by 
averment  or  parol  evidence. 

The  ]Detition  for  a  rehearing  is  overruled. 


D^    (/^ 


JOHNSON 


1885. 


V.    CORSER   ET 

34  Minnesota,  355. 


On  April  30,  1884,  the  defendants  signed  articles  associating  themi<| 
selves  together  for  the  purpose  of  organizing  as  a  bod}'  corporate  under 
the   name   of  "The   Sixth   Avenue  North   Extension  and   Improve- 'V\j^ 
ment  Association."     These  articles  of  association  were  not  filed  for   < 
record  until  November  21,  1884.     In  the  first  week  in  May,  1884,  b}^- 
laws  were  adopted  and  officers  were  elected.     On  June  16,    1884,  a 
contract  in  writing,  in  the  name  of  the  association,  was  made  with 
Egan  &  Salter  for  grading  and  improving  Sixth  Avenue.     Work  was 
begun  under  this  contract,  and  continued  till  August  5,  1884,  when 
the  plaintiff  and  others,  laborers  engaged  upon  the  work,  struck  and  r 
refused  to  continue  work,  because  they  had  not  received  their  pay.  f^j   ,      , 
Two  of  the  defendants,  the  secretary  and  vice-president  of  the  associa-^j-         ^y^^p^ 
tion,  visited  the  scene  of  work  and  succeeded  in  inducing  plaintiff  and      ^i'^\/p^^ 
his  fellow-laborers  to  return  to  work,  upon  the  promise,  as  claimed  byV^^    i^ 
plaintiff  but  denied  by  defendants,  that  the  association  would  pay  them.      ,  1- 
Thereafter  the  plaintiflf  continued  work  till  November  18,  1884,  and  ,--      \ 
the  officers  of  the  association  paid  them  to  October  1,  1884. 

Tlic  plaintiff  brought  this  action  before  a  justice  of  the  peace  for 
Hennepin  county  against  the  defendants,  as  partners,  to  recover  for 
his  work  and  services  from  October  1,  1884,  to  Novembei'  18,  1884. 
Upon  appeal  to  the  district  court,  the  action  was  tried  before  Yoimg,  J., 
and  a  jury,  and  plaintiff  had  a  verdict.  Defendants  appeal  from  an 
order  refusing  a  new  trial. 


166  JOHNSON   V.   CORSER. 

Hea^  Kitchel  <&  Shaw,  and  Scott,  Longhrake  <jb  Van  Uleve,  for 
appellants. 

Thoynas  Canty  and  Robert  Christensen,  for  respondent. 

Dickinson,  J.^  In  the  spring  of  1884  the  defendants  entered  into 
articles  of  association,  intending  to  acqnire  a  corporate  character,  and 
probablj'  supposed  that  this  purpose  had  been  accomplished.  No 
incorporation  was,  however,  effected.  The  articles  of  association 
executed  by  the  defendants  declared  the  purpose  of  the  proposed  cor- 
poration to  be  to  secure  the  extension  of  a  certain  street  in  Minneapo- 
lis, and  to  improve  and  beautifv  t?he  same.  They  provided  for  no 
capital  stock,  but  that  the  funds  necessaiy  for  the  accomplishment  of 
the  contemplated  purpose  should  be  raised  by  subscription  from  the 
members.  The  usual  officers  were  named,  and  a  board  of  five  directors 
provided  for  ;  meetings  of  the  members  were  held  ;  officers  and  a  board 
of  directors  elected  ;  by-laws  adopted,  which  provided  for  the  appoint- 
ment of  an  executive  committee,  whose  duty  was  declared  to  be  to 
direct  and  superintend  the  work  and  to  employ  the  necessary  labor ; 
subscriptions  were  made  by  all  of  the  defendants,  excepting  Stark,  for 
the  purposes  of  the  association;  a  contract  was  made  between  the  asso- 
ciation, by  its  adopted  name,  and  certain  contractors,  (Egan  &  Salter,) 
for  grading  and  improving  the  street,  and  the  performance  of  the  work 
under  the  contract  was  entered  upon.  The  plaintiff  was  an  employe  of 
Egan  &  Salter,  and  engaged,  with  others,  in  the  work.  During  the 
progress  of  the  work,  the  emplo3'es  of  the  contractors,  becoming  dis- 
satisfied with  their  employers,  ceased  to  work.  Then  two  of  the 
defendants,  Mathews  and  Riebeth,  who  were  respectively  vice-president 
and  secretary  of  the  association,  made  an  agreement  with  the  laborers, 
the  precise  nature  of  which  is  in  dispute.  The  evidence  on  the  part  of 
the  plaintiff  is  sufficient  to  support  what  must  have  been  the  conclusion 
of  the  jury,  that  the  agreement  was  that  if  the  men  would  go  on  with 
the  work,  the  association  would  pay  them ;  while  the  evidence  for  the 
defendants  tended  to  show  that  the  agreement  was  merely  to  pay 
directly  to  the  laborers  the  money  which  should  be  due  to  Egan  and 
Salter  on  their  contract.  B}'  this  action  the  plaintiff  seeks  to  recover 
against  the  defendants  individually  upon  this  agreement. 

The  attempt  to  become  incorporated  was  ineffectual  to  limit  the  indl 
vidual  liabilit}^  of  the  associates ;  and  upon  any  contract  which  they 
ma}'  be  found  to  have  authorized  to  be  made,  or  which  they  ma}-  have 
ratified,  although  in  terms  the  contract  was  made  as  the  contract  of 
the  association  or  assumed  corporation,  the  members  may  be  held  to 
an  individual  responsibility.  JIc.hs  v.  Werts,  4  Serg.  &  R.  356  ;  Pettis 
V.  Atkins,  60  III.  454;  Bujelow  v.  Gregory,  73  111.  197;  Garnett  v. 
Richardson,  35  Ark.  144;  Kaiser  v.  Lawrence  Sav.  Rank,  56  Iowa, 
104;  Abbott  v.  Omaha  Smelting  Co.,  4,  Neb.  416;  Field  v.  Cooks, 
16  La.  Ann.  153  ;  Jessup  v.  Carner/ie,  44  N.  Y.  Super.  Ct.  260.  While, 
if  the  other  contracting  party  were  to  charge  the  defendants  in  their 

*  Mitchell,  J.,  did  not  hear  tlic  argument  and  took  no  part  in  this  case. 


JOHNSON  V.   CORSER.  167 

assumed  corporate  capacit}-,  they  might  not  in  some  cases  be  heard  to 
deny  their  corporate  existence,  yet,  there  being  in  fact  no  such  exist- 
ence, the  plaintiff  may  go  behind  the  assumed  corporate  character,  and 
hold  the  real  principals  to  responsibility  for  the  acts  of  those  whom 
they  may  have  clothed  with  authority  to  act  in  behalf  of  the  associa- 
tion. Bigelow  v.  Gregory,  supra ;  Kaiser  v.  Lawrence  Sav.  Bank, 
supra;  Jessup  v.  Carnegie,  supra  ;  Hurt  v.  Salisbury,  55  Mo.  310. 

We  deem  the  evidence  to  have  been  sufficient  to  sustain  a  conclusion 
on  the  part  of  the  jury  that  all  of  the  defendants,  the  members  of  the 
association,  authorized  the  prosecution  of  the  contemplated  work,  and 
knew  that  it  was  actually  being  carried  forward  under  the  direction  of 
the  appointed  agents  of  the  association  ;  that  the  executive  committee 
was  authorized  hy  the  association  to  prosecute  the  work  as  its  agenx, 
and  for  that  purpose  to  employ  laborers;  that  the  alleged  contract 
upon  which  this  action  is  brought  was  made  b}'  two  members  of  the 
committee  in  behalf  of  the  association ;  and  that  the  whole  committee, 
having  knowledge  of  that  fact,  ratified  the  agreement,  making  pay- 
ments from  time  to  time  in  accordance  with  it.  Onl}-  as  to  two  of 
these  particulars  does  the  sufficiency  of  the  evidence  seem  questionable, 
and  only  to  that  evidence  shall  we  particularly  refer. 

It  is  in  evidence  that  the  defendant  Stark  did  not  subscribe  or  paj- 
anything  for  the  purpose  of  the  association,  and,  after  executing  the 
articles  of  association,  took  no  active  part  in  the  enterprise.  He,  how- 
ever, subscribed  to  the  articles  of  association,  the  declared  purpose  of 
which  w^as  the  prosecution  of  this  work.  He  was  present  on  the  occa- 
sion when  the  agreement  sued  on  was  made,  and,  as  the  evidence 
tends  to  show,  heard  the  agreement  then  made,  —  that  the  association 
would  pay  the  laborers,  — ■  although,  according  to  his  own  testimony, 
the  agreement  was  not  such  as  is  shown  on  the  part  of  the  plaintiff. 
We  think  this  sufficient  to  warrant  the  conclusion  that  Stark  was  aware 
that  the  work  was  being  carried  on  in  behalf  of  the  association  with 
which  he  had  united,  and  that  Mathews  and  Riebeth  in  his  presence 
assumed  to  make  this  contract  as  the  contract  of  the  association.  If 
the  fact  were  so,  the  mere  silence  of  Stark  might  be  deemed  to  signify 
his  acquiescence. 

It  is  not  entirel}'  clear  from  the  evidence  whether  the  agreement 
made  by  Mathews  and  Riebeth  was  communicated  to  all  the  other 
members  of  the  executive  committee.  The  by-laws  adopted  by  the 
association  declared  that  there  should  be  an  executive  committee  of 
five,  of  which  the  president,  vice-president,  and  secretary  should  be 
ex  officio  members,  and  of  which  three  members  should  constitute  a 
quorum.  But  it  is  testified  to  that  Jive  members  of  the  executive  com- 
mittee were  elected.  We  are  left  in  doubt  whether  the  association  in 
fact  named  three  or  five  of  its  members,  in  addition  to  the  ex  officio 
members,  as  its  executive  committee.  But  this  is  not  very  material. 
It  is  distinctly  testified  to  that  the  agreement  made  by  two  of  the  ex- 
officio  members  of  the  committee  was  communicated  to  three  of  the 


168  JOHNSON   V.   CORSER. 

Other  members  of  the  committee,  one  of  whom  was  the  president,  and 
that  they  assented  to  it.  It  further  appears  that  other  members  named 
as  members  of  that  committee  were  present  wh6n  computations  were 
made  of  the  amounts  to  be  paid  to  the  laborers  ;  that  meetings  of  the 
committee  were  held,  at  which  they  took  action  relative  to  the  work 
being  carried  forward  under  the  agreement  made  b}-  Mathews  and  Rie- 
beth ;  and  that  during  a  period  of  several  weeks  the  laborers  were  paid 
b}'  direction  of  the  committee.  While  this  evidence  is  not  the  most 
satisfactory,  it  is  still  such  as  to  justify  the  conclusion  that  the  agree- 
mient,  as  testified  to  on  the  part  of  the  plaintiffs,  was  communicated  to 
the  executive  committee  as  a  whole,  and  was  ratified  and  adopted  by 
them.  Notliing  further  was  necessar}-  to  charge  the  defendants  with 
liabilit}-. 

The  plaintiff  asserts,  as  a  rule  of  law  applicable  to  the  case,  that, 
from  the  mere  failure  to  perfect  the  contemplated  incorporation,  the 
association,  after  proceeding  to  carry  on  the  proposed  enterprise, 
became  a  partnership,  and  the  members  copartners,  with  authority 
(implied  from  their  relations)  in  each  member  to  bind  all  of  the  associ- 
ates by  any  act  within  the  scope  of  the  business  carried  on  by  the 
association.  We  cannot  sanction  the  application  to  this  case  of  the 
doctrine  of  implied  agency  as  it  is  recognized  in  ordinary  business 
copartnerships.  If  it  be  conceded  that  the  principle  upon  which  the 
plaintiff  relies  exists  and  is  applicable  in  cases  where  the  business  con- 
templated and  carried  on  by  the  association,  and  the  purposes  for 
which  it  is  prosecuted,  are  such  as  involve  the  essential  elements  of  a 
partnership  undertaking,  or  where  the  articles  of  association  contain 
all  that  is  essential  to  create  a  partnership,  —  still  the  principle  is  not 
applicable  to  this  case,  in  which  those  conditions  do  not  exist.  So  far 
as  appears,  the  business  undertaken  and  carried  on  by  the  defendants 
was  not  of  a  partnership  character,  nor  the  purposes  such  as  to  suggest 
the  relation  of  copartners  between  those  engaged  in  it.  It  was  only 
the  grading  of  a  public  street  by  the  co-operation  of  these  several  per- 
sons, and  that,  so  far  as  appears,  for  no  purpose  of  gain  or  profit. 
This  would  not  have  constituted  those  uniting  and  contributing  for 
such  a  purpose  copartners  ;  nor  can  such  a  result  have  been  accom- 
plished b}-  the  further  fact  that  an  incorporation  was  contemplated,  and 
attempted  to  be  perfected,  but  failed.  We  deem  the  liability  of  the 
defendants  to  rest  upon  the  ordinary  principles  of  contract  and  agency, 
and  not  upon  the  ground  of  an  existing  copartnership. 

The  articles  of  association  executed  by  the  defendants  were  properly 
received  in  evidence.  This  evidence  went  to  show  the  co-operation  of 
the  defendants  in  the  enterprise  in  carrying  on  which  the  contract 
sued  on  was  made.  The  same  is  true  of  the  proof  of  contributions  of 
money  from  the  defendants. 

Order  allirmed. 


SNIDEK  S   SONS   CO,  V,  TROY. 


SNIDER'S  SONS  CO.  v. 

1890. 


TROY. 


91  Alabama,  224.^  '-'--- 

Action  for  goods  sold  by  plaintiffs,  in  1888,  to,  or  on  the  order  of, 
The  Dispatch  Publishing  Co.     The  complaint  alleged  that  said  Corn- 
pan}'  was  at  the  time  a  partnership,  and  that  defendant  was  one  of  the  ^ 
partners  ;  that  the  Company'  claimed  to  be  a  corporation,  but  was  never 
in  fact  incorporated.     Plea,  setting  out  certain  steps  taken,  in  1885,  by^'*    u~. 
defendant  and  other  persons  to  organize  a  corporation  by  the  above  ^   " 
name  ;  also  alleging  that  the  debt  now  sued  for  was  contracted  by  said 
Compau}'  as  such  corporation,  and  not  otherwise ;  and  that  plaintiff 
dealt  with  it  as  a  corporation,  and  not  as  a  partnership  or  association 
of  individuals.     A  demurrer  to  the  plea  was  overruled. 

^.  I*.  3Iorrissett,  for  appellant. 

Tompkins  d;  Troy,  contra. 

Cloptox,  J.  A  corporation  de  facto  exists  when,  from  irregularity 
or  defect  in  the  organization  or  constitution,  or  from  some  omission  to 
comply  with  the  conditions  precedent,  a  corporation  de  jure  is  not 
created,  but  there  has  been  a  colorable  compliance  with  the  require- 
ments of  some  law  under  which  an  association  might  be  lawfully  incor- 
porated for  the  purposes  and  with  the  powers  assumed,  and  a  user  of 
the  rights  claimed  to  be  conferred  by  the  law,  when  there  is  an  organi- 
zation with  color  of  law,  and  the  exercise  of  corporate  franchises  and 
functions.  M.  E.  Church  v.  Pickett,  19  N.  Y.  482  ;  Stout  v.  Zulick, 
48  N.  J.  Law,  599,  7  Atl.  Rep.  362. 

The  enabling  law  under  which  a  corporation  for  the  purposes  and 
objects  of  the  Dispatch  Publishing  Company,  and  witli  the  powers 
assumed,  might  have  been  lawful!}'  created  at  that  time,  is  contained 
in  sections  1803-1812  of  the  Code  of  1876,  and  the  amendatory  acts, 
which  authorize  and  provide  for  the  incorporation  of  two  or  more  per- 
sons desirous  of  forming  a  private  corporation  for  the  purpose  of  carr}'- 
ing  on  any  industrial  or  other  lawful  business  not  otherwise  specially 
provided  for  by  law.  Acts  1882-83,  p.  40.  The  plea  avers  that  de- 
fendant and  two  other  named  persons  filed,  September  2,  1885,  with 
the  judge  of  probate  of  Montgomery  count}',  a  written  declaration^ 
signed  by  themselves,  setting  forth  substantially  the  matters  required 
by  the  statute,  except  the  residences  of  the  persons,  that  they  organ- 
ized by  the  election  of  three  directors,  and  commenced  and  continued 
to  do  business  in  a  corporate  capacity,  and  were  so  doing  business 
when  the  debt  sued  for  was  contracted.  If  the  averments  of  the  plea 
be  true,  the  truth  of  which  is  admitted  by  the  demurrer,  the  Dispatch 
Publishing  Company  was  an  association  having  capital  stock  divided 
into  shares,  organized  by  the  election  of  officers,  and  transacting  busi- 
ness, and  exercising  franchises,  functions,  and  powers,  after  an  at- 


1  Statemeut  abridged.     Arguments  omitted.  — Ed. 


170  snidek's  sons  co.  v.  troy. 

tempted  incorporation,  as  If  it  were  a  corporation  dejure,  a  colorable 
compliance  with  tlie  requirements  of  an  existing  and  enabling  law,  and 
user  of  the  rights  claimed  to  be  conferred  thereb}-,  the  essential  ele- 
ments of  a  corporation  de  facto.  Central,  A.  &  M.  Ass'n  v.  Alabama 
G.  L.  Ins.  Co.,  70  Ala.  120. 

Appellant  seeks  by  the  action  to  hold  defendant,  who  was  a  member, 
liable  as  a  partner  for  paper  and  other  supplies  sold  to  the  Dispatch 
Publishing  Company.  Whether  the  shareholders  in  a  corporation  de 
facto  are  individually  liable  for  the  corporate  debts,  in  the  absence  of 
fraud  or  a  statute,  is  a  question  as  to  which  the  authorities  are  in  direct 
antagonism.  In  Cook,  Stocks,  §  233,  the  doctrine  asserted  is:  "A 
corporate  creditor,  seeking  to  enforce  the  payment  of  his  debt,  may 
ignore  the  existence  of  the  corporation,  and  may  proceed  against  the 
supposed  stockholders  as  partners,  by  proving  that  the  prescribed 
method  of  becoming  incorporated  was  not  complied  with  by  the  com- 
pany in  question."  The  leading  cases  supporting  this  doctrine  are 
Bigelow  V.  Gregory,  73  111.  197  ;  Abbott  v.  Smelting  Co.,  4  Neb.  416  ; 
Garnett  v.  Richardson,  35  Ark.  144  ;  Ferris  v.  Thaw,  72  Mo.  446  ; 
Ridenour  v.  Mayo,  40  Ohio  St.  9  ;  Coleman  v.  Coleman,  78  Ind.  344. 
We  have  omitted  reference  to  a  few  cases,  sometimes  cited,  for  the 
reason,  that  either  the  question  of  liability  as  partners  was  not  before 
the  court,  as  in  Blanchard  v.  KauU,  44  Cal.  440  ;  or  the  debt  was 
contracted  before  any  steps  were  taken,  other  than  the  mere  filing  of  a 
certificate,  towards  organization,  as  in  Bergen  v.  Fishing  Co.,  (N,  J.) 
3  Atl.  Rep.  404  ;  or  it  was  contracted  after  the  expiration  of  the  char- 
ter b}'  its  own  limitation  without  reorganization,  as  in  Bank  v.  Landon, 
45  N.  Y.  410.  In  the  case  last  cited,  the  shareholders  entered  into  a 
special  agreement,  which  by  its  terms  created  a  partnership  as  to  third 
persons.  In  2  Mor.  Priv.  Corp.  §  748,  the  doctrine  is  stated  as  follows  : 
"If  an  association  assumes  to  enter  into  a  contract  in  a  corporate 
capacity,  and  the  party  dealing  with  the  association  contracts  with  it 
as  if  it  were  a  corporation,  the  individual  members  cannot  be  charged 
as  parties  to  the  contract,  either  severally  or  jointly  or  as  partners." 
The  following  cases  maintain  the  doctrine  that  the  members  of  a  cor- 
poration de  facto  cannot  be  held  liable  as  partners  for  the  corporate 
debts.  Fay  v.  Noble,  7  Cush.  188;  Bank  v.  Almy,  117  Mass.  476; 
Stout  V.  Zulick,  48  N.  J.  Law,  599,  7  Atl.  Rep.  362  ;  Bank  v.  Padgett, 
69  Ga.  164  ;  Bank  v.  Stone,  38  Mich,  779  ;  Humphreys  v.  Mooney,  5 
Colo.  282  ;  Bank  v.  Walker,  66  N.  Y.  424  ;  Coal  Co.  v.  Maxwell,  22 
Fed.  Rep.  197  ;  Whitney  v.  Wyman,  101  U.  S.  392. 

The  plea  and  demurrer  do  not  raise  the  question  of  the  liability  of 
the  supposed  stockholders,  as  partners,  where  there  has  been  no  inten- 
tion or  attempt  to  incorporate,  where  they  are  acting  as  a  bod}'  cor- 
porate without  even  color  of  legislative  authority,  Vy  sheer  usurpation. 
The  plea  avers  that  the  debt  sued  for  was  contracted  by  the  Dispatch 
Publishing  Company,  which  is  alleged  to  have  been  a  de  facto  corpora- 
tion, and  that  plaintiff  sold  the  goods  to,  and  contracted  with,  the  com- 


SNIDER  S   SONS   CO.    V.   TROY.  171 

pan}'  as  a  corporation,  knowing  that  it  was  doing  business  as  such. 
The  question  before  us,  and  the  only  question  we  propose  to  decide,  is 
whether,  there  being  no  fraud  alleged,  nor  statute  making  the  stock- 
holders individually  liable,  a  creditor,  who  has  dealt  with  a  de  facto 
corporation  as  a  corporation,  who  has  entered  into  contractual  relations 
with  it  in  its  corporate  name  and  capacit}',  can  disregard  the  existence 
of  the  corporation,  and,  electing  to  treat  it  as  a  partnership,  enforce  the 
collection  of  his  debt  from  the  stockholders  individually?  The  conflict- 
ing authorities  afford  aid  in  the  solution  of  this  question,  only  so  far  as  • 
their  opinions  ma}'  be  in  accord  with  settled  principles  and  sustained 
by  reason.  Though  it  is  an  undecided  question  in  this  state,  principles 
have  been  well  settled  which  materially  bear  upon  the  inquiry,  and 
mark  the  way  to  a  correct  conclusion. 

Corporations  may  exist  either  de  jure  or  de  facto.  If  of  the  latter 
class,  they  are  under  the  protection  of  the  same  law,  and  governed  by 
the  same  legal  principles,  as  those  of  the  former,  so  long  as  the  state 
acquiesces  in  their  existence  and  exercise  of  corporate  functions.  A 
private  citizen,  whose  rights  are  not  invaded,  and  who  has  no  cause  of 
complaint,  has  no  right  to  inquire  collaterally  into  the  legality  of  its 
existence.  This  can  only  be  done  in  a  direct  proceeding  on  the  pai*t 
of  the  state,  from  whom  is  derived  the  right  to  exist  as  a  corporation, 
and  whose  authority  is  usurped.  This  principle  was  clearly  and  em- 
phatically declared  in  Lehman  v.  Warner,  61  Ala.  455,  in  the  following 
language:  "The  corporation  must  of  necessity  be  presumed  to  be 
rightfully  in  possession  of  the  franchise,  and  rightfully  to  exercise  the 
power  which  the  legislative  grant  confers.  Individual  right  is  not  in- 
vaded, if  the  negative  is  true  in  fact,  and  there  is  usurpation.  It  is 
the  state  —  the  sovereign  —  whose  rights  are  invaded  and  whose  au- 
thority is  usurped.  The  individual  could  not  create  the  corporation, 
could  not  grant,  define,  limit  its  powers,  and  no  grant  of  these  by  the 
sovereign  can  lessen  his  rights.  There  can  consequently  be  no  cause 
of  complaint  by  the  citizen,  and  no  right  to  inquire  whether  corporate 
existence  is  rightful  de  jure,  or  merely  colorable."  Taylor,  Corp. 
§  145  ;  4  Amer.  &  Eng.  Enc.  Law,  198.  The  creditor  cannot  proceed 
against  the  stockholders  as  partners,  without  proving  non-compliance 
with  prescribed  conditions  precedent,  thus  inquiring  collaterally,  not 
into  the  fact,  but  the  legality,  of  its  existence. 

It  is  also  an  established  rule  of  general  application,  that  a  party  who 
contracts  with  a  corporation,  exercising  corporate  powers  and  perform- 
ing corporate  functions,  existing  as  a  de  facto  corporation,  in  its  cor- 
porate name  and  capacity,  will  not  be  permitted  in  a  suit  on  the  contract 
to  deny  and  disprove  the  rightfulness  of  its  existence.  4  Amer.  &, 
Eng.  Enc.  Law,  198.  In  Swartwout  v.  Railroad  Co.,  24  Mich.  390, 
CooLEY,  J.,  declares  the  rule  as  follows:  "  Where  there  is  thus  a  cor- 
poration de  facto,  with  no  want  of  legislative  power  to  its  due  and  legal 
existence,  when  it  is  proceeding  in  the  performance  of  corporate  func- 
tions, and  the  public  are  dealing  with  it  on  the  supposition  that  it  is 


172  SNIDER'S   sons   CO.    V.    TROY. 

what  it  professes  to  be,  and  the  questions  are  onlj*  wliether  there  has 
been  exact  regularit}'  and  strict  compliance  with  the  provisions  of  the 
law  relating  to  cor^aorations,  it  is  plainly  a  dictate  alike  of  justice  and 
public  policy,  that,  in  controversies  between  the  de  facto  corporation 
and  those  who  have  entered  into  contract  relations  with  it,  as  corpo- 
rators or  otherwise,  such  questions  should  not  be  suffered  to  be  raised." 

The  general  rule  is  thus  stated  by  Brickell,  C.  J.  :  "  Whoever 
contracts  with  a  corporation  in  the  use  of  corporate  powers  and  fran- 
chises, and  within  the  scope  of  such  powers,  is  estopped  from  denying 
tlie  existence  of  the  corporation,  or  inquiring  into  the  regularity  of  the 
corporate  organization,  when  an  enforcement  of  the  contract,  or  of 
rights  arising  under  it,  is  sought."  Cahall  v.  Association,  61  Ala.  232  ; 
Central  A.  &  M.  Ass'n  v.  Alabama  G.  L.  Ins.  Co.,  70  Ala.  120  ;  Schloss 
V.  Trade  Co.,  87  Ala.  411,  6  South.  Rep.  360. 

It  is  conceded  that  the  rule  has  been  invoked  and  applied  most  fre- 
quently in  suits  against  the  stockholders  or  corporation,  or  persons 
who  have  contracted  with  it,  where  the  stockholder,  or  corporation,  or 
person,  is  seeking  to  avoid  a  liability  by  denying  the  legality  of  the 
corporate  organization.  But  wh}'  should  it  not  be  applicable  in  other 
cases  ?  Why  should  the  stockholder  be  estopped  in  a  suit  by  a  cr*^ditor 
of  an  insolvent  corporation  to  require  payment  of  his  unpaid  subscrip- 
tion, and  the  creditor  allowed  to  ignore  the  existence  of  the  corporation, 
and  proceed  against  the  stockholder  as  a  partner?  Why  should  not 
the  estoppel  be  mutual?  Taylor,  in  his  work  on  Corporations,  §  148, 
having  stated  the  general  rule,  that  a  corporation,  when  sued  on  its 
contract,  and  the  person  who  contracted  with  it,  when  sued  on  his  con- 
tract, is  estopped  to  deny  its  legal  incorporation,  adds  :  "  Furthermore, 
persons  who  have  contracted  with  a  corporation  as  such,  and  have 
acquired  claims  against  it^  are  estopped  from  denying  its  corporate 
existence  for  the  purpose  of  holding  its  shareholders  liable  as  part 
ncrs."  And  the  same  rule  was  applied  in  several  of  the  cases  cited 
aliove,  in  which  a  corporate  creditor  was  seeking  to  hold  the  stockholder 
liable  as  a  partner  for  a  corporate  delit.  The  abrogation  of  the  fore- 
going well-established  rule  is  the  logical  sequence  of  maintaining  a  suit 
1)3'  a  creditor  of  a  de  facto  corporation,  charging  the  stockholders  as 
partners. 

Another  consideration.  Section  8,  art.  14,  of  the  constitution,  de- 
clares :  "  In  no  case  shall  an}-  stockholder  be  individually  liable  other- 
wise than  for  the  unpaid  stock  owned  by  him  or  her."  Exemption  from 
liability  other  than  for  unpaid  stock  is  the  declared  policy  of  the  state. 
It  cannot  be  imposed  by  legislation  or  by  the  judgment  of  a  court.  In 
view  of  the  constitutional  provision  it  is  manifest  that  the  shareholders 
of  the  Dispatch  Publishing  Company  intended,  by  the  attempt  to  incor- 
porate, to  avoid  individual  liability  for  the  debts  contracted  by  the  cor- 
poration. When  a  party  deals  and  contracts  with  a  corporation  as 
corporators,  exemption  from  individual  liability  enters  as  an  element 
of  the  contract.     It  is  true  that  the  liability  of  persons  associated  in  an 


EUTHEKFOED   V.    HILL.  173 

enterprise  or  adventure  is  not  determinable  hy  the  name  tbey  maj" 
assume,  but  by  the  legal  consequences  of  their  acts.  A  partnership 
ma}'  arise  as  to  third  persons  by  mere  operation  of  law,  and  contrary* 
to  the  intention  of  the  parties,  but,  to  have  the  effect,  the  elements 
essential  to  constitute  a  partnership  as  to  third  persons  must  exist.  A 
corporation  de  facto  has  an  independent  status^  recognized  by  the  law 
as  distinct  from  that  of  its  members.  A  partnership  is  not  the  neces- 
sary legal  consequence  of  an  abortive  attempt  at  incorporation.  As 
said  in  Fay  v.  Noble,  supra  :  "  Surely,  it  cannot  be,  in  the  absence  of 
all  fraudulent  intent,  that  such  a  legal  result  follows  as  to  fasten  on 
parties  involuntarily,  for  such  a  cause,  the  enlarged  liabilit}'  of  copart- 
ners, a  liability  neither  contemplated  nor  assented  to  by  them.  The 
statement  of  the  proposition  carries  with  it  a  sufficient  refutation." 

Maintenance  of  such  suit  involves  judicial  nullification  of  franchises 
and  powers  enjoyed  and  exercised  by  a  de  facto  corporation  as  a  dis- 
tinct entit}-  recognized  b}'  the  law,  acquiesced  in  by  the  state  ;  defeats 
the  corporate  character  of  the  contract ;  changes  the  relation  from  that 
of  stockholders  to  that  of  partners  ;  substitutes  other  and  new  parties 
to  the  contract ;  effects  the  imposition  of  an  enlarged  hability,  which 
they  did  not  assume,  but  intended  to  avoid,  so  understood  b}'  the 
creditor  when  he  contracted  the  debt  with  the  corporation  as  such. 
The  contract  is  valid  and  binding  on  the  corporation,  which  the  cred- 
itor trusted.  No  injustice  is  done  him,  for  all  his  rights  and  remedies 
are  preserved  by  the  principle,  that  the  corporation  and  the  share- 
holder are  estopped  from  denying  its  legal  existence,  as  against  him. 
It  will  not  answer  to  say  that  he  is  not  repudiating,  but  enforcing,  the 
contract.  He  repudiates  the  party,  the  corporation,  with  which  he 
made  the  contract,  and  seeks  its  enforcement  against  parties  who  never 
entered  into  contractual  relation  with  him.  The  doctrine  that  a  cred- 
itor who  has  dealt  with  a  de  facto  corporation  in  its  corporate  capacity 
cannot  charge  the  stockholders  as  partners  with  the  corporate  debt, 
there  being  no  fraudulent  intent  alleged  and  proved,  seems  to  us  to  be 
sustained  b}'  the  weight  of  authority,  maintained  b}'  stronger  reasoning 
consistent  with  well-settled  principles,  and  in  harmony  with  the  policy 
of  the  state.     Affirmed. 


RUTHERFOKD  v.  HILL. 

1892.     22  Oregon,  218. 

Multnomah  county :  E.  D.  Shattuck,  Judge. 

Defendants  appealed.     Reversed. 

The  defendants  are  sued  as  partners  under  the  name  and  style  of  the 
Himes  Printing  Company.  The  complaint  does  not  anywhere  allege 
that  the  defendants  entered  into  an  agreement  of  co-partnership,  but  in 
lieu  thereof  the  following  facts  are  alleged  :  "That the  defendants,  on 


174  KUTHERFORD   V.    HILL. 

or  about  the  fifth  day  of  September,  1890,  executed,  acknowledged, 
and  filed  in  the  office  of  the  clerk  of  the  county  court  of  Multnomah 
county,  and  in  the  office  of  the  secretary  of  state  at  Salem,  Oregon, 
certain  articles  of  incorporation  as  the  Himes  Printing  Company  ;  that 
the  defendants,  in  violation  of  the  laws  for  the  formation  of  corpora- 
tions subsisting  in  the  state  of  Oregon,  negligently  failed  to  provide  a 
stock-book  and  to  secure  stock  subscriptions  to  said  corporation  ;  that 
in  spite  of  their  said  violation  of  the  law,  the  defendants  undertook  to 
carry  on  the  business  provided  for  in  said  articles  of  incorporation, 
appointed  one  George  H.  Himes  superintendent  of  their  said  business, 
and  authorized  him  and  the  defendant  Sherman  Martin  to  represent 
tlieni  in  all  the  transactions  of  said  business  ;  that  said  business  was 
carried  on  under  the  firm  name  and  title  of  the  Himes  Printing  Com- 
pany ;  that  between  May  1,  and  September  1,  1891,  the  plaintiff,  at 
the  instance  and  request  of  the  defendants,  through  their  agents,  the 
aforesaid  Himes  and  the  defendant  Martin,  performed  certain  labor 
and  services  for  the  defendants,  of  the  reasonable  and  agreed  value  of 
two  hundred  and  thirteen  dollars  and  fourteen  cents,  which  sum  the 
defendants  promised  to  pa}' ;  that  the  plaintiffs  performed  the  aforesaid 
work,  relying  on  the  credit  and  representations  of  the  defendants  for 
their  pa3"ment." 

Earhart  and  Hill  answered  separately,  and  each  of  them  denied 
every  material  allegation  of  the  complaint,  except  they  did  not  deny 
executing  and  filing  the  articles  of  incorporation  of  the  Himes  Print- 
ing Company. 

The  jury  returned  a  verdict  against  the  defendants  Earhart  and  Hill 
for  the  amount  claimed,  and  a  judgment  was  entered  thereon,  from 
which  this  appeal  was  taken. 

George  II.  Durham^  and  J.  F.  Watson,  for  Appellants. 

Wallace  M'  Cammant.,  for  Respondents. 

Strahan,  C.  J. — At  the  conclusion  of  the  evidence,  the  defendants 
Hill  and  Earhart  asked  the  court  to  instruct  the  jury  as  follows : 
"1.  The  execution  and  filing  of  the  articles  of  incorporation  of  the 
Himes  Printing  Compan}-  by  said  Hill  and  Earhart,  in  connection  with 
the  defendant  Sherman  Martin,  would  not  itself  make  them  partners 
with  Martin,  or  render  them  liable  in  this  action.  2.  Said  defendants 
Hill  and  Earhart  cannot  be  charged  in  this  action  unless  it  has  been 
shown  b}'  a  preponderance  of  the  evidence  that  they  had  notice  of 
their  being  held  out  as  such  partners,  and  plaintiffs  also  had  notice 
thereof  before  or  at  the  time  they  performed  the  labor  and  services 
alleged  in  the  complaint  and  perfoi'med  the  same  on  the  faith  thereof. 
3.  The  plaintiffs  cannot  recover  in  this  action  against  Hill  and  Earhart, 
unless  it  lias  ])een  proved  by  a  preponderance  of  the  evidence  that  said 
Hill  and  Earhart  were  partners  in  said  printing  compan}'  at  the  time 
the  contract  for  said  labor  and  services  was  entered  into,  or  at  the  time 
the  same  were  performed,  or  at  the  time  the  contract  was  entered  into, 
or  said  labor  and  services  performed,  undertook  to  carr\-  on  said  busi- 


EUTHERFORD   V.    HILL.  175 

ness  of  said  companj-,  or  were  interested  as  partners  or  appointed  or 
pai'ticipated  in  the  appointment  of  George  H.  Hiraes  as  superintendent 
of  said  business,  or  authorized  him  or  said  Martin  to  represent  them 
in  the  transaction  of  said  business,  or  requested  through  said  Hiraes  or 
Martin  the  plaintiffs  to  perform  said  labor  and  service."  No.  4  was  in 
effect  a  direction  to  the  jury  to  return  a  verdict  for  the  defendants  Hill 
and  Earhart.  The  defendants  excepted  to  the  rulings  of  the  court  in 
refusing  to  give  each  of  the  foregoing  instructions. 

The  court  then  instructed  the  jury  as  follows  :  "  I  cannot  agree  with 
you,  Mr.  Durham  and  Judge  Watson,  that  there  may  not  be  some 
other  reasons  wh}^  parties  should  not  be  bound  than  such  as  usuall}' 
arise  from  an  estoppel.  Since  this  case  has  been  going  on,  it  has  oc- 
curred to  me  whether  or  not  this  may  not  furnish  a  class  of  itself  for 
pronouncing  a  man  to  be  a  partner.  As  a  general  rule,  the  doctrine  of 
estoppel  has  got  to  be  made  out  according  to  the  authorities  you  have 
read  ;  but  I  am  inclined  to  the  opinion  that  the  mere  act  of  filing  arti- 
cles is  itself  a  holding  out  and  notice  to  the  world  that  they  are  associated 
in  the  business  that  is  carried  on  under  the  name.  I  do  not  feel  very 
certain  about  it,  but  my  best  conception  of  this  matter  is  that  it  ought 
to  be  considered  the  rule."  An  exception  to  this  instruction  was  duly 
noted.  The  court  also  gave  the  following  instruction:  "  If  you  find 
from  the  evidence  in  this  case  that  these  two  defendants  and  Sherman 
Martin  filed  articles  of  incorporation  for  the  purpose  of  carrying  on 
the  printing  business  under  the  name  of  the  Himes  Printing  Company, 
and  that  thereafter  one  of  these  men,  to-wit,  Sherman  Martin,  took  up 
the  business  contemplated  by  this  corporation,  5nd  carried  it  on  under 
that  name,  and  incurred  liabilities,  then  all  these  incorporators  that 
signed  the  articles  are  liable,  and  your  verdict  should  be  for  the  plain- 
tiffs for  the  amount  claimed,  provided  you  further  find  that,  before  they 
performed  the  labor  and  rendered  the  services,  they  ascertained  the 
fact  of  these  articles  being  filed,  and  acted  on  the  faith  of  the  associa- 
tion of  these  defendants  with  Sherman  Martin,  and  that  they  were 
induced  thereby  to  perform  the  labor  and  render  the  services."  An 
exception  was  also  taken  to  this  instruction. 

There  was  no  evidence  whatever  before  the  jury  that  these  defend- 
ants had  anything  to  do  with  the  business  of  the  Himcs  Printing  Com- 
pany, or  in  any  wa}'  authorized  the  same,  except  to  sign  the  articles  of 
incorporation.  They  appointed  no  agents  and  employed  no  laborers, 
purchased  no  material,  nor  did  they  have  any  knowledge  that  any  busi- 
ness was  conducted  under  that  name,  except  the  company  did  some 
printing  for  the  defendant  Hill ;  and  when  a  bill  was  presented  to  him 
for  the  same  it  had  at  the  top,  printed  in  bold  letters,  "The  Himes 
Printing  Company,  incorporated ;  Geo.  H.  Himes,  Superintendent ; 
Sherman  Martin,  Manager."  There  was  no  evidence  before  the  jury 
that  the  plaintiffs  had  any  actual  knowledge  of  the  filing  of  the  articles 
of  incorporation  at  the  time  they  performed  the  services  sued  for. 

The  sole  question,  therefore,  seems  to  be  whether  or  not,   where 


i76  KUTHERFORD   V.    HILL. 

three  or  more  persons  sign,  acknowledge,  and  file  articles  of  incorpo- 
ration under  the  laws  of  this  state,  and  do  nothing  further  towards 
effectino"  an  organization  or  carrying  on  the  proposed  business,  and  one 
of  them  assumes  to  do  business  under  the  proposed  corporate  name 
and  incurs  liabilities,  the  other  persons  who  sign  said  articles  are  liable. 
Appellants  maintain  that  in  such  case  there  is  no  liability  on  the  part 
of  those  who  do  not  participate  in  the  business  either  directly  or  in- 
directl}',  while  the  respondents  seek  to  maintain  the  reverse  of  this 
proposition ;  and  this  contention  presents  the  only  question  we  need 
consider  on  this  appeal. 

The  respondent  contends  that  the  executing  and  filing  of  the  articles 
of  incorporation  and  the  assumption  of  the  corporate  name  by  one  of 
the  parties  under  which  he  does  business,  create  a  partnership  between 
all  the  persons  signing  said  articles  ;  and  to  sustain  this  view  he  relies 
upon  these  authorities  :  Whipple  v.  Parker^  29  Mich.  369  ;  Jessup  v. 
Carnegie,  44  N.  Y.  Sup.  Ct.  260  ;  Goleman  v.  ColewMn,  78  Ind.  344  ; 
Pettis  V.  Atkins,  60  111.  454  ;  Smith  v.  Warder,  86  Mo.  382  ;  Garnett 
V.  Richardson,  35  Ark.  144 ;  Lind.  Part.  5  ;  Abbott  v.  Omaha  Smelt- 
ing Co.,  4  Neb.  416  ;  Johnson  v.  Corser,  34  Minn.  355.  Some  other 
autliorities  similar  to  these  in  principle,  might  be  cited,  but  tliey  add 
nothing  to  this  side  of  the  question.  Without  stopping  to  distinguish 
these  cases  from  the  one  now  before  us,  we  think  tlie  decided  weight 
of  authority,  as  well  as  the  better  reason,  is  the  other  way.  Fay  v. 
Noble,  7  Cush.  188,  is  an  early  case  in  which  it  was  held  that  the  sub- 
scribers for  and  holders  of  stock  in  a  manufacturing  corporation,  which 
has  been  defectively  organized  and  transacted  business  under  such  de- 
fective organization,  do  not  thereby  become  partners,  general  or  spe- 
cial, in  such  business.  la  Trowbridge  v.  Scudder,  11  Cush.  83,  it  was 
held  that  the  stockholders  of  a  corporation  do  not  become  liable  as 
partners  on  notes  given  by  the  treasurer  of  the  corporation,  merely 
because  after  organizing  they  transacted  no  business.  In  First  Nat. 
Bank  v.  Almy,  117  Mass.  476,  it  was  held  that  the  members  of  a  cor- 
l)oration  were  not  liable  as  partners  by  reason  of  having  transacted 
business  before  the  whole  capital  stock  was  paid  in  as  required  by 
statute.  In  Humphreys  v.  Mooney,  5  Col.  282,  in  considering  the 
question  now  before  the  court,  it  was  said  :  "  The  doctrine  of  a  part- 
nership liability  in  such  case  is  not  founded  in  law  reason,  and  is  re- 
pugnant to  the  very  purposes  of  the  statute  authorizing  a  corporation, 
one  object  of  which  is  to  limit  individual  liability."  Substantially,  the 
same  doctrine  is  announced  in  Gartside  Coal  Co.  v.  Maxwell,  22  Fed. 
Rep.  197  ;  Planters'  etc.  Bank  v.  Padgett,  69  Ga.  159  ;  Stafford  Nat. 
Bank  v.  Palmer,  47  Conn.  443  ;  Ward  v.  Brigham^  127  Mass.  24  ; 
Central  etc.  Bank  v.  Walker,  66  N.  Y.  424  ;  Jessup  v.  Carnegie,  80 
N.  Y.  441  ;  36  Am.  Rep.  643  ;  Blanrhardy.  Kaid.l,  44  Cal.  440  ;  Mora- 
wetz  Corp.  §  748.  And  17  Am.  «fe  Eng.  Ency.  Law,  866,  after  stating 
that  the  rule  contended  for  by  respondents  had  been  adopted  by  quite 
a  large  number  of  cases,  remarks  :  "  IJut  the  weight  of  authority  per- 


BUSHNELL  V,    CONSOLIDATED   ICE   MACHINE   CO.  177 

"uaps  sustains  the  contraiy  rule,  that  if  they  were  acting  under  the  sup- 
position that  they  were  incorporated,  and  were  assuming  onl}-  the 
liability  of  stockholders,  and  not  that  of  partners,  they  will  not  be 
held  liable  as  such  " ;  and  a  long  list  of  cases  is  cited  to  sustain  this 
proposition. 

It  is  not  doubted  that  cases  might  arise  and  can  readily  be  imagined 
where  the  incorporators  sought  to  be  charged  might  take  such  part  in 
conducting  the  business,  or  bold  themselves  out  to  the  world  as  part- 
ners or  as  principals  in  tlie  business,  that  tbey  would  be  held  liable ; 
but  this  would  grow  out  of  their  conduct  in  carrying  on  the  business, 
and  not  out  of  the  mere  fact  of  signing  and  filing  the  articles.  If  tlie 
appellants  could  be  held  liable  in  this  case,  such  liabilit}-  would  rest 
on  the  mere  act  of  signing  and  fihng  the  articles,  and  not  upon  any 
participation  in  the  business,  either  directly  or  indirectl}-.  It  would 
have  to  rest  upon  the  theor}-,  that  by  the  mere  signing  the  articles 
with  Martin,  they  constituted  him  their  general  agent  to  proceed  to 
conduct  the  business  contemplated  by  the  proposed  corporation,  thus 
creating  a  liability  for  an}'  act  of  his  done  within  the  scope  of  the 
powers  of  the  proposed   corporation. 

No  authority'  to  wliich  our  attention  has  been  directed,  has  gone  so  .v'*'''"^ 

far,  and  we  feel  safe  in  saying  that  none  can  be  found  to  support  that 
doctrine.     We  therefore  reverse  the  judgment,  and  remand  the  cause  , .,.-   r 

for  such  further  proceedings  as  are  not  inconsistent  with  this  opinion.  V       jj 

BUSHNELL  V.   CONSOLIDATED  ICE     MACHINE, CO-  ^  Ji\k^     I 

1891.     138  minois,lQ7. 1  ^    ^  ^'        .r-    \ 

Suit  in  chancery  to  have  the  Consolidated  Ice  Machine  Co.  declared) '   ^  V  A>f''^ 

a  copartnership,  and  its  affairs  settled  between  the  complainant  and^-'  ^^^   f>^  i  > 
defendants  accordingly.     In  the  court  below,  the  demurrer  was  sus- 
tained and  the  bill  dismissed.  ^  ->  s,-   I  '    V 

The  following  facts  appear  from  the  bill :  In  1884  the  complainanir  i  ^^-f^'      ,\«^-'5 
and  the  individual  defendants  entered  into  a  written  agreement  to't'^ 
form  a  corporation,  with  the  above  title,  under  the  laws  of  the  State ;  '"^ 

all  the  required  steps  were  taken,  up  to  and  including  the  issuing  of 
a  certificate  of  the  complete  organization  of  such  corporation  by  the 
Secretary  of  State ;  complainant  was  a  director ;  and  for  several 
months  secretary  and  soliciting  agent,  actively  engaged  in  its  busi- 
ness. In  1885  complainant  became  afflicted  with  melancholia  and 
remained  incapacitated  for  the  transaction  of  business  for  about  three  \ 
years.  During  his  sickness,  the  other  directors  sold  some  of  his 
shares  for  non-payment  of  installments,  the  sale  being  without  notice. 
Since  the  sale  he  has  been  excluded  from  all  participation  in  the 
1  Statement  abridged.    Arguments  and  part  of  opinion  omitted.  —  Ed. 


178  BUSHNELL  V.    CONSOLIDATED   ICE   MACHINE   CO. 

niana"-ement  of  the  business.  After  being  restored  to  health,  and 
before  filinf^  his  bill,  he  made  frequent  demands  to  be  restored  to  his 
rights  in  said  corporation,  but  without  avail. 

The  only  allegation  of  the  bill  which  is  seriously  insisted  upon  as 
furnishin"'  a  ground  for  the  relief  prayed  is,  that  the  certificate  of 
complete  organization,  issued  by  the  Secretary  of  State  was  never 
recorded  in  the  office  of  the  recorder  of  deeds  in  the  county  where 
the  principal  office  of  the  company  was  located.  The  statute  requires 
that  "  the  same  shall  be  recorded  "  in  that  office. 

WiLKIX  J. 

But  assuming  that  a  corporate  existence  dejure  depends  upon  the 
filing  of  the  certificate  of  complete  organization  in  the  office  of  the  re- 
corder of  deeds  of  the  county  in  which  its  principal  office  is  located, 
and  that  the  bill  properly  avers  that  it  was  not  done  in  the  case  of  the 
corporation  in  question,  it  by  no  means  follows  that  it  did  not  become 
a  corporation  de  facto  as  between  the  complainant  and  defendants. 
From  the  facts  set  up  in  the  bill  it  clearly  appears  that  there  was  an 
honest  attempt  by  the  incorporators  to  organize  a  corporation  author- 
ized by  the  laws  of  this  State.  The  necessary  steps  to  perfect  that 
organization  were  all  taken  as  required  by  the  statute,  except  that  the 
final  certificate  was  not  recorded.  It  is  shown  by  the  bill  that  upon 
the  issuing  of  that  certificate  its  directors  elected  the  proper  officers 
and  proceeded  to  the  transaction  of  business  as  a  corporation,  and 
continued  to  act  as  such  until  the  filing  of  this  bill,  a  period  of  more 
than  five  3'ears.  That  these  facts  establish  a  corporation  de  facto  is 
settled  by  numerous  decisions  of  this  court.  President  and  Trustees^ 
etc.  V.  Thompson,  20  111.  198  ;  Rice  v.  R.  I.  and  A.  R.  R.  Co.  21  id. 
93  ;  Baker  et  al.  v.  Administrator.,  32  id.  79  ;  Ramsey  v.  Marine  and 
Fire  Ins.  Co.  55  id.  311  ;  Cincinnati.,  Lafayette  and  Chicago  Rail- 
road Co.  V.  Danville  and  Vincennes  Ry.  Go.  lb  id.  113;  Louisville^ 
New  Albany  and  Chicago  Ry.  Co.  v.  Shires,  108  id.  617  ;  Hudson  v. 
Green  Hill  Seminary  Corporation,  113  id.  G18, 

That  plaintiff  in  error,  if  he  had  been  sued  by  the  Consolidated  Ice 
IMachine  Company'  on  his  subscription  to  its  capital  stock,  could  not 
have  questioned  its  corporate  existence  on  the  grounds  alleged  in  his 
bill,  is  directl}'  settled  by  several  of  the  above  cited  decisions.  It  is 
equally  clear  that  if,  during  the  time  he  was  a  member  of  said  cor- 
poration, it  had  been  sued  as  such,  neither  he  nor  an}-  other  of  its 
members  could  have  been  heard  to  say  that  no  such  corporation  ex- 
isted. The  general  rule  is,  that  one  who  deals  witli  a  corporation  as 
existing  de  facto,  is  estopped  to  deny,  as  against  it,  that  it  has  been 
legally  organized.  It  is  the  settled  rule  in  this  State  that  the  legal 
existence  of  a  corporation  de  facto  can  not  be  questioned  collaterally. 
Bee  cases  sufira,  and  Remiiick  et  al.  v.  Hdl  et  <d.  84  111.  1(32;  The 
People  ex  rel.  v.  Trustees  of  Schools,  111  id.  171  ;  Keigwin  et  al.  v. 
Drainage  Comrs.  115  id.  347. 


BUSHNELL   V.    CONSOLIDATED   ICE   MACHINE   CO.  179 

It  seems  impossible  to  find  a  reason  for  placing  the  complainant  in 
this  bill  in  a  more  favorable  position  to  deny  the  existence  of  the  cor- 
poration in  question  than  a  mere  subscriber  to  its  capital  stock,  or  one 
who,  as  a  third  part}*,  had  dealt  with  it  as  a  corporation,  and  we  are  of 
the  opinion  that  he  could  not  do  so  in  this  collateral  proceeding.  He, 
however,  not  only  seeks  to  question  the  legal  organization  of  the  cor- 
poration, but  to  have  the  same  changed  into  a  co-partnership  between 
himself  and  the  other  incorporators,  and  to  compel  the  defendants  to 
account  to  him  as  his  co-partners.  "  A  partnership  is  never  created 
between  parties  b}'  implication  or  operation  of  law,  apart  from  an 
express  or  implied  intention  and  agreement  to  constitute  the  relation." 
(1  Bates  on  Law  of  Partnership,  sec.  3.)  In  Phillqjs  v.  PhiUq)s^ 
49  111.  437,  Caton,  C.  J.,  said :  "  A  partnership  can  onl3'  exist  in  pur- 
suance of  an  express  or  implied  agreement,  to  which  the  minds  of  the 
parties  have  assented."  This  rule  will  not  prevent  the  enforcement  of 
liability  against  persons  as  partners,  when  sued  by  third  parties.  "  Par- 
ties may  so  conduct  themselves  as  to  be  liable  to  third  persons  as 
partners,  when  in  fact  no  partnership  exists  as  between  themselves. 
The  public  are  authorized  to  judge  from  appearances  and  professions, 
and  are  not  absolutely  bound  to  know  the  real  facts,  while  the  certain 
proof  is  positively  known  to  the  alleged  parties  to  a  firm."  (PJilUijjg 
V.  P/iilli'p.-i,  supra.)  On  this  latter  ground  parties  who  have  attempted 
to  organize  a  corporation,  but  have  failed  to  comply  with  the  law,  so 
as  to  perfect  their  incorporation,  may  be  held  liable  as  partners  to 
creditors,  as  in  Btgelow  v.  Gregory  et  al.  73  111.  197.  This  liability 
vests  on  the  doctrine  of  estoppel.  When,  however,  even  a  creditor  has 
dealt  with  the  corporation  as  such,  partnership  liabilit}'  can  not  be 
enforced,  even  though  the  corporation  has  not  been  legally-  organized. 
Tarbell  v.  Page,  24  111.  46. 

It  is  wholly  unnecessary,  however,  in  this  case,  to  determine  when 
and  under  what  circumstances  third  parties  may  proceed  against  incor- 
porators acting  under  a  defective  or  imperfect  organization,  as  indi- 
viduals or  co-partners.  In  this  case  the  complainant  shows  by  his  bill 
that  he  was  not  only  one  of  the  incorporators  of  the  compan}'  he  now 
seeks  to  question,  but  that  he  was,  upon  its  complete  organization, 
elected  its  secretary  and  general  agent,  and  acted  as  such  for  several 
months  prior  to  his  alleged  disability,  during  which  time  he  was 
actively  engaged  in  assisting  to  carrj'  on  its  corporate  business,  and 
that  upon  his  being  restored  to  health  he  still  recognized  its  corporate 
existence,  and  sought  to  be  restored  to  his  rights  therein.  If  the 
recording  of  the  certificate  in  question  was  essential  to  the  organiza- 
tion of  the  corporation,  there  is  nothing  in  this  bill  to  show  that  it 
was  not  as  much  his  duty  to  have  it  done  as  either  of  the  other  incor- 
porators. We  are  unable  to  perceive,  then,  upon  what  principle  he 
tan  now  compel  those  who,  for  anything  appearing  in  this  bill,  hon- 
estly supposed  they  were  incorporated  during  all  the  time  the  business 
mentioned  in  the  bill  was  being  carried  on,  to  account  to  him,  upon  the 


180  SNYDER   V.    STUDEBAKER. 

theory  that  they  were  his  co-partners.  In  fact,  if  the  allegation  as  to 
his  mental  condition  at  the  time  his  stock  was  sold  was  omitted  from 
the  bill,  it  would  strike  any  one  as  too  clear  for  argument  that  he  has 
failed  to  state  a  case  entitling  him  to  equitable  relief,  and  it  must,  we 
think,  be  held,  that  whether  that  fact,  together  with  the  allegation  that 
his  stock  was  sold  without  notice  and  he  ousted  from  all  participation 
in  the  business  of  the  company,  would  entitle  him  to  his  action  for  that 
alleged  wrong,  or  to  be  restored  to  his  former  rights  as  a  member  of 
said  corporation  or  not,  no  legal  ground  is  shown  by  this  bill  for  hold- 
ing defendants  liable  to  him  as  partners. 

There  is  nothing  in  the  case  of  Flag f/  v.  Stove,  85  111.  166,  when 
the  facts  of  that  case  are  considered  as  they  appear  in  that  report,  and 
in  Stotre  v.  Flagg  et  al.  72  111.  397,  contrar\-  to  the  view  here  ex- 
pressed. We  have  examined  the  numerous  cases  cited  by  counsel  for 
plaintiff  in  error  as  giving  support  to  the  position  that  a  corporation 
defectively  organized  may  be  treated  as  a  co-partnership,  and  the  mem- 
bers held  liable  as  partners  ;  but  when  it  is  borne  in  mind  that  com- 
plainant himself  was  a  member  of  the  corporation  in  question,  and  in 
no  sense  a  third  party,  and  that  he  is  not  seeking  by  this  bill  to  recover 
for  anything  which  he  has  been  required  to  pay  third  parties  for  or  on 
behalf  of  said  corporation,  the}'  have  no  application.  What  he  seeks 
to  do  is  to  have  the  corporation  converted  into  a  partnership,  contrary 
to  the  contract  of  the  parties,  simply  because  he  and  other  incorpora- 
tors failed  to  perfect,  as  he  says,  the  corporation.  He  does  not  even 
show  that  he  has  been  misled  or  in  any  way  injured  b}'  the  failure  to 
have  the  certificate  of  complete  organization  recorded.  Neither  does 
he  pretend  that  the  omission  of  any  of  the  incorporators  to  have  the 
same  recorded  was  willful,  or  in  any  way  designed  to  injure  him  or 
others. 

We  can  find  neither  authority  nor  reason  to  sustain  this  bill,  and  are 
clearly  of  the  opinion  that  the  decree  of  the  circuit  court  is  right. 

Decree  a-§irmed. 


:-r^  ;.r     ■ 

. ..  ^ 

SNYDER  V.    STUDEBAKER. 

/. /*  ,-  1862.     19  Indiana,  462. 

I  )'  Ai'PKAL  from  the  Wells  Circuit  Court. 

WoKUKx,   J.     This  was  an  action  by   Snyder  against   Studebaker^ 
fj  to  recover  possession  of  a  certain  tract  of  land.     Judgment  for  the 

'  defendant. 

y  ^  'I'lie  same  question  is  presented  by  the  pleadings  and  the  evidence. 

/  It  appears  that,   in   March,   1853,  the  plaintiff,    who  was  then  the 


'^y 


SNYDEE   V.    STUDEBAKER.  181 

ownevof  the  land,  conveyed  the  same  to  the  Fort  Wnjne  and  Southern 
Railroad  Vompany,  by  deed,  dul}-  executed  and  delivered. 

This  convej'ance  was  made  on  account  of  a  stock  subscription. 

Afterward,  in  November,  1855,  the  railroad  compan}',  for  a  valuable 
consideration,  conve3ed  the  premises  to  the  defendant. 

T/ie  Fort  Wayne  and  Southern  Railroad  Company  was  chartered 
by  an  act  of  the  legislature,  passed  in  1849  ;  and  it  appears  that  tlie 
corporators  named  in  the  act  in  question  met  in  the  town  of  Bluffton, 
in  said  county  of  Wells^  on  the  19th  day  of  November,  1851,  and  then 
and  there  accepted  tlie  act  of  incorporation,  and  organized  the  company 
pursuant  to  the  provisions  of  said  act. 

If  the  corporation  was  not  created  before  the  1st  of  November,  1851, 
when  the  new  constitution  took  effect,  it  could  have  no  existence  at 
all,  as  that  instrument  prohibits  the  creation  of  corporations,  other 
than  banking,  b}-  special  act.  The  State  v.  Dawson,  16  Ind.  40. 
Harrinian  v.  Southam,  Id.  190. 

The  plaintiff  claims,  that  inasmuch  as  there  was  no  acceptance  of 
the  charter,  or  organization  under  it,  until  after  the  adoption  of  the 
constitution  of  1851,  there  was  no  such  corporation  as  The  Fort  'Wayne 
and  Southern  Railroad  Conqxmy  at  the  time  he  executed  the  convey- 
ance, and,  hence,  that  no  title  passed  from  him.  But  is  he  in  a  con- 
dition to  dispute  the  existence  of  the  corporation  at  the  time  he  made 
his  conve3"ance  to  it? 

It  has  been  held,  in  numerous  cases  in  this  State,  that  a  party  who 
has  contracted  with  a  corporation,  as  such,  is,  as  a  general  proposition, 
estopped  by  his  contract  to  dispute  the  existence  of  the  corporation  at 
the  time  of  the  contract.  The  following  cases  may  be  cited,  though 
there  are,  perhaps,  others  reported,  and  some  not  reported  as  yet. 
Judah  V.  The  American  Live  Stock  Insurance  Company,  4  Ind.  333. 
The  Brookville  and  Greensburg  Turnpike  Company  v.  McCarty-^ 
8  Id.  392.  Ensey  v.  The  Cleveland  and  St.  Louis  Railroad  Com- 
fany,  10  Id.  178.  Fort  Wayne  and  Bluffton  Turnpike  Comjxmy  v. 
Deam,  Id.  563.  Jones  v.  The  Cincinnati  Type  Foundery  Company., 
14  Id.  89.  Huhbard  v.  Chappell,  Id.  601.  The  Evansville,  etc. 
Railroad  Company  v.  The  City  of  Evansville,  15  Id.  395.  Meikel 
V.  The  German  Savings  Fund  Society,  16  Id.  181.  Heaston  v.  The 
Cincinnati  and  Fort  Wayne  Railroad  Company,  Id.  275. 

The  doctrine  is  by  no  means  confined  to  the  State,  but  prevails  else- 
where. The  Dutchess  Cotton  Manufactory  v.  Davis,  14  Johns.  238. 
All  Saints  Church  v.  Lovett,  1  Hall,  191.  Palmer  v.  Laurence, 
3  Sand.  Sup.  C.  R.  161.  Eaton  v.  Asjnmrall,  6  Duer,  176.  Jones  v. 
Bank  of  Tennessee,  8  B.  Mon.  122.  Worcester  Medical  Institution 
v.  Harding,  11  Cush.  285.  The  Congregational  Society  v.  Perry, 
6  N.  H.  164.  People^s  Savings  Bank,  etc.  v.  Collins,  27  Conn.  142. 
West  Winsted  Savings  Rank  v.  Ford,  Id.  282.  Angell  and  Ames  OQ 
Corp.,  sec.  94. 

The  estoppel  arises  upon  matter  of  fact  onl^',  and  not  upon  matter  of 


182  SNYDER   V.    STUDEBAKER. 

law.  Hence,  if  there  be  no  law  which  authorized  the  supposed  oorpo- 
ration,  or  if  the  statute  authorizing  it  be  unconstitutional  and  void,  the 
contract  does  not  estop  the  party  making  it,  to  dispute  the  existence 
of  the  corporation.  But  if,  on  the  other  hand,  there  be  a  law  which 
authorized  the  corporation,  then,  whether  the  corporators  have  com- 
plied with  it,  so  as  to  become  dulj'  incorporated,  is  a  question  of  fact^ 
and  the  part3'  making  tlie  contract  is  estopped  to  dispute  the  organi- 
zation or  the  legal  existence  of  the  corporation.  This  proposition  is 
substantially  stated  in  the  cases  of  Jones  v.  The  Cincinnati  Type 
Foundery  Company;  Meikel\.  The  German  Savings  Fund  Society  ; 
and  Heaston  v.  The  Cincinnati  and  Fort  Wayne  Railroad  Company^ 
sripra. 

Let  us  appl}'  the  doctrine  to  the  case  before  us.  The  corporators 
named  in  the  act  to  establish  the  Fort  Wayne  and  Southern  Mailroad 
Company  had  a  right,  at  an}'  time  before  the  offer  of  the  franchises 
was  withdrawn,  that  is,  before  the  constitution  of  1851  was  adopted, 
to  accept  the  charter,  and  organize  under  it.  If  they  did  so  accept  the 
charter,  and  organize,  the  corporation  was  legitimatel}'  created,  and 
the  new  constitution  did  not  destro}'  it. 

Whether  they  did  so  accept  the  charter,  and  organize,  was  a  ques- 
tion of  fact,  and  the  plaintiff,  by  his  conveyance,  is  estopped  to  den}' 
such  acceptance  and  organization. 

That  the  corporators  accepted  the  charter,  and  organized  under  it, 
within  the  time  when  it  was  competent  to  do  so,  was  as  fully  admitted 
by  the  contract,  as  was  any  other  step  necessary  to  an  organization. 

The  conclusion  necessarily  follows,  that  the  plaintiff  is  estopped  to 
dispute  the  existence  of  the  corporation  at  the  time  of  his  conveyance 
to  it. 

This  point  was  ruled  the  other  way  in  the  case  of  Ilarriman  v. 
Southarn,,  16  Ind.  190,  but,  upon  more  more  mature  reflection,  we  are 
satisfied  that  the  decision  upon  this  point  was  wrong,  and  should  be 
overruled. 

We  may  remark,  also,  that  the  doctrine  of  estoppel  was  erroneously 
applied  in  the  case  of  The  FiKuisville^  etc.  Railroad  Co.  v.  TJte  City 
of  Evansville,  15  Ind.  395.  There  the  point  made  was,  that  the  law, 
under  which  the  corporation  was  organized,  was  unconstitutional  and 
void.  A  party,  we  have  seen,  does  not,  by  his  contract,  estop  himself 
to  deny  that  there  is  any  law,  or  any  valid  law,  by  which  the  corpora- 
tion was  authorized. 

Some  further  observation,  in  respect  to  the  case  before  us,  will  not 
be  out  of  place.  The  doctrine  of  estoppel,  as  applied  to  the  case,  does 
not  rest  upon  a  mere  technical  rule  of  law.  It  has  its  foundation  in  the 
clearest  equity,  and  the  principles  of  natural  justice.  The  doctrine  of 
estoppel,  in  pais,,  is  of  comparatively  recent  growth,  but  is  firuily  and 
clearly  established.  "  The  recent  decisions  of  the  courts,  both  in  this 
country  and  in  England,  appear  to  have  given  a  much  broader  sweep 
to  the  doctrine  of  estoppel  in  pais,,  than  that  which  formerly  existed. 


SOCIETY   PERUN   V.    CLEVELAND.  183 

and  to  have  established  that,  in  all  eases  where  an  act  is  done,  or  a 
statement  made,  by  a  party,  the  truth  or  efficacy  of  which  it  would  be 
a  fraud,  on  his  part,  to  controvert  or  impair,  there  the  character  of  an 
estoppel  will  be  given  to  what  would  otherwise  be  mere  matter  of  evi- 
dence, and  it  will,  therefore,  become  binding  upon  a  jury,  even  in  the 
presence  of  proof  of  a  contrarj-  nature."  2  Smith,  Lead.  Ca.  p.  531, 
1  Am.  Ed.  See,  also,  upon  this  subject,  Kinnerf  \.  Farnsvyjrth,  17 
Conn.  355.  MUUleton  Bank  v.  Jerome^  18  Id.,  443.  Laney  v. 
Laney.,  4  Ind.  149.  In  Doe  ex  dem.  RicTiardson  v.  Baldvnn,  1  Za- 
briskie,  397,  it  was  said,  that  "  The  doctrine  of  estoppel  rests  upon  the 
principle,  that  when  one  has  done  an  act,  or  made  a  statement,  which 
it  would  be  a  fraud,  on  his  part,  to  controvert  or  impair,  and  such  act 
or  statement  has  so  iniluenced  any  one  that  it  has  been  acted  upon,  the 
party  making  it  will  be  cut  off  from  the  power  of  retraction.  It  must 
appear,  1.  That  he  has  done  some  act,  or  made  some  admission  incon- 
sistent with  his  claim  5  2.  That  the  other  party  has  acted  upon  such 
conduct  or  admission ;  3.  That  such  party  will  be  injured  by  allowing 
tlie  conduct  or  admission  to  be  withdrawn."  Here  the  plaintiff,  by  his 
convej'ance  to  the  corporation,  admitted  that  it  had  an  existence,  and 
could  receive  the  title.  Upon  this  act  and  admission  of  the  plaintiff 
the  defendant  has  acted,  in  purchasing  the  land  of  the  company.  If 
the  plaintiff  had  not  conveyed  to  the  corporation,  the  defendant  would 
not  have  purchased  from  it.  The  law  will  not  now  permit  the  plaintiff 
to  withdraw  the  admission  made  by  him  in  conveying  to  the  corpora- 
tion, and  deprive  the  defendant  of  the  land  which  he  purchased  on  the 
faith  of  such  admission. 

In  our  opinion,  the  judgment  below  is  right,  and  must  be  affirmed. 

Per  Curiam.  —  The  judgment  is  affirmed,  with  costs. 

John  R.  Coffroth,  for  the  appellant. 


SOCIETY  PERUN  v.   CLEVELAND.  ;^i!y>Y 

1885.     ^3  Ohio  State,  A%\>  ■'^    ^ 


Error  to  the  District  Court  of  Cuyahoga  County. 

Action  by  city  of  Cleveland  to  foreclose  a  mortgage,  as  against  cer- 
tain subsequent  grantees,  mortgagees,  and  purchasers.  Perun,  a  cor- 
poration, Jan.  28,  1874,  executed  and  delivered  a  mortgage  to  the  cit}'. 
This  mortgage  was  not  filed  for  record  until  Oct.  21,  1879.  In  Feb- 
ruary, 1874,  certain  persons  attempted  to  organize,  under  general  laws, 
a  corporation  by  the  name  of  Society  Perun.  In  Ma}',  1874,  Perun 
delivered  to  Society  Perun  its  deed,  purporting  to  convey  to  the  latter 
the  premises  theretofore  mortgaged  to  the  city.  Between  that  date 
and  Oct.  21,  1879,  Society  Perun,  acting  in  its  supposed  corporate 

1  Statement  abridged.     Arguments  omitted  —  Ed. 


184  SOCIETY   PERUN   V.    CLEVELAND. 

capacity,  executed  and  delivered  deeds  and  mortgages,  purporting  to 
conve}'  and  incumber  parcels  of  these  mortgaged  premises  to  various 
parties,  who  are  made  defendants  in  the  present  suit.  During  the  pen- 
dency  of  the  present  foreclosure  suit,  it  was  adjudged,  in  a  Quo  War- 
ranto proceeding,  instituted  by  the  Attorney  General,  that  the  persons 
who  attempted  to  incorporate  under  the  name  of  Society  Perun  had 
not  been  legall}'  incorporated,  and  that  their  attempted  organization  as 
a  corporation  was  wholly  void  ;  and  a  decree  of  ouster  was  rendered. 
Upon  the  trial  of  the  present  foreclosure  suit  in  the  District  Court,  the 
plaintiff  gave  in  evidence,  against  the  objection  of  the  defendants,  the 
record  of  the  Quo  Warranto  proceedings.  Defendants  offered  evidence 
tending  to  prove  an  attempt  in  good  faitli  to  incorporate  Society  Perun. 
This  evidence  was  excluded,  and  defendants  excepted.  The  District 
Court  found,  among  other  things,  that,  as  to  the  city  of  Cleveland, 
Society  Perun  was  not  a  corporation  either  in  law  or  in  fact ;  that  the 
conve^'ance  to  it  b\'  Perun  was  void  as  against  the  city  ;  and  that  the 
claims  of  all  the  defendants  (except  certain  claims  for  taxes  and  im- 
provements) were  subsequent  and  inferior  to  the  lien  of  the  cit}'.  To 
reverse  the  judgment  rendered  upon  these  findings,  error  was  brought. 

Willson  cfc'  Sykora,  for  plaintilT  in  error. 

B.  H.  Beavis,  for  executors  of  Stone,  cross-petitioners  in  error. 

A.  T.  Brinsmade  and  W.  E.  Sherwood,  for  city  of  Cleveland. 

Owen,  J.  The  defendants  below,  conceding  that  Society  Perun  had 
never  been  a  corporation  dejure.  maintain  that  the  court  below  should 
have  permitted  them  to  prove  that  such  society  was  a  de  facto  corpora- 
tion ;  that  it  attempted,  in  good  faith,  to  become  a  body  corporate  ; 
proceeded  to  act  and  transact  business  in  good  faith  under  the  sup- 
posed authorit}'  of  incorporation,  and  that  its  acts  ought  not  to  have 
been  declared  to  be  whollj'  void  as  against  the  city  of  Cleveland. 

The  judgment  of  ouster  was  an  adjudication  between  the  state  and 
the  society'  upon  the  right  of  the  latter  to  exercise  corporate  franchises. 
For  the  purposes  of  such  adjudication  it  was  competent  for  this  court 
to  consider  and  determine  what  had  been  its  status  from  its  first  at- 
tempt to  incorporate.  But  it  had  no  power  to  pass  upon  or  determine 
the  rights  of  parties  not  before  it. 

It  was  not  competent  for  this  court  to  determine  in  that  proceeding 
that  Society'  l*erun  had  never  been  a  corporation  de  facto,  or  that  its 
acts  and  business  transactions,  under  the  color  of  its  supposed  charter 
powers,  were  void.  The  authority  of  the  court  in  that  behalf  was  de- 
rived from  sec.  6774  (Rev.  Stats.),  which  provides:  "  When  a  defend- 
ant is  found  guiltj'  of  usurping,  intruding  into,  or  unlawfully  holding  or 
exercising  an  office,  franchise,  or  privilege,  judgment  shall  be  rendered 
that  such  defendant  be  ousted  and  altogether  excluded  therefrom,  and 
tiiat  the  relator  recover  his  costs." 

When  the  court  had  excluded  the  society  from  its  franchises  to  be  a 
eorijoration,  it  exhausted  its  jurisdiction  over  the  subject-matter.  It 
liad  no  power  to  speak  concerning  whatever  rights  may  have  been 


SOCIETY   PERUN  V.   CLEVELAND.  185 

acquired  bj-  the  society  as  a  corporation  de  facto,  or  by  tliiid  parties  in 
their  transactions  with  it  as  an  acting  corporation. 

It  is  conceded  b}"  the  city  that  parties  who  had  recognized  the  exist- 
ence of  the  society  b}-  tlieir  transactions  with  it  as  a  supposed  corpora- 
tion are  estopped  to  den\'  its  corporate  existence.  But  it  is  maintained 
that  the  city,  having  engaged  in  no  transactions  with  it,  is  free  to  chal- 
lenge its  existence  as  a  corporation  de  facto  as  well  as  de  jure.  The 
argument  is  that:  "  No  case  can  be  found  where  it  is  held  that  there 
is  a  corporation  de  facto  against  persons  who  have  in  no  wa}'  recog- 
nized its  existence  as  a  corporation,"  and  that:  "The  notion  of  a  de 
facto  corporation  is  based  on  the  doctrine  of  estoppel ;  when  estoppel 
can  not  be  invoked  there  can  be  no  de  facto  corporation." 

The  theory  that  a  de  facto  corporation  has  no  real  existence,  that  it 
is  a  mere  phantom,  to  be  invoked  only  by  that  rule  of  estoppel  which 
forbids  a  part}-  who  has  dealt  with  a  pretended  corporation  to  deny  its 
corijorate  existence,  has  no  foundation,  either  in  reason  or  authorit}'. 
A  de  facto  corporation  is  a  reality.  It  has  an  actual  and  substantial 
legal  existence.     It  is,  as  the  term  implies,  a  corj)oration. 

"  It  is  a  self-evident  proposition  that  a  contract  can  not  be  made  with 
a  corporation  unless  the  corporation  be  in  existence  at  the  time.  A 
real  contract  with  an  imaginary  corporation  is  as  impossible,  in  the 
nature  of  things,  as  a  real  contract  with  an  imaginary  person.  It  is 
essential,  therefore,  in  order  to  establish  the  existence  of  a  contract 
with  a  corporation,  to  show  that  the  corporation  was  in  existence,  at 
least  de  facto.,  at  the  time  the  contract  was  made."  Morawetz  Private 
Corporations,  sec.  137. 

It  is  bound  by  all  such  acts  as  it  might  rightfully  perform  as  a  cor- 
poration de  jure.  Where  it  has  attempted  in  good  faith  to  assume 
corporate  powers ;  where  its  proceedings  in  that  behalf  are  colorable, 
and  are  approved  by  those  officers  of  the  state  who  are  authorized  to  act 
in  that  regard  ;  where  it  has  honestly  proceeded  for  a  number  of  years, 
without  interference  from  the  state,  to  transact  business  as  a  corpora- 
tion ;  has  been  reputed  and  dealt  with  as  a  dul}'  incorporated  bod}', 
and  valuable  rights  and  interests  have  been  acquired  and  transferred 
b}'  it,  no  substantial  reason  is  suggested  wh}'  its  corporate  existence,  in 
a  suit  involving  such  transactions,  should  be  subject  to  attack  b}'  an}' 
other  party  than  the  state,  and  then  only  when  it  is  called  upon  in  a 
direct  proceeding  for  that  purpose,  to  show  by  what  authority  it  assumes 
to  be  a  corporation. 

Proof  was  offered  upon  the  trial  below  to  show,  (1)  that  the  persons 
seeking  to  incorporate  first  filed  with  the  secretary  of  state  a  certificate 
which  fully  complied  with  the  requirements  of  the  statutes,  and  free 
from  the  defect  which  finally  proved  fatal  to  its  existence,  but  which 
was  disapproved  by  the  attorney-general ;  (2)  That  the  certificate  of 
incorporation  which  was  finally  filed  with  the  secretary  of  state  recited 
that,  "  said  association  has  been  formed  and  organized  for  the  mutual 
protection  and  relief  of  its  members,  and  for  the  payment  of  stipulated 


186  SOCIETY   PERUN   V.    CLEVELAND. 

suins  of  monej-  to  the  families  or  heirs  of  the  deceased  members  of  said 
association  ;  that  the  officers  of  said  association  have  been  dul^'  chosen  ; 
that  for  tlie  purpose  of  becoming  a  body  corporate  under  an  act  passed 
by  the  o-eneral  assembl}'  of  the  state  of  Oliio,  entitled,  an  act  sup- 
jjieraentary  to  an  act,  entitled  an  act  to  provide  for  the  creation  and 
reo-ulation  of  incorporated  companies  in  the  state  of  Ohio,  passed  Ma^' 
(,  1852,  passed  April  20,  1872  ;  "  (3)  That  this  certificate  was  approved 
bv  the  secretar}'  of  state,  and  also  by  the  attorney-general,  as  provided 
by  the  statutes  (69  Oliio  L.  150)  ;  (4)  That  it  proceeded  in  good  faith 
to  transact  business  peculiar  to  corporations  provided  for  by  the  act 
under  which  it  attempted  to  incorporate. 

All  this  was  excluded,  and  the  decision  of  the  court  below  practically 
rested  on  the  proof  offered  by  the  city,  that  Society  Perun  had  been 
ousted  of  its  franchises,  which  was  evidently  construed  as  determining 
that  such  society  had  from  the  first  no  corporate  existence,  either  de 
jure  or  de  facto,  and  consequently  no  capacity  to  receive  or  impart  any 
interest  in  or  title  to  real  estate  except  as  against  such  parties  as  were 
by  reason  of  their  recognition  of  or  dealings  with  it,  estopped  to  deny 
its  incorporate  existence. 

Did  the  court  err?  This  fairly  presents  the  controlling  and  very  im- 
portant question  :  "Was  it  competent  to  show,  as  against  a  party  who 
was  not  estopped  to  deny  its  corporate  existence,  that  Society-  Perun 
was,  at  the  time  of  the  transactions  involved  in  controversy',  a  corpora- 
tion de  facto? 

In  Attorney-  General  ex  rel.  Pettee  v.  Stevens,  Saxton  (N.  J.  Eq.)  369, 
the  relator  sought  to  enjoin  the  Camden  and  Amboy  R.  R.  and  Trans- 
portation Co.  and  others  acting  under  its  authority  from  erecting  a 
In-idge  over  a  navigable  stream.  The  claim  was  that  the  act  author- 
izing the  corporation  had  been  perverted  and  disregarded,  and  that 
there  was  no  legal  incorporation.  The  relators  were  iii  no  manner 
estopped  to  attack  the  corporate  existence  of  the  respondent.  The 
court  held : 

"  Where  a  set  of  men  claiming  to  be  a  legally  incorporated  company 
under  an  act  of  the  legislature,  have  done  everything  necessary  to  con- 
stitute them  a  corporation,  colorably  at  least,  if  not  legally, ^and  are 
exercising  all  the  powers  and  functions  of  a  corporation ;  they  are  a 
corporation,  de  facto,  if  not  dejure;  and  this  court  will  not  interfere, 
in  an  incidental  wa}',  to  declare  all  their  proceedings  void,  and  treat 
them  as  a  body  having  no  rights  or  powers." 
The  chancellor,  speaking  for  the  court,  said  : 

"  Here,  then,  is  a  set  of  men  claiming  to  be  a  legally  incorporated 
company  under  the  act  of  the  legislature,  exercising  all  the  powers  and 
functions  of  a  corporation.  The}'  are  a  corporation  de  facto,  if  not 
dejure.  P^ver}'  thing  nccessar}'  to  constitute  them  a  corporation  has 
been  done,  colorably  at  least,  if  not  legally ;  and  I  do  not  feel  at 
liberty,  in  this  incidental  way,  to  declare  all  tlicir  proceedings  void,  and 
treat  them  as  a  body  having  no  rights  or  powers.     It  has  been  seen 


SOCIETY    PERUN   V.   CLEVELAXD.  187 

that  the  court  will  not  do  this  where  a  corporation  properly  organized 
has  plainl}-  forfeited  its  privileges  ;  and  there  is  but  little  difference  in 
principle  between  the  two  cases.  In  both  the  corporation  is  actually-  in 
existence,  but  whether  legally  and  rightfully  so  is  the  question.  And 
it  appears  to  me  that  if  the  court  can  take  cognizance  of  the  matter  in 
this  case,  it  must  in  all  others  where  it  can  be  brought  up,  not  only 
directly,  but  incidental!}." 

This  case  is  approved  and  followed  in  N<itional  Docks  R.  Co.  v. 
Central  R.  R.  Co.,  32  N.  J.  Eq.  755,  which  held  :  "  When  a  corpora- 
tion exists  de  facto,  the  court  of  chancery  can  not,  at  the  instance  of 
private  parties,  restrain  its  operations  upon  the  ground  that  its  organi- 
zation is  not  dejure.  In  such  case  the  proper  remedy  is  b}-  quo  vur- 
ranto,  or  information  in  the  nature  thereof,  instituted  b}'  the  attorne}'- 
general."     The  rule  of  estoppel  found  no  place  in  this  case. 

In  S.  &  L.  G.  R.  Co.  v.  >^.  cfc  C  R.  B.  Co.,  45  Cal.  680,  it  was 
held  that:  "  If  a  corporation  de  facto  is  in  the  actual  possession  of  a 
public  highway,  under  a  grant  of  a  franchise  to  improve  and  collect 
tolls  on  the  same,  a  mere  trespasser  can  not  justify  his  entry  thereon 
on  the  ground  that  it  was  only  a  corporation  de  facto,  and  was  not  de 
jure  entitled  to  the  franchise." 

In  Williams  v.  Kokorno  B.  &  L.  Ass'n.,  89  Ind.  339,  one  Leach 
gave  to  an  acting  corporation  his  mortgage  on  real  estate.  Subsequent 
to  the  execution  and  recording  of  it,  he  executed  another  mortgage  on 
the  same  land  to  Williamson.  In  a  proceeding  to  foreclose  the  junior 
mortgage,  Williamson  maintained  that  the  pretended  corporation  had 
no  legal  existence,  by  reason  of  defects  and  omissions  in  the  proceed- 
ings to  incorporate,  and  that  the  senior  mortgage  was  void.  He  was  in 
no  manner  estopped,  by  dealings  with,  or  recognition  of,  the  first  mort- 
gagee to  denj-  its  corporate  existence.  The  court  held  that :  "  A  junior 
mortgagee  can  not  defeat  a  senior  mortgage  by  showing  that  the  corpo- 
ration to  which  the  senior  mortgage  was  executed  was  defectively  or- 
ganized, if  it  be  a  corporation  de  facto."  Elliot,  J.,  said:  "Where 
persons  assume  to  incorporate  under  the  laws  of  the  state,  and  in  part 
comply  with  their  requirements,  assume  corporate  functions  and  trans- 
act business  as  a  corporation,  private  persons  can  not  collaterally 
question  the  right  of  such  an  association  to  a  corporate  existence, 
although  there  has  not  been  a  full  compliance  with  the  provisions  of 
the  statute.  Baker  v.  JVeff,  73  Ind.  68.  This  rule  is  not  limited  to 
cases  where  one  by  contract  admits  corjyorate  existence,  but  is  a  rule 
of  general  application"  It  is  not  easy  to  distinguish  the  principle  of 
this  case  from  that  of  tlie  case  at  bar. 

In  Pajie  v.  Capitol  Bank,  20  Kan.  440,  Pape  and  wife  gave  their 
notes  to  '"James  M.  Spencer  or  beaver,"  and  their  mortgage  on  real 
estate  to  secure  them.  Spencer  transfei-red  the  notes  to  the  Capital 
Bank  of  Topeka,  an  acting  corporation,  with  this  indorsement:  "Pay 
the  bearer,  without  recourse  on  me  ;  James  M.  Spencer."  The  mort- 
gage was  also  transferred  to  the  bank,  which  proceeded  by  suit  to  col* 


188  SOCIETY   PERUN   V.    CLEVELAND. 

Ject  the  notes  and  foreclose  the  mortgage.  Pape  and  wife  interposed 
the  defense  that  the  bank  was  not,  and  never  had  been,  a  bod}'  corpo- 
rate, b}-  reason,  among  others,  of  a  defective  organization.  The  bank 
had  assumed  corporate  functions  after  an  attempt,  in  good  faith,  to  in- 
corporate, and  for  a  number  of  ^^ears  was  in  the  actual  and  notorious 
exercise  of  corporate  franchises.  Pape  had  transacted  banking  business 
with  the  plaintiff  prior  to  the  purchase  of  the  notes  and  mortgage,  but 
such  business  was  wholl}'  unconnected  with  the  notes  and  mortgage  in 
suit.  His  wife,  however,  had  not  in  an}'  manner  recognized  the  exist- 
ence of  the  bank  as  a  corporate  bod}',  and  the  doctrine  of  estoppel  was 
not  invoked  to  aid  the  court  in  sustaining  a  judgment  oif  foreclosure 
against  Pape  and  wife.  Brewer,  J.,  says:  "  Tlie  corporation  is  one 
de  facto  ;  and  only  the  state  can  inquire,  and  that,  in  a  direct  proceed- 
ing, whether  it  be  one  dejure.  .  .  .  There  must,  in  such  cases,  be  a  law 
under  which  the  incorporation  can  be  had ;  there  must,  also,  be  an  at- 
tempt, in  good  faith,  on  the  part  of  the  corporators,  to  incorporate 
under  such  law ;  and  when,  after  this,  there  has  been  for  a  series  of 
years  an  actual,  open,  and  notorious  exercise,  unchallenged  by  the 
state,  of  the  powers  of  a  corporation,  one  who  is  sued  on  a  note  held 
by  such  corporation  will  not  be  permitted  to  question  the  validity  of  the 
incorporation  as  a  defense  to  the  action.  No  mere  matters  of  technical 
omission  in  the  incorporation,  no  acts  of  forfeiture  from  misuser  after 
the  incorporation,  are  subjects  of  inquiry  in  such  an  action.  This  is 
not  upon  tJie  ground  of  equitable  estoppel  but  upon  grounds  of  public 
•policy.  If  the  state,  which  alone  can  grant  the  authority  to  incorporate, 
remains  silent  during  the  open  and  notorious  assertion  and  exercise  of 
corporate  powers,  an  individual  will  not,  unless  there  be  some  powerful 
equity  on  his  side,  be  permitted  to  raise  the  inquiry." 

Ixv  Thompson  \ .  Candor,  60  III.  244,  Willetts,  in  February,  1858, 
deeded  to  "  Mercer  Collegiate  Institute,"  a  body  pretending  to  be  a 
corporation,  the  tract  of  land  in  controversy.  He  died  in  March,  1858. 
In  1«G8  his  heirs  quit-claimed  their  interest  in  the  land  to  Thompson, 
who  filed  a  bill  in  chancery  for  the  cancellation  of  the  deed  from  Wil- 
letts to  the  "Institute,"  alleging,  as  one  of  the  grounds  of  relief,  that 
the  named  grantee  was  not  legally  incorporated  —  had  no  capacity  to 
take  tlie  title,  and  tliat  the  deed  was  void.     The  court  held : 

*'  Where  parties  endeavor  to  organize  a  corporation  for  educational 
purposes,  under  the  general  law,  adopt  a  name,  elect  trustees,  and  or- 
ganize by  electing  a  president  and  oflicers,  and  the  trustees  had  acted 
for  years  in  managing  the  property,  had  leased  and  mortg:iged  it,  and 
expended  a  large  sum  of  money  in  its  im[)rovement,  these  acts  consti* 
tute  it  a  corporate  body  de  facto,  and  the  regularity  of  its  organization 
can  not  be  questioned  collaterally.  Such  irregularity  can  only  be  ques- 
tioned by  quo  vmrranto  or  scire  facias." 

Tliornton,  J.,  says:  "In  1856  an  attempt  was  made  to  organize  a 
coriKjration  under  the  general  incorporation  law.  A  corporate  name 
was  selected,  trustees  were  appointed,  and  an  organization  effected  b^ 


SOCIETY   PERUN   V.    CLEVELAND.  189 

the  election  of  a  president  and  proper  officers.  The  trustees  thus  ap. 
pointed  acted  for  3'ears  in  the  general  management  of  the  propert}', 
leased  and  mortgaged  it,  and  expended  a  large  amount  of  money. 
Here  then  was  a  corporate  body  de  facto,  which  had  been  engaged 
in  an  undertaking  involving  important  interests.  The  regularity  of  its 
organization  can  not  be  questioned  collaterally.  Any  alleged  non- 
compliance with  the  law  can  only  be  inquired  into  b}'  the  writ  of  quo 
loarranto  or  scire  facia s y 

There  is  no  suggestion  throughout  the  entire  case  of  the  rule  of 
estoppel  as  an  element  affecting  its  disposition. 

In  Paper  Works  v.  Willett,  1  Robertson  (N.  Y.  Sup.),  131,  it  is  held 
that  formal  defects  in  proceedings  to  organize  a  corporation  are  not 
available  to  defeat  an  action  brought  by  a  corporation  for  trespass  in 
wrongfully  taking  property  out  of  its  possession. 

See  also,  as  illustrating  the  principle  under  discussion  :  Smith  v. 
Sheeley,  12  Wall.  361  ;  Grand  Gulf  Bank  v.  Archer,  8  S.  &  M.  151, 
173;  Dunning  v.  R.  R.  Co.  2  Carter  (Ind.),  437;  Dannebroge  Min- 
ing  Co.  v.  Ailment.,  26  Cal.  286  ;  Searsburgh  Turnpike  Co.  v.  Cutler.^ 
6  Vt.  315  ;  Mitchell  v.  Deeds,  49  111.  416  ;  Eliz.  Academy  v.  Lindsey, 
6  Ired.  476  ;  Darst  v.  (?a/e,83  111.  136  ;  Rondellv.  Fay,  32  Cal. 354  ; 
De  Witt  v.  Bastings,  40  N.  Y.  (Superior  Court)  463  ;  Rice  v.  R.  R. 
Co.,  21  111.  93  ;  Douglas  County  v.  Bolles,  94  U.  S.  104  ;  The  Banks, 
V.  Poitiaux,  3  Randolph  (Va.),  136  ;  Goundie  v.  Northampton  Water 
Co.,  7  Pa.  St.  233  ;  Baker  v.  Backus,  32  111.  79  ;  Tarbell  v.  Page,  24 
111.  46  ;  Thornhurgh  v.  B.  B.  Co.,  14  Ind.  499  ;  Tar  Biver  Nav. 
Co.  v.  Neal,  3  Hawks,  520 ;  Bear  Camp  Biver _  Co.  v.  Woodman, 
2  Me.  404. 

In  Jones  v.  Dana,  2 A  Barb.  395,  it  was  held  that  if  a  company  has 
in  form  a  charter  authorizing  it  to  act  as  a  body  corporate,  and  is  in 
fact  in  the  exercise  of  corporate  powers  at  the  time  of  taking  a  note 
from  an  individual,  it  is,  as  to  him  and  all  third  persons,  a  corporation 
de  facto,  and  the  validitj'  of  its  corporate  existence  can  onl}'  be  tested 
by  proceedings  on  behalf  of  the  people. 

In  the  case  at  bar,  the  certificate  which  was  last  filed  by  the  society 
embraced  a  full  statement  of  the  objects  of  incorporation  and  indicated 
what  the  nature  of  its  business  must  necessarily  be,  and  was  strongly 
suggestive  of  the  manner  in  which  it  must  necessarily  be  transacted  ; 
and  while  it  is  not  our  purpose  to  call  in  question  the  action  of  this  court 
in  the  quo  warranto  proceedings,  we  have  no  hesitation  in  sa3ung  that  if 
we  were  now  called  upon  to  determine  whether  the  corporate  life  of 
Society  Perun  should  be  taken,  the  question,  upon  the  facts  offered  in 
proof  at  the  trial  below,  would  not  be  free  from  doubt  and  difficulty. 
It  is  ver}'  clear  that  the  proceedings  to  incorporate  were  colorable  ;  and 
so  far  as  this  fact  is  a  test  of  the  existence  of  a  corporation  de  facto, 
it  is  most  amply  established.  That  there  was  proof  of  user  is  mani- 
fest from  the  evidence  which  was  received  without  objection. 

That  the  judgment  of  ouster  did  not  and  could  not  have  a  retroactive 


190  SOCIETY   PERUN   V.   CLEVELAND. 

effect  upon  the  rights  of  the  societ}',  and  of  parties  who  had  dealt  with 
it  during  its  de  facto  existence,  is  suggested  by  the  opinion  of  Wright,  J., 
in  G"fv.  Flesher,  33  Ohio  St.  115. 

The  evidence  which  was  offered  and  exchided  would,  if  credited, 
have  shown  Society-  Perun  capable  of  holding  and  transferring  the  legal 
title  to  the  lands  in  controversy.  Walsh  v.  Barton^  24  Ohio  St.  43  ; 
BarA  V.  Gale,  83  111.  136  ;  Shewalter  v.  Pirner,  55  Mo.  218  ;  JSTat. 
Bank  v.  3Iatthews,  98  U.  S.  628  ;  Go%mdie  v.  Northampton  Water 
Co.,  7  Penn.  St.  233  ;  Barrow  v.  Nashville  Turn.  Co.,  9  Humph.  304  ; 
Kelly  V.  People's  Trans.  Co.,  3  Ore.  189 ;  Bogardus  v.  Trinity 
Church,  4  Sandf  Ch.  758. 

The  public  and  all  persons  dealing  with  this  society  were  justified  in 
assuming  that  the  certificate  filed  with  the  secretary'  of  state,  and  by 
him  admitted  to  record  in  his  oflflce,  had  been  approved  by  him,  and 
also  b}'  the  attorne3'-general,  as  required  by  statute  (69  Ohio  L.  150), 
and  that  it  so  far  conformed  to  all  legal  requirements  that,  as  provided 
in  section  2  of  the  act  of  incorporation  (69  Ohio  L.  83),  "  a  copj-, 
duly  certified  by  the  secretary  of  state,  under  the  great  seal  of  the  state 
of  Ohio,  shall  be  evidence  of  the  existence  of  such  association." 

It  would  seem  that  such  approval,  record,  and  certificate,  followed 
b}-  uninterrupted  and  unchallenged  user  for  nearl}'  six  years,  of  all  of 
which  proof  was  tendered,  would  constitute  a  corporation  de  facto,  if 
such  a  body  is,  under  any  circumstances,  entitled  to  legal  recognition. 

The  highest  considerations  of  public  policy  and  fair  dealing  protest 
against  treating  such  an  organization  as  a  nullity,  and  all  of  its  trans- 
actions void. 

The  principle  of  the  above  cases  is  to  be  distinguished  from  a  case 
where  a  mere  corporation  de  facto  attempts  to  assert  the  power  of  emi- 
nent domain  by  tlie  appropriation  of  private  property  to  public  use. 
It  has  been  held  that  the  exercise  of  tliis  right  (which  is  but  a  delega- 
tion of  the  sovereign  power  of  the  state),  depends  upon  the  sufficiency 
and  legal  validity  of  the  certificate  of  incorporation  and  public  record 
of  its  organization.  B.  B.  Co.  v.  Stdlivant,  5  Ohio  St.  276  ;  Atkinson 
V.  B.  B.  Co.,  15  Ohio  St.  21. 

The  case  of  Baccoon  Biver  Nav.  Co.  v.  JEJagle,  29  Ohio  St.  238,  is 
relied  upon  by  the  defendant  in  error.  It  was  an  action  to  recover 
upon  a  stock  subscription.  A  plea  of  md  tiel  corporation  was  inter- 
posed. Tiie  plaintiff  claimed  to  be  organized  under  an  act  to  authorize 
the  incorporation  of  companies  "  for  the  purpose  of  improving  any 
stream  of  water  .  .  .  declared  navigable  by  any  law  of  the  state  of 
Ohio."  On  the  trial  the  plaintiff  offered  in  evidence  a  certificate 
by  which  it  appeared  that  the  company  was  formed  for  the  pur- 
pose of  improving,  etc.,  Big  Raccoon  river.  Unfortunately  there  was 
no  navigable  stream  in  Ohio  by  that  name.  No  other  testimony  was 
offered.  There  was  no  proof  of  user.  There  was  no  defect  in  the 
form  of  the  proceedings  to  incorporate,  but  an  attempt  to  organize  and 
Incorporate  for  a  purpose  impossible  of  accomplishment.     There  was 


BRADLEY  V.    REPPELL.  191 

neither  a  de  jure  nor  de  facto  corporation.     Judgment  was  properly 
rendered  for  defendant. 

In  excluding  proof  of  what  was  actuall}'  done  looking  to  the  incor- 
poration of  Society  Perun,  and  of  the  subsequent  acts  of  user,  which 
was  offered  in  evidence,  there  was  error,  for  which  the  judgment  in  the 
first  entitled  case  (as  well  as  that  in  the  same  plaintiff  against  Hay  et 
al.,  which  was  tried  with  it  and  involves  the  same  general  questions) 
are  reversed.  Numerous  other  questions  are  presented  by  the  volumi- 
nous records  in  these  cases,  but  as  the}'  all  depend  upon  the  one  cen- 
tral and  controlling  question  discussed  above,  and  as  the  disposition 
here  made  of  the  cases  must  lead  to  a  re-trial  in  the  light  of  the  prin- 
ciples indicated  in  this  opinion,  they  are  not  separately  considered. 

J   ^j/^.   V**         ^  W   (J  Judgment  reversed. 

-  ,.   'h\  ^^    — ee—  I    ->, 


U^'^ 


V-    ,v.    BRADLEY  et  als.  v.  REPPELL. 

,1/         <>  n   ^  October  Term,  1895.     Supreme  Court  of  Missouri,  Division  No.  \} 

\J^  Brace,  P.  J.     This  is  an  action  in  ejectment  in  common  form 

'^  '^    recover  the  possession  of  certain  lands  described  in  the  petition,  situat^l^    i'    ^    n 

in  Kansas  City;  instituted  in  the  Circuit  Court  of  Jackson  County, nt^^/H^      ^ y 
taken  thence  by  change  of  venue,  and  tried,  in  the  Circuit  Court     " 
Clay  County. 

The  answer  was  a  general  denial,  and  a  plea  of  the  statute  of  limita- 
tions as  to  a  part  of  the  land,  and  no  claim  as  to  the  remainder.  Issue^ 
was  joined  by  repl}'. 

On  the  trial,  at  the  close  of  the  plaintiff's  evidence,  the  court  sus-ji/T^  | 
tained  a  demurrer  to  the  evidence  as  to  the  plaintiff  T.  C.  Bradley,  and-f^ 
overruled  it  as  to  the  other  plaintiffs,  Samuel  F.  Freeman  and  the  Atlas      v^ 
Investment  Company.     The  trial  then  proceeded,  and  after  all  the  evi' 
dence  was  heard,  the  issue  was  submitted  to  the  jury,  who  returned 
verdict  for  the  defendant.     Thereupon  plaintiffs  tiled  motions  for  new 
trial  and  in  arrest  of  judgment.     The  motion  for  new  trial  coining  on 
to  be  heard,  was  sustained  and  the  verdict  set  aside  on  the  followinw^ 
grounds,  "  specified  of  record." 

"  9th.    Because  the  Court  erred  in  refusing  to  admit  as  evidence  a  certifie 
copy  of  the  Warranty  Deed  dated  August  20,  1880,  from  the  West  Kans 
City  Land   Company  to  Charles  W.  Whitehead,  which   certified  copy  wasM 
offered  in  evidence  by  plaintiff.  .  ^      m^       z 

loth.  Because  the  Court  erred  in  refusing  to  admit  as  evidence  the  certi-^^'V)  "-^tlr^ 
fied  copy  of  the  Quit  Claim  Deed  from  the  West  Kansas  City  Land  CompanyC^l  < ''  '  * 
to  Charles  W.  Whitehead,  which  is  offered  in  evidence  by  the  plaintiff."      .    a  ,        -a*       ,       ^   . 

From  the  order  sustaining  this  motion  and  setting  aside  the  verdict,  i/ "^/yv^       V^ 
the  defendant  appeals.  -^'3^      Qr\ 

(1).   By  a  Special  Act  of  the  Legislature  approved  March  14,  I859h[^,r^  ^  \j  ', 

1  From  copy  of  opinion  furnished  by  Clerk  of  Supreme  Court.  K*^  A^it-S        ?W  il      (^ 


192  BRADLEY  V.    REPPELL. 

(Sess.  Acts,  1858,  p.  292),  The  "West  Kansas  Cit}'  Land  Company 
was  incorporated  with  power  "  to  make  contracts,  sue  and  be  sued," 
and  to  "  purchase  and  hold  any  quantity  of  land  in  Kaw  township  in 
Jackson  County,  Missouri,  not  exceeding  one  tliousand  acres ;  to  lay 
the  same  off  into  parks,  squares,  and  lots,  improve,  sell  or  conve}'  the 
same  by  deed  ;  to  re-purchase  and  re-convey  any  portion  of  the  same, 
when  necessar}'  in  transacting  the  legitimate  business  of  said  com- 
pany ;  and  purchase  and  hold  any  personal  property  necessary  for  the 
purposes  above  indicated."  Nothing  was  said  in  the  act  either  directly 
or  indirectl}'  as  to  the  duration  of  the  company's  corporate  existence. 
By  the  general  law  in  force  at  the  time  this  compan}'  was  thus  incor- 
porated it  was  provided  that  "  P^verj-  corporation,  as  such,  has  power, 
to  have  succession  by  its  corporate  name  for  the  period  limited  in  its 
charter  and  when  no  period  is  limited,  for  twenty  years."  R.  S.  1855, 
Vol.  1,  p.  369.  Sec.  1.  ""  And  that  upon  the  dissolution  of  any  cor- 
poration, the  president  and  directors  or  managers  of  the  affairs  of  the 
corporation  at  the  same  time  of  the  dissolution  shall  be  trustees  of 
such  corporation  with  full  power  to  settle  its  affairs."  R.  S.  1855, 
Vol.  1,  p.  375,  Cap.  34,  Sec.  24.  The  corporation  thus  chartered  was 
an  ordinary  business  corporation  whose  corporate  existence  b}-  virtue 
of  these  statutory  provisions  expired  on  the  14th  of  March,  1879, 
State  ex  rel.  vs.  Payne,  29  Mo.  468,  and  the  two  deeds  rejected 'by  the 
court  upon  the  trial  were  executed  after  that  date  in  the  name  and 
under  tho  corporate  seal  of  the  company  "  b}'  "William  McCo}',  Presi- 
dent." "Attest:  Edw.  A.  Allen,  Secretar}'."  The  defendant  objected 
to  the  introduction  of  these  deeds  offered  in  evidence  by  the  plaintiffs  as 
constituting  a  part  of  their  chain  of  title,  and  in  support  of  his  objec- 
tions read  in  evidence  the  Act  of  the  Legislature  aforesaid  incorporat- 
ing said  company,  and  it  was  admitted  that  said  company  in  whose 
behalf  said  deeds  bad  been  so  executed,  was  the  same  compan}-  by 
said  act,  incorporated,  and  that  it  was  never  thereafter  re-incorporated. 
The  defendant's  claim  of  title  was  b}'  adverse  possession,  and  there  is 
not  in  the  case  any  question  of  estoppel  to  den}'  the  existence  of  the 
corporation  by  reason  of  the  relation  sustained  by  the  defendant  to  the 
land  company,  or  of  any  dealings  by  him  directl}-  or  indirectly  with  it, 
or  any  person  connected  with,  or  representing  it.  Why  then  should 
the  defendant  be  precluded  from  showing,  by  the  law  that  gave  that 
company  its  corporate  existence,  that,  at  the  time  these  deeds  were 
made,  it  was  dead,  incapable  of  executing  a  legal  convej'ance  of  the 
real  estate  in  question,  and  that  said  deeds  were  tlierefore  void,  and  no 
evidence  of  title?  The  answer  returned  by  the  counsel  for  plaintiffs  to 
this  question  is,  "  That  it  is  the  settled  law  of  this  State  that  a  con- 
veyance to,  or  b}'  a  corporation  de  facto  can  be  assailed  on  the  ground 
of  lack  of  corporate  existence  only  by  the  State." 

This  answer  does  not  meet  the  question,  unless  it  be  assumed  that  a 
cor{)oration  wiiosc  corporate  existence  has  expired  b}-  the  terms  of  the 
law  whicli  created  it,  still  exists  as  a  de  facto  corj)oratiou  as  to  all  per- 


BRADLEY  V.    REPPELL.  193 

sons  except  the  State,  an  assumption  that  we  think  is  not  sustained  by 
the  authorities  cited,  and  is  not  ''  the  settled  law  in  this  State."  £)n 
the  contrar}',   in_this   State,  as^jsewhcI^e,_unlessoLherwisp  prnvirlpfi  . 

bx^statute,  the  law  is,  that  whei'e  the  term  of  the  existence  of  a  cor-  w 
poration  is  fixed  b}'  its  charter  or  the  general  law,  upon  the  expiration 
of  that  term,  the  corporation  becomes  ipso  facto  dissolved  ;  it  can  no 
longer  act  in  a  corporate  capacity,  and  its  title  to  propeity  ceases. ,  2 
Beach  on  Private  Cor.  Sec.  780;  2  Morawetz,  Sec.  1031.  In  such  an 
event  in  this  State  the  title  to  its  property  is  b}-  statute  devolved  upon 
trustees  for  the  settlement  of  its  affairs  and  the  distribution  of  its 
assets.  R.  S.  1855  supra,  R.  S.  1889,  Sec.  2513  ;  and  thereafter  it  has 
no  power  to  make  a  legal  contract  or  convey  property  in  its  corporate 
name  and  capacity.  It  ceases  to  be  a  corporation,  dejnre  et  de  facto, 
for  the  reason  that  there  is  no  law  in  force  authorizing  its  existence, 
and  no  law  by  virtue  of  which  it  might  exist,  and  no  person  unless 
estopped  by  his  own  action,  ought  to  be,  or  can  be  precluded  from 
showing  this  fact,  apparent  on  the  face  of  the  law  itself,  without  the 
necessit}' of  any  judicial  investigation;  in  an  issue  involving  his  own 
personal  rights  and  interests. 

An  examination  of  the  authorities  cited  by  counsel  for  respondents, 
and  of  all  the  other  cases  touching  this  question,  will  show  that  it  has 
never  been  otherwise  ruled  in  this  State,  nor  elsewhere  so  far  as  we 
have  been  able  to  discover. 

The  first  case  cited  by  counsel  for  respondent  ]\IcIndoe  vs.  St.  Louis, 
10  Mo.  576,  does  not  touch  the  question,  side,  edge,  or  bottom 

The  cases  of  Cham.bers  v.  St.  Louis,  29  Mo.  543  ;  Land  v.  Coffman, 
50  Mo.  243  ;  Shewalter  v.  Pirner,  55  Mo.  218  ;  and  Conn.  Mutual  Life 
Ins.  Co.  vs.  Smith,  117  Mo.  26  ;  go  no  farther  in  the  direction  of  our 
present  inquiry  than  to  hold  that  where  an  existiiig  corporation  has 
power  to  acquire,  hold  and  dispose  of  land  the  question  whether  such 
corporation  has  transcended  the  limits  of  such  power  in  respect  thereto 
can  only  be  raised  and  determined  in  a  direct  proceeding  by  the  State 
against  the  corporation.  But  this  falls  far  short  of  the  question  here  ; 
which  goes  to  the  fact  of  the  existence  of  the  corporation,  conceded  in 
these  cases. 

It  is  also  well  settled    law  that  one  who  has    contracted  with   an  / 
organization    as    a    corporation,   in    its  corporate    name,  is   estopped/ 
from  denying  the  existence  of  such  corporation  at  the  time  of  making/ 
the  contract,  or  of  alleging  any  defect  in  its  organization  affecting  its! 
capacity  to  contract    or  sue  as  a   corporation    upon   such    contract.^ 
4  Thomp.  Corp.  5275  ;  4  Am.  &  Eng.  P^ncycl.  of  law,  p.  198  and  cases  ' 
cited  note  1,  p.  199  ;  2  Morawetz  Priv.  Corp,  Sec.  750,  753  ;  Beach 
on  Corp.,  Sec.  13.     And  so  it  has  been  ruled  in  this  state  in  many 
cases,  including  those  next  cited  in  the  brief  of  counsel  for  respond- 
ent.    Ohio  &  M.  R.  R.  Co.  vs.  McPherson,  35  Mo.   13  ;    Farmers  & 
Merchants  Ins.  Co.  v.  Needles,  52  jNIo.  18  ;  City  of  St.  Louis  v.  Sliield, 
62  Mo.  247  ;  Stoutimore  vs.  Clark,  70  Mo.  471  ;  Studcbaker  Bros.  v. 


6 


194  BKADLEY  V.    EEPPELL. 

Mont<yomery,  74  Mo.  101  ;  St.  Louis  Gas  Light  Co.  v.  Citv  of  St.  Louis, 
84  Mo.  302,  affirming  U  Mo.  App.  55  ;  Broadwell  v.  Menitt,  87  Mo. 
95  •  Grandv  Mining  Co.  vs.  Ricliards,  95  Mo.  106.  Of  course  such 
estoppel  extends  as  well  to  the  privies  of;  as  to  the  parties  to  such 
contracts.  '  Hasenritter  v.  Hirchhoffer,  79  Mo.  239  ;  Ragan  v.  Mc- 
Eh'ov,  98  :\Io.  349  ;  Broadwell  v.  Merritt,  87  Mo.  95  ;  Reinliard  v. 
Va.  Lead  Mining  Co.  107  Mo.  616.  The  rulings  in  none  of  these  cases, 
however,  support  the  contention  that  the  deeds  should  have  been  ad- 
mitted in  evidence  in  the  case  in  hand,  in  which,  as  has  been  alreadj' 
seen,  there  is  no  question  of  estoppel. 

Nor  do  the  cases  of  Finch  v.  Ullraan,  105  Mo.  255,  or  Crenshaw 
V.  Ulluian,  113  Mo.  633,  cited  by  plaintiff's  counsel;  in  which  it 
was  ruled  where  there  was  a  law  authorizing  the  existence  of  a  cor- 
poration, at  the  time  when  the  organization  assumed  to  act,  and  did 
act  as  such  corporation,  —  that  its  corporate  existence  as  to  such  act 
could  not  be  called  in  question  in  a  collateral  proceeding ;  sustain 
respondent's  contention.  It  is  true  in  these  and  other  cases,  it  is 
sometimes  broadly  stated  as  settled  law,  in  substance,  "  that  a  trans- 
fer of  property  to  or  by  a  corporation  cle  facto  will  be  binding  and 
valid  as  against  all  parties  except  the  state,"  but  this  is  simply  a  re- 
statement in  another  form  of  the  proposition  ruled.  It  implies  that 
the  case  is  one  in  which  a  corporation  ma}'  by  law  exist,  for  there  can 
be  no  corporation  de  facto  when  there  cannot  be  a  corporation  de 
jure.  1  Beach  on  Priv.  Corp.  Sec.  13;  4  Thomp.  Corp.  Sec.  523- 
5275  ;  at  least  as  to  an}'  person  who  is  not  precluded  by  his  own 
action,  or  that  of  those  under  whom  he  claims,  from  questioning  its 
existence.  Whatever  may  be  the  rule  as  to  these,  as  to  all  other  per- 
sons, there  must  be  at  least  color  of  law  for  its  corporate  existence  t« 
preclude  such  inquiry,  and  it  would  seem  to  go  without  saying,  that 
a  law  which  gives  existence  to  a  corporation  for  a  certain  number  of 
years  at  the  end  of  which  time  it  must  surely  die,  cannot  give  color 
to  its  corporate  existence  after  the  date  of  its  death  as  decreed  by  the 
terras  of  that  same  law. 

Judge  Thompson  in  his  recent  work  on  Private  Corporations  says : 
"  There  is  much  judicial  authority  for  the  proposition  that  where  a  corpora- 
tion is  brought  to  an  end  by  the  lapse  of  time,  that  is,  by  the  expiration  of 
tiie  distinct  limitation  of  its  life  in  its  charter,  any  further  exercise  of  its  cor- 
porate powers,  may  be  questioned  collaterally.  Tlie  governing  principle  here 
is  that  upon  the  expiration  of  the  time  limited  by  the  charter  for  the  existence 
of  the  corporation  its  dissolution  is  complete.  '  The  dissolution  in  such  case,' 
it  has  been  said,  '  is  declared  by  the  act  of  the  Legislature  itself.'  Tlie  lim- 
ited time  of  existence  has  expired,  and  no  judicial  determination  of  that  fact 
is  requisite.  The  corporation  is  de  facto  dead."  Thomp.  Corp.  Sec.  580,  cit- 
ing in  support  of  the  text.  People  v.  Manhatten  Co.,  9  \Veud.  N.  Y.  3.Jl ;  Mor- 
gan V.  Lawrenceburg  Ins.  Co.,  3  Ind.  285;  Wilson  v.  Tesson,  12  Ind.  285; 
Grand  riai)i(l8  Bridge  Co.  v.  Prague,  35  ]\lich.  400;  Dobson  v.  Simonton,  86 
N.  C.  4t)2;  Sturges  v.  Vanderbilt,  73  N.  Y.  381;  Bank  of  U.  S.  v.  Mcl^augh- 
liu,  2  Cranch  C.  C  (U.  S.)  20.     Further  on  in  the  same  section,  however,  he 


BRADLEY  V.   EEPPELL.  195 

says:  "On  the  other  hand  it  has  been  ruled  in  Missouri,  tliat  the  qupstion 
•wliether  the  charter  of  a  corporation  has  expired  by  limitation  of  time,  can  be 
adjudicated  only  in  a  direct  proceedine^  by  the  State,  that  such  a  defense  can- 
not be  set  up  collaterally  in  an  action  by  the  corporation,"  —  citinij  the  single 
case  of  St.  Louis  Gas  Light  Co.  v.  City  of  St.  Louis,  84  Mo.  202,  affirming  11 
Mo.  App.  55. 

In  Sturges  v.  Vanderbilt,  supra,  decided  in  1878,  Rapallo  J.  said.- 
♦'Tt  is  further  claimed  that  until  a  corporation  is  declared  dissolved  by  Ju- 
dicial decree,  creditors  may  proceed  against  it  by  its  corporate  name,  and  that 
it  remains  in  essp  until  formally  adjudged  dissolved.  All  the  cases  cited  in 
support  of  this  proposition  relate  to  a  dissolution  in  con.sequence  of  insolvency; 
or  non  user,  or  mis-user  of  the  corporate  franchises,  or  some  other  cau.se  of 
forfeiture.  In  such  cases  it  is  well  settled  that  the  dissolution  does  not  take 
effect  until  judicially  declared.  But  the  principle  upon  which  that  class  of 
cases  rests,  is  not  applicable  to  a  dissolution  by  expiration  of  the  charter. 
The  dissolution  in  such  case  is  declared  by  the  act  of  the  Legislature  itself. 
The  limited  time  of  existence  has  expired,  and  no  judicial  determination  of 
that  fact  is  requisite.  The  corporation  is  de  facto  dead.  People  v.  Walker,  17 
N.  Y.  503;  Greely  v.  Smith,  3  Story  C.  C.  R.  658.  Where  the  charter  of  a 
corporation  is  annulled  by  act  of  the  legislature  the  corporation  is  extinct  and 
no  judgment  can  be  rendered  against  it  (Mumma  v.  Potomac  Co.,  8  Pet.  286; 
^Merrill  v.  Suffolk  Bank,  31  ]\Ie.  57).  "We  have  been  referred  to  no  authority 
holding  a  contrary  doctrine." 

After  a  very  extended  search  for,  and  a  careful  examination  of,  the 
cases,  both  before  and  since  the  date  of  this  decision,  we  also  have 
been  unable  to  find  any  authority  contrarv  of  this  doctrine  ;  unless  it 
can  be  found  in  the  Gas  Light  Co.  case  above  cited  by  Judge  Thomp- 
son or  in  Miller  v.  Coal  Co.  81  W.  Va.  83G  also  cited  by  him,  and  to 
these  cases  our  attention  will  now  be  directed. 

In  St.  Louis  Gas  Light  Co.  v.  City  of  St.  Louis,  which  was  an  action 
by  a  corporation  upon  a  written  contract  entered  into  between  plaintiff 
and  defendant,  the  defendant  claimed  that  the  plaintiff  could  not  main- 
tain its  action  thereon,  because  its  corporate  life  had  expired  before 
the  making  of  the  contract   and  the  institution  of  the  suit.      Uponi 
this  claim  the  court  ruled,  that,  the  defendant  having  b}-  entering  into/ 
the  contract  with  the  plaintiff  admitted  the  capacity  of  the  plaintiff  tol 
enter  into  a  binding  obligation  as  a  corporation,  the  defendant  was] 
estopped  to  deny  plaintiffs  corporate  existence,  when  sued  upon   a) 
promise  contained  in  such  contract.     After  having  b}'  this  ruling  fully 
covered  the  point  in  issue,  Judge  Thompson,  who  delivered  the  opinion 
of  the  court,  in   the  same  connection,  closed  this  paragraj)h  of   his 
opinion  b}-  adding  the  following  dicta:    "Whether  or  not  its  charter 
has  expired  b}'  limitation  is  a  question  which  cannot  be  adjudicated  in 
a  collateral  proceeding  such  as  this.     It  can  only  be  raised  in  a  direct 
proceeding  between  the  state  of  3I!ssouri  and  the  defendant.     City  of 
St.  Louis  vs.  Shields,  62  Mo.  247,  251."    The  case  cited  by  the  learned 
judge  was  one  in  which  it  was  sought  to  draw  in  question  the  constitu- 
tionalitv  of  an   act  incorporating  the  plaintifT,  in  which  the  court  held 
that  the  act  was  constitutional,  and  further  that  the  defendant  having 


196  BRADLEY  V.  EEPPELL. 

entered  into  the  contract  with  the  city  admitted  its  corporate  capacity 
and  was  estopped  from  denying  it  in  an  action  upon  sucli  contract. 
While  the  latter  ruling  supports  the  ruling  in  the  case  in  which  it  is 
cited  b\'  Judge  Thompson,  and  is  in  harmony  with  all  the  cases,  it 
does  not  support  his  dicta  therein,  that  the  question  whether  the  char- 
ter of  the  corporation  has  expired  by  limitation  "  can  only  be  raised  in 
a  direct 2^roceedlng  betioeen  the  State  of  Missotiri  ayid  the  defendant y 
The  dicta  being,  then,  obiter^  to  the  case  then  in  hand,  and  unsup- 
ported b}'  the  case  cited  for  it,  is  not  to  be  regarded  as  authority-.  In 
the  case  of  Miller  v.  Coal  Co.  31  West.  Va.  836,  it  was  held,  under  the 
statute  of  that  state,  providing,  in  effect,  that  when  a  corporation  shall 
expire  or  be  dissolved,  suits  may  be  brought,  continued  or  defended,  prop- 
erty convej^ed,  and  all  lawful  acts  be  done  in  the  corporate  name  in  the 
•^ike  manner  and  with  like  effect  as  before  such  dissolution  or  expiration 
hO  far  as  is  necessary  to  wind  up  its  affairs  :  That,  a  corporation  con- 
tinuing in  business,  and  committing  a  tort  after  the  expiration  of  the  term 
of  its  existence,  as  provided  by  its  charter,  was  precluded  from  setting 
up  the  expiration  of  its  corporate  existence  as  so  provided  in  an  action 
against  it  by  the  person  injured  by  such  tort.  Here  we  have  a  law  by 
which  the  corporation  might  exist  for  certain  purposes  after  its  charter 
term  had  expired,  and  a  state  of  facts  which  precluded  the  corporation 
from  denying  its  existence  ;  in  other  words  :  law  for  the  existence  of  the 
corporation^  and  an  estoppel  to  deny  it.  These  two  elements  are  alike 
wanting  in  the  proposition  of  the  dicta  of  Judge  Thompson,  and  in  the 
facts  of  the  case  under  consideration,  and  tliis  West.  Va.  case,  no  more 
than  the  case  of  the  St.  Louis  Gas  Light  Co.  v.  St.  Louis,  11  Mo.  55  {the^ 
riding  in  xchich.,  but  7iOi  the  dicta^  was  approved  in  84  Mo.  202)  is  author- 
ity for  his  proposition  or  the  respondent's  contention  in  the  case  in  hand. 

We  are  cited  by  counsel  for  respondent  to  one  other  case,  which  has 
not  3'et  been  noticed,  the  case  of  the  Catholic  Church  v.  Tobein,  82 
Mo.  418,  in  which  it  was  held  that  the  plaintiff  suing  as  a  corporation 
acquired  no  right  to  property  devised  to  an  unincorporated  organiza- 
tion of  the  same  name,  by  a  will  which  took  effect  before  the  plaintiff 
was  incorporated. 

It  cannot  be  seen  how  this  case  can  in  any  waj'  support  the  re- 
spondent's contention.  On  the  contrary  the  ruling  could  have  been 
made  only  upon  an  inquiry  and  finding  that  the  alleged  corporation 
was  non-existent  at  the  time  the  will  took  effect.  It  was  non-existent 
then  because  there  was  no  law  authorizing  its  existence.  If  inquiry 
could  be  legitimately  made  in  that  case  whether  there  was  any  law  in 
force  authorizing  the  existence  of  that  corporation,  why  can  not  a  like 
inquiry  be  made  in  the  present  case?  The  defendant  was  not  pre- 
cluded from  making  such  inquiry  by  any  act  of  his  own,  or  of  an}'' 
other  person  under  whom  he  claimed.  lie  did  not  propose  to  bring  in 
question  the  validity  of  any  law,  authorizing  tlie  existence  of  the  cor- 
poration at  the  time  these  deeds  were  made,  or  the  regularity  or 
validity  of  the  corporation  organized  under  such  a  law,  or  the  validity 


BRADLEY   V.    REPPELL.  197 

of  any  of  the  acts  of  such  corporation  to  determine  which  would  re- 
quire judicial  investigation  ;  but  simply  to  show  by  the  law  which  once 
had  given  corporate  existence  to  the  AVest  Kansas  City  Land  Company 
that,  at  the  time  those  deeds  purport  to  have  been  executed,  that  cor- 
poration had  ceased  to  exist,  and  could  not  have  executed  thera.  Ui)on 
no  principle  of  law  with  which  we  are  familiar  can  he  be  precluded 
from  so  doing,  and  we  think  no  well-considered  case  can  be  found,  that 
properly  understood,  gives  support  to  a  ruling  to  that  effect.  We  have 
been  speaking  of  the  law  of  the  company's  existence  as  a  unit,  for  we 
fail  to  discover  how  the  fact  that  the  limit  of  the  term  of  existence, 
being  contained  in  the  general  law,  and  not  in  the  special  Act,  can  in 
any  wa}'  affect  the  principle  we  have  been  discussing.  The  general 
law  became  a  part  of  the  charter  of  the  companj-  at  the  moment  of  its 
creation,  and  must  be  read  into  it,  the  same  as  if  it  had  been  written 
therein.  It  follows  from  what  has  been  said  that  the  trial  court  com- 
mitted [no]  error  in  rejecting  the  deeds  aforesaid  when  offered  in  evi- 
dence by  the  plaintiffs,  and  that  it  did  commit  error  in  setting  aside 
the  verdict  for  defendant,  and  granting  a  new  trial  on  the  ground  that 
it  did  commit  error  in  refusing  to  admit  said  deeds  in  evidence. 

We  can  review  cases  only  upon  the  record  made  by  the  trial  court, 
autlienticafed  to  us  in  the  manner  provided  b}-  law,  and  having  thus 
reviewed  this  case  and  found  that  the  trial  court  committed  error  in 
setting  aside  the  verdict  and  granting  a  new  trial  for  the  reasons  speci- 
fied of  record,  and  no  other  ground  for  such  action  appearing  upon  the 
record  thereof  before  us,  the  same  is  reversed  and  set  aside  and  the 
cause  will  be  remanded  to  the  circuit  court  with  directions  to  enter  up 
judgment  in  accordance  witli  the  verdict.     All  concur. 

Per  Curiam  :  The  foregoing  opinion  handed  down  in  Division  No.  1, 
is  adopted  as  the  opinion  of  the  Court  in  Banc.  Gantt,  Sherwood, 
Macfarlane,  and  Burgess,  JJ.,  concurring  with  Brace,  C.  J.,  therein. 
Barclay  and  Robinson,  JJ.,  dissenting.  Judgment  will  therefore  be 
entered  as  directed  in  the  opinion. 


19S  SLOCUM   V.    PROVIDENCE   STEAM   AND   GAS   PIPE   CO. 


SLOCUM  iau  PROVIDENCE   STEAM  AND  GAS   PIPE  CO. 


Vi      I'^/u  1870.     10  Rhode  Island,  112.1 

I  IcM  SLOCUM  V.   WARREN. 


r<f 


1871.     10  Rhode  Island,  lU^ 


ujd^^ju^  D  ^ /jLBi]fxs  in  equit}',  praying  that  defendants  might  be  enjoined  from 
^    \    l<v^ ^  ^  jU*selling  plaintiff's  land  under  executions  recovered  b}-  them  against  the 

M  /a>-  J^^a  American  Steam  and  Gas  Pipe  Co.  The  plaintiff  was  found  b}-  the 
^  e\^  ^^''^TS^Kl^y^^^'^^^  ^^  ^^  ^  stoclvholder  in  the  latter  Company.  Chapter  128,  Rev. 
,<Kl/-'  f^tV  r)  Stat.,  provides  that  every  manufacturing  company  shall  annually  file  a 
^-''■"^  -A  ,        ,  certain  certificate  ;  and  that,  if  any  of  said  companies  shall  fail  so  to 

'^A^^'  Jy'^^Sij^  |L^   <io,  all  the  stockholders  of  said  company  shall  be  jointly  and  severally 
J  ly       \ji  ^     0-^  liable  for  all  the  debts  of  the  company  then  existing.     It  appeared  that 

^•j-J    -fty^^  lo^  I       one,  at  least,  of  the  creditors,  Elizabeth  Warren,  made  a  loan  to  the 


'     1  «~      .\  "^  T  Company,  relying  for  repayment  not  only  upon  the  credit  of  the  Com- 

£,>n  '.  '^\/^''  ^ifi'^  P^y-'  ^^"^  ^^^^  upon  the  personal  liabilit}'  of  the  stockholders,  and  of 
?''^.l  f^y"^^  t^  /;^**^^e  plaintiff  especially  as  one  of  them.  Plaintiff  contends  that  he  is 
lA  ■t'  ^^"^^t/^  •  ^^^  subject  to  any  such  liabilit}-,  for  the  reason  that  the  American 
O^sj}^,  i  '^  f^  Steam  and  Gas  Pipe  Company  never  had  any  legal  existence  as  a 
corporation. 
^  Bradley  and  John  Eddy^  for  plaintiff. 

B.  N.  &  S.  S.  Lapham^  Jcimes  Tilllnghast  and  Cohh,  for  defendants. 
DuRFEE,  J.  [in  SJocum  v.  Providence  &c.  Co.].  .  .  .  The  charter, 
^  or  act  of  incorporation,  for  the  American  Steam  and  Gas  Pipe  Com- 
'  '  ''op^^^y-'  ^^s  granted  or  passed  in  1867,  the  capital  named  in  the  charter 
\jiy^^  or  act  being  seventy-five  thousand  dollars.  At  that- time,  there  was  in 
f^  1^  \  ^  force  in  the  state  a  public  statute  which  provided  that  no  act  of  incor- 
"^  ir^'(^^^^  poration  granted  after  the  passage  thereof,  "for  any  other  than  for 
W^  \\  }^  'Ko  ^^ religious,  literary,  charitable,  or  cemetery  purposes,  or  for  a  military  or 
/  /^^  '  -/\'/l^  fire  company,  shall  take  effect  until  the  persons  therein  incorporated 

L      §->^ i^^  shall  have  paid  to  the  general  treasurer  the  sum  of  one  hundred  dol- 

v*V-.        X)  (<^''  Mrs,  if  the  capital  limited  by  such  act  of  incorporation  is  the  sum  oi 

fA  F       ^  /      any  less  sum  than  one  hundred  thousand  dollars."     The  hundred  dol« 

/\    A  (>  L^         lars,  required  by  this  statute,  was  not  paid  for  the  American  Steam  and 

1^        ^*        y  ^^^  ^''P^  Compan}',  and  consequently,  their  act  of  incorporation  never 

'     \jr^  went  into  effect,  if  it  is  to  be  construed  as  passed  subject  to  the  statute. 

We  think  it  is  to  be  so  construed,  there  being  no  clause  of  the  act 
excepting  it  out  of  the  operation  of  the  statute.  See  The  Union 
Horse  Shoe    Works  v.  Levns,  1  Abbott  U.  S.  518. 

The  defendants  contend  that,  even  if  the  act  has  never  gone  into 
elfect,  the  existence  of  the  compan}'  as  a  corporation  cannot  be  ques- 
tioned in  a  collateral  proceeding.  It  is  undoubtedly  the  rule  that,  if  a 
uliurter  lias  once  been  duly  granted  and  accepted,  the  state  alone  can 

%        1  Statement  abridged.     Only  portions  of  the  opinions  are  given.  —    d. 


SLOCUM  V.    PKOVIDEXCE   STEAM   AND   GAS   PIPE   CO.  199 

enforce  a  forfeiture  of  the  charter  for  an}'  violation  thereof,  or  faihire 
to  coraph'  with  its  considerations  on  the  part  of  the  corporation  ;  and 
that,  until  the  state  sees  fit  to  enforce  the  forfeiture,  the  corporation  is 
to  be  recognized  as  legally  existing  in  all  collateral  proceedings.  But 
here,  the  act  of  incorporation  being  inoperative,  there  never  was  an}' 
corporation  to  incur  a  forfeiture,  or  an}-  charter  to  be  forfeited.  We 
know  of  no  rule  wliich  prechides  inquiry  into  the  question,  wliether  a 
company  which  assumes  to  act  as  a  corporation  has  ever  been  incorpo- 
rated, in  any  case,  in  the  absence  of  any  matter  of  estoppel  to  prevent 
the  inquiry. 

But  tlie  plaintiff,  in  order  to  have  the  relief  which  he  seeks,  ought 
to  satisf}'  us,  not  onl}'  that  his  company  is  not  a  corporation,  but  also 
that  he  is  entitled  to  show  the  fact  as  against  its  creditors.  We  as- 
sume, as  we  think  the  bills  warrant  us  in  assuming,  that  the  plaintiff 
is  a  stockholder  in  the  American  Steam  and  Gas  Pipe  Company,  though 
he  has  done  nothing  as  such,  except  hold  his  stock.  The  question  then 
iSj_wheUier^  a  stockholder,  who  does  nothing  but  hold  his  stockjjs_eSi 
topped,  when  pursued  b}'  a  creditor  of  the  supposed  corporation,  from 
denying  its  existence.  We  think  he  is  so  estopped^  B}'  becoming 
and  continuing  a  stockholder,  he  holds  himself  out  as  a  corporator^_and 
so  contributesJo_the  belief  that  the  company  with  which  he  is  associ- 
ated is  a  corporation.  To  pemiit^  a  person  who  has  so  held  hjmself 
outto_say  ttuithejs  not  a  corporator,  when  legally  pursued  as  such, 
would  Ijc  to  permit  him  to  take  advantage  of  his  own  wrong,.  He  is 
like  a  person  who,  having  held  himself  out  or  suffered  himself  to  be 
held  out  as  a  copartner,  ma}'  be  charged  with  the  copartnership  debts. 
Or  he  is  like  a  person  who,  without  authority,  as  executor  or  adminis- 
trator, intermeddles  with  the  property  of  a  decedent,  and  so  becomes 
chargeable  as  an  executor  in  his  own  wrong.  The  plaintiff  having 
assumed  the  character  of  a  corporator,  where  he  is  sought  to  be  charged 
as  such,  ought  not  to  be  heard  to  say  that  the  character  was  falsely  or 
unlawfully  assumed.  The  fact  that  he  was  not  active  in  the  business  of 
the  company  cannot  avail  him  ;  for  it  is  the  assumption  to  hold  the 
stock  as  if  he  were  a  corporator,  which  makes  the  mischief.  It  might 
easily  happen  that  the  stockholder,  whose  name  contributed  most  to 
the  credit  of  the  supposed  corporation,  was  least  active  in  its  busi- 
ness, and  it  would  be  plainly  unjust  to  exempt  him  from  liability  to  the 
creditors,  merely  because  of  his  inactivity. 

We  are  aware  that  in  Utley  v.  Union  Tool  Company^  11  Gray,  139, 
the  Supreme  Court  of  Massachusetts  exempted  a  stockholder  from  lia- 
bility to  a  creditor  of  a  supposed  corporation,  upon  proof  tliat  the 
corporation  had  never  legally  come  into  being  under  the  statute  of 
that  state  But  it  does  not  appear  that  in  that  case  the  question  of 
estoppel  was  raised  by  the  counsel  or  considered  by  the  court.  We 
should  agree  entirely  with  the  Supreme  Court  of  Massachusetts  in  their 
decision  in  any  case  in  which  the  estoppel  would  be  inapplicable. 


6 


200  SLOCUM   V.    WARREN. 

DuRFEE,  J.  [in  Slocum  v.  Warreii].  .  .  We  decided  in  tlie  former 
ease  that  having,  by  becoming  a  stockholder,  helped  to  hold  the  com- 
pan}-  out  as  a  corporation,  he  could  not  be  permitted  to  say,  when 
pursued  by  a  creditor  of  the  company,  that  he  and  his  associates  or 
predecessors  had  omitted  to  do  an  act  which  they  ought  to  have  done 
before  organizing  as  a  corporation,  and  that  in  consequence  of  this 
delinquency  the  company  was  not  (what  it  purported  to  be)  a  legally 
established  corporation."  The  plaintiff  maintains  that  this  decision  was 
erroneous,  and  in  support  of  his  view,  relies  especially  upon  the  cases 
of  Hudson  V.  Carman,  41  Maine,  84 ;  Unity  Insurance  Company  v. 
Cram,  43  N.  H.  636;  Utley  v.  Union  Tool  Company,  11  Gray,  139  ; 
and  Gardner  v.  Post  et  al.  43  Pa.  St.  19.  We  propose  to  consider 
these  and  some  of  the  other  cases  bearing  upon  the  question,  somewhat 
in  detail. 

[After  commenting  on  various  authorities,  the  opinion  proceeds.] 

The  plaintiff  also  cites  cases  in  which  it  has  been  held  that  a  corpora- 
tion dulj'  established  as  such  is  not  estopped  from  denying  its  liability 
where  there  is  a  want  of  power  to  contract  the  liability,  the  reason 
being,  he  says,  that  otherwise  the  powers  of  the  corporation  might  be 
indefinitely  enlarged ;  and  he  argues  that,  in  the  case  at  bar,  the  doc- 
trine of  estoppel  is  still  less  applicable,  inasmuch  as  the  company  was 
acting  not  merely  in  excess  of  its  corporate  powers,  but  without  any 
corporate  power  whatever.  But  in  the  case  at  bar,  the  defect  of  power 
exists  not  by  reason  of  any  insufficiency  of  the  grant,  but  by  reason 
solely  of  a  delinquency  on  the  part  of  the  grantees  of  the  power ;  and 
the  estoppel,  if  applied,  would  be  applied  not  to  prevent  an  appeal  to 
the  charter  to  show  a  want  of  authority,  but  to  prevent  the  intro- 
duction of  evidence  by  the  company  or  its  members  to  prove  their  own 
delinquency.  We  do  not  think  that  in  such  a  case  there  should  be  any 
hesitation  to  apply  the  doctrine  of  estoppel  from  fear  that  it  would  lead 
to  an  indefinite  enlargement  cf  the  powers  of  the  corporation.  And 
see  Bargate  v.  SJiortridge,  5  H.  L.  Cas.  297,  318  ;  ZabrisJde  v  Cleve- 
land, Columbus  &  Cincinnati  Railroad  Company  et  al.  23  How.  U.  S. 
381. 

[After  citing  and  commenting  upon  other  authorities,  the  opinion 
proceeds.] 

It  is  true  these  cases  are  not  precisely  like  the  case  at  bar,  but 
they  are  cases  which  illustrate  the  application  of  the  law  of  estoppel 
in  respect  to  corporations,  or  companies  acting  as  corporations,  or 
which  illustrate  to  what  extent  the  corporate  existence  of  a  company 
acting  as  a  corporation  can  be  collaterally  questioned.  And  we  think 
it  is  safe  to  say  upon  the  authority  of  these  cases,  that  at  least  where 
there  is  an  act  or  charter  in  existence,  under  which  a  company  bv  taking 
the  proper  steps  can  become  a  corporation,  if  ajx)mpaiiy  docs  defmto 
or<^tiiz(^nd  bold  itself  outas  a  C£r|>orationi^contracting  (jbligations  as 
6ucli»ut_caiuiot^,  wlicnsucdu])on  such_C)l2li^^ations,  b^\-  [xisons  wiio  have 
dealt  with  it  as  sudLJn  good  faith,  be  permitted  to  avoid  a'corporate 


SLOCUM   V.    WARKEN.  201 

I 


Ijabilitv  thereon,  by  setting  up  that  it  has  not  taken  all  the  steps  pre- 


scribed  as  conditions  prpppfTpntj^nJfg  Ifgnl  pvistpnnp  as  a  corporation 
If  this  be  so  in  regard  to  the  compan}-  as  a  whole,  we  do  not  see  why 
it  is  not  equally  so  in  regard  to  each  member  of  the  company  individu- 
ally, in  so  far  as  membership  imports  an  individual  liability.  In  this 
case,  it  is  said  there  was  no  act  or  charter ;  but  in  our  opinion  there 
was  a  charter  dul}'  granted  b}-  the  legislature,  subject  only  to  a  condi- 
tion that  it  should  not  take  effect  until  a  certain  act  should  be  per- 
formed ;  but  inasmuch  as  this  act  could  have  been  performed,  as  it 
ought  to  have  been  performed,  by  the  grantees  of  the  charter  before 
their  organization  as  a  corporation,  the  case  does  not,  in  our  view, 
substantially  differ  from  cases  which  are  clearh'  within  the  rule  above 
stated.  Indeed  it  is  frequently  the  case  that  a  charter  is  granted  sub- 
ject to  an  implied  condition,  that  the  grant  shall  not  take  effect  un- 
til it  has  been  dul}'  accepted  ;  and  yet,  as  we  have  seen,  the  doctrine 
of  estoppel  may  be  applied  to  prevent  the  want  of  such  an  acceptance 
from  operating  to  defeat  a  just  claim.  Cam/)  v.  Byriie^  supra  ;  and 
see  Tobacco  Pipe  Makers'  Co.  v.  Woodroffe,  8  D.  &  R.  30,  cited  in 
Abbott's  Dig.  Law  of  Corp.  p.  331,  §  23.  In  this  case  the  company 
bad  only  to  pay  Into  the  treasury'  of  the  state  one  hundred  dollars, 
and  all  would  have  been  right.  When  it  organized  as  a  corporation, 
and  from  3ear  to  year  continued  doing  business  as  such,  it  as  much  as 
said,  and  each  one  of  the  stockholders  as  much  as  said,  that  that  sum 
had  been  paid  ;  and  now  neither  the  compan}'  nor  any  one  of  the  stock- 
holders ought  to  be  heard  to  assert  the  contrary  in  order  to  escape  any 
liabilitv  to  which  he  or  it  would  have  been  subject  if  the  payment  had 
been  duh'  made. 

This  decision  is  doubtless  a  hard  decision  for  the  plaintiff,  and  we 
ver}-  much  regret  that  his  situation  is  such  that  he  is  so  seventy  af- 
fected by  it.  But  hard  as  the  decision  is  for  the  plaintiff,  it  onh'  sub- 
jects him  to  the  liability  to  which  he  would  have  been  subjected  if  the 
tax  due  the  state  had  been  paid,  as  it  ought  to  have  been  paid,  and 
therefore  only  to  the  liability  which,  as  an  honest  man,  he  must  be 
presumed  to  have  intended  to  incur  when  he  connected  himself  with 
the  companj.i  [Plaintiff' s ptrayer  denied.'\ 

1  The  statute  under  consideration  in  the  above  case  was  repealed  by  the  Rhode  Island 
General  Statutes  of  1872;  and  the  following  provision  substituted:  "  No  corporation  shall 
be  organized  under  a  charter,  until  the  petitioners  .  .  ,  shall  pay  into  the  general  treasury 
for  the  use  of  the  State,  one  hundred  dollars."  In  Eughesdale  Mfg.  Co.  v.  Vanner,  12  R. 
I.  491  Ian  action  of  assumpsit  by  the  corporation),  it  was  held,  that,  under  the  later  statute, 
the  failure  to  make  the  payment  would  be  taken  advantage  of  only  by  the  State,  and  did 
not  avail  the  defendant  as  a  valid  objection  to  the  plaintiff's  corporate  existence.  The 
Court  said,  that  the  payment  prescribed  by  the  later  statute  was  not,  like  that  prescribed 
by  the  earlier  statute,  a  condition  precedent  to  the  existence  of  the  corporation;  but  some- 
thing re(|uired  to  be  after  the  charter  has  gone  into  effect,  and,  if  the  charter  is  in  the  usu^ 
form,  after  the  corporation  has  been  created.  —  Ed. 


Q 


202 


NARRAGANSETT  BANK   V.   ATLANTIC   SILK   CO. 


^  '^  J^ARRAGANSETT   bank  v.    ATLANTIC   SILK   CO 

,Q      .    ^  I  1841.     3  Metcalf,  287.1 

Mi/^    Shaw,  C.  J.     The  first  of  these  cases  was  assumpsit  on  a  bill  of  ex- 

f  change,  drawn  on  the  corapany  at  four  months'  date,  and  accepted  by 

l}    Samuel  B.  Tuck,  treasurer.     This  company  was  incorporated  as  a  man- 
/K^^     •  ./»      .  jrlifacturing  corporation  by  St.  1836,  c.  108.     The  defendants  contended, 
^       ^  A/^ '  i*^  that  in  order  to  recover  against  the  defendant  corporation  it  was  in- 
^     .     jf  cumhent  on  the  plaintiffs  to  prove  that  the  company  had  complied  with 
(f"      jMg^rovisions  of  the  Rev.  Sts.  c.  38,  §§  4,  9,  and  c.  44,  §  3,  regula- 
fu^       v~  rting  the  organization  of  manufacturing  corporations.     These  provisions 
/j^'"^      D^    *>»         require  them  to  choose  a  clerk  and  treasurer ;  that  the  clerk  shall  be 


sworn,  and  shall  keep  a  record  of  votes  ;  that  the  capital  stock  shall 
Vvbe  divided  into  shares  ;  that  the  first  meeting  shall  be  called  by  a  pre- 

"bed  form  of  notice,  &c.  The  court  are  of  opinion,  that  this  argu- 
^mept^f  the  defendants  proceeds  upon  an  erroneous  view  of  the  law ; 
ij^speciall}'  in  cases,  where  a  party,  who  is  a  stranger,  and  not  pre- 
sumed to  have  access  to  the  books,  and  to  have  notice  of  the  proceed- 
ings of  a  corporation,  is  proceeding  to  recover  against  a  company 
acting  as  a  corporation.  Many  of  the  requisitions  of  the  statute? 
referred  to  are  director^'  to  the  corporation,  its  oflBcers  and  members, 
and  are  not  conditions  precedent  to  the  existence  and  capacitj*  of  the 
corporation  to  contract. 

But  were  it  necessary  to  prove  the  regular  organization  of  the  corpo- 
ration, the  objection  would  come  with  an  ill  grace  from  the  defendants, 
and  under  the  circumstances  must  be  deemed  untenable.  It  is  the 
duty  of  such  corporations  to  keep  records  ;  the  primar}'  and  only  regu- 
lar evidence  of  their  organization  is  legally-  presumed  to  be  in  their 
records  and  the  defendants  decline  producing  those  records,  on  notice, 
without  assigning  an}'  reason.  The  maxim  of  law  is,  that  all  things 
shall  be  presumed  to  have  been  riglitly  and  con-ectly  dune,  until  tTie 
contrary  is  proved.  This  maxim  is  stated  and  explained,  and  many 
instances  given  of  its  application  to  corporations,  and  to  acts  and 
doings  of  their  members,  officers  and  agents,  in  J^a»k  of  U.  States  v. 
Daiidridge,  12  Wheat.  70.  As  the  cor])oration  could  not  proceed  law- 
fujly^^  until_dulx_organized,  ancl  as^they^  did_£roceed  to  act  as  a  corpora- 
tion,  this^presumi)tionJias-it§.  effect.  The  defendants  have  the  records, 
which  prove  such  organization,  if  it  took  place,  and  withhold  them. 
This  maxim  under  these  circumstances,  would  go  far  to  establish  the 
actual  and  regular  organization  of  the  defendant  corporation. 

But  the  court  are  of  opinion,  that  in  an  action  against  a  corporation, 
It  IS  not  incumbent  on  the  plaintiff  to  prove  that  the  defendants  have 
oomplied  with  the  requisitions  of  the  statutes,  where  they  are  not  ie 


'  Statement,  and  part  of  opinion,  omitted.  —  Ed. 


NAERAGANSETT  BANK  V.   ATLANTIC  SILK  CO.        203 

terms,  or  by  necessary-  or  reasonable  implication,  conditions  precedent 
to  their  existence,  or  capacit}'  to  do  particular  acts.  It  has  been  held 
that  the  existence  of  a  corporation,  and  of  course  its  organization, 
may  be  proved  by  reputation,  and  by  its  actual  use,  for  a  length  of 
time,  of  the  powers  and  privileges  of  a  corporation.  Dillmffham  v. 
Snow,  5  Mass.  547.  Stockbridge  v.  West  Stockhridge,  12  Mass.  400. 
In  regard  to  manufacturing  corporations,  which  are  of  more  recent 
origin  in  this  Commonwealth,  itis  in  general  sufficient  to  give  in  evLr 
dence  the  act  of  incorporation  duly  authenticated,^  and  the  actual  use 
of  the  powers  and  privileges  of  an  incorporated  company,  under  the 
name  designated  in  the  act  of  incorporation.  Bank  of  IT.  States  v, 
Dandridge,  12  Wheat.  64l  XMca  Ins.  Co7\.  Tillman,  1  Wend.  555. 
Utica  Ins.  Co.  v.  Cadwell,  3  Wend.  296.  Fire  Department  of  Neio 
York  V.  Kijy,  10  Wend.  266.  These  were  cases  in  which  the  corpo- 
ration, whose  organization  was  in  question,  were  plaintiffs.  The  rule 
applies  a  fortiori  to  the  case  of  a  plaintiff  seeking  to  enforce  an  obli- 
gation against  a  corporation. 

\  And  we  think  it  highly  necessary-  to  the  purposes  of  justice,  that  the 
law  should  be  so  held ;  otherwise  a  company  might  avail  themselves  of 
the  powers  and  privileges  of  a  corporation,  without  subjecting  them- 
selves to  its  duties  and  obligations,  and  might  set  up  their  own  neglect 
of  duty,  or  wilful  non-compliance  with  the  requisitions  of  law,  to  dis- 
charge themselves  of  such  obligations.  Nor  would  this  be  the  whole 
extent  of  the  wrong  doue  by  such  construction,  in  regard  to  manufac- 
turing corporations.  It  has  been  the  polic}'  of  this  Commonwealth  to 
give  a  qualified  remed}'  against  the  individual  members  of  manufac- 
turing corporations,  as  collateral  security  to  their  debts  and  obligations. 
But  any  construction,  which  would  destro}'  or  impair  the  obligation  of 
tlie  corporation,  would,  to  the  same  extent,  take  from  creditors  their 
remedy  against  the  members. 

As  to  the  evidence  in  regard  to  the  fact  of  acting  as  a  corporation, 
it  is  stated  hereafter  in  reference  to  the  other  case.^ 

Judgment  on  the  verdict  for  plaintiff . 

1  Acts  of  incorporation  are  now  deemed  public  acts;  Rev.  Sts.  c.  2,  §  3;  anc? 
printed  copies  of  them,  published  under  the  authority  of  the  government,  are  to  be 
admitted  as  sufficient  evidence  thereof,  in  all  courts  of  law,  &c.     Rev.  Sts.  c.  94,  §  58. 

2  [In  the  opinion  in  the  case  of  Westcott  v.  Atlantic  Silk  Co.,  heard  at  the  same 
time,  Shaw,  C.  J.,  says  :  "  The  act  of  incorporation  being  shown,  there  was  evidence 
tending  to  prove  that  the  company  went  into  operation,  established  a  factor}^  and 
erected  machinery ;  .  .  ."] 


204  JONES   V.   CINCINNATI   TYPE   FOUNDRY   CO. 


JONES  V.   CINCINNATI  TYPE  FOUNDRY   CO. 

I860.     14  Indiana,  89.1 

Appeal  from  the  Grant  Circuit  Court. 

/Perkins,  J.  —  Suit  upon  a  promissory  note. 
^       "  The  Cincinnati  Type  Foundry  Company^    a   corporation,"   &c., 
r^        "  complains  of  David  W.  Jones ^  defendant,"  &c.,  upon  a  promissory 
note,  of  which  a  copy  is  set  out  thus  : 

"$279.  Indianapolis,  Indiana,  October  11,  1857. 

"  Six  months  after  date,  I  promise  to  pay  to  the  order  of  the  Cincin- 
nati Type  Foundry  Company,  two  hundred  and  sevent3'-nine  dollars, 
for  value  received,  without  relief  from  valuation  laws. 

David  W.  Jones" 
The  defendant  demurred  to  the  complaint.     The  demurrer  was  over- 
ruled, and  rightly. 

The  defendant  then  answered  ^ 

1.  That  he  was  not  indebted  to  the  plaintiffs. 

2.  That  each  and  everv  allegation  of  the  complaint  was  untrue. 

3.  That  the  plaintiffs  had  not  a  legal  capacity  to  sue,  because  not  a 
corporation. 

Issue.  Trial.  The  note  constituted  all  the  evidence.  Judgment  for 
the  plaintiffs  on  the  note. 

The  appellant  contends  that  the  case  was  not  made  out  against  him, 
because  it  was  not  proved  that  the  appellees  were  a  corporation,  and 
thus  possessed  of  the  capacity  to  sue. 

The  appellees  insist  that  the  note  sued  on  is  a  contract  with  them  as 
a  corporation,  and  that  their  existence  is  therebv  admitted. 

As  a  general  proposition,  it  is  the  law  of  this  state  that  a  contract 
«vith  a  party  as  a  corporation  estops  the  party  so  conti-acting  to  deny 
the  existence  of  the  corporation  at  the  time  it  was  contracted  with  as 
such.     Shappel  v.  Ilnhhard,  at  this  term. 

And  it  has  been  held  in  other  states  that  where  individuals  are  incor- 
porated upon  performance  of  certain  acts,  a  person  who  contracts  with 
them  by  their  corporate  name,  cannot,  in  an  action  against  him  on  the 
contract,  deny  the  performance  b}'  them  of  the  acts  necessary  to  give 
them  a  corporate  existence.  Ilamtranch  v.  Tlie  Bank  of  Edwards- 
ville,  2  Miss.  R.  169.  — Tarr  River  Naniyation  Co.  v.  Neal^  3  Hawks, 
520.     See  1  U.  S.  Dig.,  593  ;  4  id.  433. 

In  New  York,  to  work  such  estoppel,  it  has  been  necessary  that  the 
contract  should  state  that  the  party  contracted  with  was  a  corporation. 
But  this  rule  docs  not  prevail  in  other  states.  It  has  not  been  acted 
i]l)on  in  this  state. 

If  the  style  by  which  a  party  is  contracted  with  is  such  as  is  usual  in 
creating  corporations,  viz.,  naming  an  idealit}',  but  disclosing  that  of 

1  Part  of  opinion  omitted.  —  Ed. 


JONES   V.    CINCINNATI   TYPE   FOUNDKY    CO.  205 

no  individual,  as  is  usual  in  the  cases  of  simple  partnerships,  it  has 
been  treated  as  prima  facie,  at  least,  indicating  a  corporate  existence. 
And  such  seems  to  have  been  the  rule  at  common  law.  Grant  on 
Corp.,  62.  Probably,  a  special  answer,  in  such  cases,  in  the  nature  of 
a  plea  in  abatement,  might,  at  the  proper  time,  be  made  available. 
See  Ang.  and  Ames  on  Corp.,  506,  507,  and  the  numerous  cases  in 
our  own  Reports. 

And  there  is  no  hardship  in  this.  The  party  executing  the  note  owes 
tlie  amount  of  it.  The  judgment  upon  it  in  the  suit  merges  it,  and  the 
payment  of  the  judgment  satisfies  it,  and  bars  any  other  action  against 
the  maker  for  the  money. 

But,  in  this  class  of  cases,  it  would  seem,  after  all,  that  the  Courts 
have  proceeded  upon  a  rule  of  evidence,  rather  than  the  strict  doctrine 
of  estoppel.  They  have  treated  the  contract  with  a  party  by  a  name  im-i 
]>lying  a  corporation,  really  as  evidence  of  the  existence  of  a  corpora-/ 
tion,  more  than  as  an  estoppel  to  disprove  such  fact.  Grant,  in  hislatg 
learned  work  on  Cor[)orations,  says  :  "  Generally,  the  fact  of  an  aggre- 
gate body  being  called  by  a  name,  is,  prima  facie,  evidence  that  the3' 
are  incorporated,  '  for  the  name  argues  a  corporation.'  Nbrris  v. 
/Stops,  Hobart,  11.  But  the  Courts  take  judicial  notice  that  '•A.  JB. 
and  company'  is  not  the  name  of  a  corporation.  Hex  v.  Harrison^ 
8  T.  R.  508.'"' 

The  doctrine  of  conclusive  estoppel  seems  more  properly  applied  to 
cases  involving  the  question  of  legality  of  organization,  where  the  fact 
of  an  existing  statute,  authorizing,  in  the  given  case,  such  corporation, 
is  known  to  the  Court,  either  by  judicial  notice  or  actual  evidence  in 
tlie  cause. 

In  such  cases,  where  a  party  has  contracted  with  a  body  as  being 
organized  as  a  corporation  under  the  law,  he  will  be  estopped  to  dis- 
pute the  legality  of  the  organization.  See  the  cases  cited  in  the  U.  S. 
Dig.,  and  Ang.  and  Ames,  iibi  supra. 

This  doctrine  of  estoppel,  as  applied  to  contracts  with  corporations, 
needs  further  examination  ;  but  it  is  not  important  in  this  case,  and  we 
shall  not  here  pursue  it.  The  decision  of  this  case  will  rest  upon 
another  ground. 

[The  learned  Judge  then  takes  the  position  that  the  general  denial 
in  the  answer  admits  the  plaintiff's  capacit}'  to  sue,  and  that  the  subse- 
quent paragraph  denying  plaintiff 's  capacit}'  is  in  the  nature  of  a  plea 
in  abatement  and  is  inconsistent  with  such  general  denial*] 

Judgment  affirined. 


TOUTIMORE   V.   CLAEK. 


STOUTIMORE  v.   CLARK  et  als. 

1879.     70  il/issouri,  471.1 

Appeal  from  Cla}'  Circuit  Court. 
^I/'         /W^    I        '        ^^6  action,  Stoutimore  v.  Clark^  was  brought  to  establish  a  certain 
0  •       V        I  ^.y^jjiarge  as  a  lien  upon  the  land  formerlj'  the  property  of  Joseph  Y. 

£/j2^'^ji  ■'.      ^    Clark,  now  deceased  ;  and  to  obtain  a  decree  for  the  sale  of  the  land 

.  J  >         ^^^   --^.--f"..  iu_   _i gy  order  of  court,  the  Missouri  Cit}'  Savings 

made  defendants  in   said   suit.     The 
lien  under  a  judgment  against  Clark, 
•^^   ^ y,  ^  rendered  March  27,  1874.     This  judgment  was  founded  on  a  note  of 

Tj       /  said  Clark  paj-able  to  the  order  of  the  Missouri  City  Savings  Bank,  at 

^       /  the  office  of  said  Bank.     Chrisman  filed  an  answer  alleging  a  lien  on 

|r  '  ,  I      n-  part  of  the  land  under  a  trust  deed,  executed  by  Clark  Sept.  19,  1874, 

^jh*'  to  secure  a  loan.   Chrisman  also  filed  a  cross  answer  to  the  answer  of  the 

,  Missouri  City  Savings  Bank,  alleging  that  said  Bank  was  not  a  corpo- 

ration. Upon  the  trial,  to  prove  the  corporate  organization  and  exist- 
ence of  the  Bank,  a  certificate  signed  by  the  alleged  president  and 
secretary  was  ofl^ered  in  evidence.  To  the  admission  of  this  certificate 
Chrisman  objected,  on  the  ground  that  it  did  not  comply  with  the 
statutory  requirements.  This  objection  was  sustained,  and  the  evi- 
dence was  excluded.  The  Circuit  Court  ordered  the  sale  of  the  land  ; 
and  directed  that  the  judgment  of  the  Bank  should  be  paid  out  of  the 
proceeds  before  the  claim  of  Chrisman.  Chrisman  appealed  from  an 
order  denying  his  motion  for  a  new  trial. 

D.  C.  Allen,  and  /Samuel  Hardwicke,  for  appellant. 
"^  The  doctrine  of  estoppel  does  not  apply.     It  takes  two  to  make  an 

estoppel.  There  must  be  a  party  estopped,  and  a  party  in  whose  favor 
the  estoppel  works.  Herman  on  Estoppel,  40,  41.  It  is  plain  from 
the  evidence  that  the  Missouri  City  Savings  Bank  never  had  a  cor- 
porate existence,  nor  a  lawful  organization  on  which  corporate  exist- 
ence could  be  based.  The  Circuit  Court  in  excluding  the  certificate 
dated  April  24th,  1869,  so  held.  Hence  there  was  no  person  in  whose 
favor  an  estoppel  could  work.  Douthitt  v.  Stinso7i,  63  Mo.  279.  The 
judgment  against  Clark  being  a  nullity  (because  not  rendered  in  favor 
of  any  legal  entity),  no  question  of  estoppel  arises  under  it.  Bigolovv 
on  Estoppel,  21,  283  ;  Wixom  v.  Stephens,  17  Mich.  518. 
[Omitting  remainder  of  argument.] 
Simrall  &  Sandusky,  for  respondent. 

By  the  execution  of  the  note  Clark  admitted  the  corporate  existence 
of  the  Missouri  City  Savings  Bank,  and  he  was  estopped  thereafter  from 
denying  its  corporate  existence.  [Omitting  citations.]  It  was  un- 
necessary to   allege   that   plaintiff   was  a  corporation  ;    and  therefore 

1  Only  so  much  of  the  report  is  given  as  relates  to  one  point.  —  Ed. 


STOUTIMORE   V.   CLARK.  207 

unnecessar}'  to  prove  it.  Clark  was  not  only  estopped  by  the  execu- 
tion of  said  note  from  denying  the  corporate  existence  of  the  bank,  but 
he  was  also  estopped  by  the  judgment.  If  the  defense,  7ml  tiel  corpo- 
ration, was  open  to  him  at  all,  it  should  have  been  asserted  before  the 
rendition  of  said  judgment. 

[Omitting  remainder  of  argument.] 

Norton,  J.  .  .  . 

In  support  of  these  positions  it  is  insisted  by  counsel  that,  inasmuch 
as,  on  the  trial  of  the  cause,  the  Missouri  City  Savings  Bank  failed  to 
introduce  evidence  establishing  the  fact  that  it  was  a  corporation,  the 
said  judgment  rendered  in  its  favor  was  a  nullity  and  did  not  create  a 
lien  upon  the  real  estate  of  Clark. 

We  think  the  view  thus  taken  is  unsound.  The  note  upon  which 
said  judgment  was  rendered  is  as  follows : 

"  S4,000.  Missouri  Citt,  July  1st,  1870. 

Four  months  after  date  we  promise  to  pay  to  the  order  of  the  Mis- 
souri City  Savings  Bank,  Four  Thousand  Dollars,  negotiable  and  pay- 
able at  the  office  of  the  Missouri  City  Savings  Bank,  Missouri  Cit}', 
Mo.,  without  defalcation  or  discount,  for  value  received,  with  interest 
at  ten  per  cent  per  annum  from  maturity  until  paid. 

Gilmer,  Clark  &  Co. 

J.  Y.  Clark. 

R.  G.  Gilmer,  Security." 

"We  think  it  clear  that  in  the  suit  instituted  by  the  bank  on  this  note 
Clark  would  not  have  been  allowed  to  deny  the  corporate  existence  of 
the  bank  for  the  reason  that  b}-  executing  the  note  he  admitted  the  fact 
that  it  was  a  corporation,  which  estopped  him  from  disputing  it.  This 
principle  was  distinctly  enunciated  in  the  case  of  National  Insuraficej  /f- 
Co.  V.  Boicman,  60  Mo.  252,  following  the  case  of  Farmers  and  Mer- 
chants Insurance  Co.  v.  Needles,  52  Mo.  17,  and  the  case  of  O.  db  M, 
B.R.  Co.  V.  McPherson,  35  Mo.  13.  In  the  case  of  City  of  St.  Louis 
V.  Shields,  et  al.,  62  Mo.  247,  it  was  expressly  held  that  the  obligors 
on  a  bond  given  to  a  corporation  by  making  and  signing  the  instrument 
admit  the  corporate  capacity  of  the  obligee,  and  in  a  suit  on  such  bond 
cannot  plead  nul  tiel  corporation.  The  cases  cited  indisputably  estab- 
lish that  Clark,  the  obhgor  in  the  note  upon  which  the  judgment  rests, 
could  not  have  set  up  as  a  defense  that  the  bank  was  not  a  corporation, 
and  it  therefore  follows  that  the  judgment,  so  far  from  being  a  nullity 
as  counsel  contend,  was  rightful  and  proper,  and  from  the  time  of 
its  rendition  became  a  lien  on  the  real  estate  of  Clark  in  Clay  county, 
and  was  conclusive  and  binding  not  only  on  him  but  upon  all  claiming 
through  or  under  him. 

[After  discussing  the  doctrine  of  privity.]  It  thus  appearing  that 
Clark,  against  whom  the  judgment  in  favor  of  the  bank  was  rendered, 
could  not  have  prevented  its  rendition  by  disputing  the  corporate  ex- 
istence of  the  bank  it  therefore  necessarily  follows  from  the  principles 


^^fi^ 


208      CALLENDER  V.   PAINESVILLE   AND   HUDSON   RAILROAD   CO. 

above  announced  that  Chrisman,  the  beneficiary  in  the  deed  of  trust 
executed  subsequently  to  the  rendition  of  the  judgment,  and  convey- 
nig  to  the  trustee  for  him  land  upon  which  said  judgment  had  become 
a  lien,  occupied  no  better  position  than  Clark.  The  judgment  being 
efficacious  to  create  a  lien  on  Clark's  land,  could  not  have  been  drawn 
iu  question  by  Clark  on  the  ground  that  it  was  a  nullity,  because  the 
bank  was  not  a  corporation ;  nor  can  it  be  assailed  on  the  ground  by 
Chrisman,  who  became  a  priv}^  in  estate  by  reason  of  the  grant  made 
by  Clark  to  him  in  the  deed  of  trust  of  part  of  the  land  upon  which 
the  judgment  was  attached  as  a  lien. 

Judgment  affirmed. 


PAINESVILLE   &   HUDSON   RAILROAD   CO. 

I860.     11  Ohio  State,  b\(>A 

R    to    the   Court    of    Common    Pleas    of    Cuyahoga  County, 
ved  in  District  Court. 
Plaintiffs  filed  petition  to  recover  debt  and  damages  claimed  under  a 
written  contract  of  defendant,  an  incorporated  company,  executed  on 
the  part  of  the  company  by  Van  R.  Humphrey,  as  its  president. 
^   George  W.  Steele  filed  a  motion  to  dismiss ;  stating  that  he  was  a 
member  and  secretary  of  the  compan}',  denying  the  validity  of  the  ser- 
vice of  the  summons,  and  alleging  that  said  company  is  not  a  corpora- 
The  Court  of  Common  Pleas  dismissed  the  action,  holding  that, 
lew  of  the  defects    in   the   certificate  of  organization  under  the 
feneral  statute,  the  defendant  was  not  a  duly  organized  corporation  or 
[liable  to  be  sued  as  such. 

SuTLiFF,  J.     [After  considering  the  question  as  to  the  validit}'  of 
^  certificate,  and  intimating  that  the  only  objection  to  it  raised  by 
v^  counsel  was  untenable.] 
■J^'t^'y^  I^i^t  in  this  case  the  original  petition  alleged  that  the  defendant  was 

y^  1  a  corporation.  The  contract  upon  which  the  action  was  brought,  a 
y2  copy  of  which  was  appended  to  the  petition,  purported  to  be  executed 
by  the  defendant,  as  a  corporation  ;  and  the  motion  and  the  affidavit 
of  the  mover,  disclosed,  at  most,  only  a  defect  in  the  act  of  incorpora- 
tion. But  the  affidavit  admits  that  the  company  had  attempted  in  all 
respects  to  comply  with  the  requisitions  of  tlie  statute,  and  in  fact  ob- 
tained, by  a  supposed  compliance  on  their  part,  the  acceptance  and 
record  of  their  certificate  by  the  secretary  of  state,  a  copy  of  which 
was  to  them  a  valid  charter,  as  they  supposed.  And  tlie  affiant  further 
states  tliat  he  had  acted  as  their  secretary  for  some  three  years,  and 


*  Only  so  much  of  the  case  is  given  as  relates  to  one  point.  —Ed. 


CALLENDER.  V.   PAINESVILLE   AND   HUDSON   RAILROAD   CO,      209 

that  the  president  of  the  compan}'  was  then  residing  at  Painesville, 
where  the  company  then  kept  its  office. 

It  thus  appears  that  the  members  of  the  company  obtained  their 
charter,  supposed  themselves  a  legally  incorporated  company,  and  had 
continued  to  hold  themselves  out,  and  to  act  as  such,  to  and  with  the 
public,  and  are  still  so  acting.  Nor  is  there  any  denial,  either  in  the 
motion  or  aftidavit  of  Steele,  that  their  president,  Humphrey,  was 
not  authorized  by  himself  and  others  of  the  association,  to  execute 
said  contract  on  behalf  of  the  association,  as  an  incorporated  company. 

Under  such  circumstances,  the  members  of  the  company,  and  espe- 
cially the  officers  of  the  company,  are  estopped  to  deny  its  existence  as  a 
corporation.  However  mistaken  in  fact,  no  person,  whether  artificial  or 
natural,  is  permitted  to  so  conduct  and  represent  himself  as  to  induce 
reasonable  men,  at  his  instance,  to  act  upon  the  truth  of  such  represen- 
tations in  their  contracts  and  dealings  with  him,  and  to  then  den}-  the 
truth  of  such  representations,  to  the  prejudice  of  the  party  so  having 
relied  upon  them. 

In  order  for  the  company-,  or  any  member  thereof,  to  so  repudiate  its 
conduct,  and  disprove  the  truth  of  its  own  representation,  it  is  neces 
sarj  for  jt,  not  only  to  show  an  honest  mistake^,  but  that  such  mistak 
representation  had  not  induced  the  adversary  party,  in  the  exercise 
reasonable  prudence  on  his  part,  to  give  the  credit,  make  the  contra';c,  I 
and  act  under  it  in  confidence  of  the  truth  of  such  conduct  and  I 
representations. 

But  in  this  case,  not  only  has  the  association  obtained  a  cop}-  of  the 
certificate,  its  charter  of  incorporation,  and  represented  itself  to  the 
other  party  to  be  a  corporation,  by  making  the  contract  in  that  capa- 
city, but  it  has  continued  to  act  in  a  corporate  capacity  down  to  the 
time  of  filing  the  motion  ;  and  the  member  so  filing  the  motion  states 
that  he  is  still  the  officer  of  the  corporation.  It  thus  appears  that,  in- 
stead of  contradicting  the  misrepresentation,  before  the  contract  was 
made,  the  company  had  not,  even  after  making  the  contract,  either  in 
conduct  or  representation,  ever  denied  their  corporate  character. 

Under  such  circumstances,  to  suffer  the  defendants  to  repudiate 
their  first  conduct,  and  deny  the  truth  of  their  representations,  by 
which  the  plaintiffs  had  been  induced  to  contract  with  them,  and  upon 
which  both  parties  had  acted,  would  be  in  contravention  of  those  prin- 
ciples of  equity  upon  which  the  doctrine  of  estoppel  rests,  and  its 
operative  effect  to  prevent  fraud  depends. 

We  are,  therefore,  clearly  of  opinion  that,  at  the  time  of  the  hearing 
of  the  motion,  the  company  and  its  members  who  had  so  Iield  them- 
selves out  to  be  a  corporation,  were  estopped  to  deny  tlint  fact,  for  any 
defect  whatsoever,  if  the  same  had  in  fact  existed  in  their  charter. 

The  judgment  of  the  court  of  common  pleas  must,  therefore,  be 
reversed,  and  the  cause  remanded.  Judgment  accordbighj. 

Scorr,  C.  J.,  and  Peck,  Gholson  and  Brinkekhoff,  JJ.,  concurred. 


itsy 

cen  \    p 
;of    1 


\ 


<^^.-  ;^^ 


V 

CE   V.   TRUSTJ^ES'' OF   TOWSONTOWN   STATION. 


(i  r-       '  BOYCE  V.  TRUSTEES   OF  TOWSONTOWN   STATION  OF 
'  THE  M.  E.   CHURCH. 


u- 


1877.     46  Maryland,  359.1 

/     Assumpsit  against  an  alleged  religious  corporation.     Defendants  ap- 

Ipeared  by  counsel,  and  pleaded,  1st,  that  the  defendants  are  not  and 

'  never  were  a  body  corporate,  as  alleged.     Plaintiff  offered  in  evidence 

an  agreement  or  certificate  of  incorporation  under  a  general  statute. 

The  statute  required  this  document  to  be  acknowledged  before  two 

ustices  of  the  Peace,  or  a  Judge  of  the  Circuit  Court  or  of  the  Supreme 

Bench  of  Baltimore.     It  was  acknowledged  before  a  single  Justice  of 

/^  "     J     the  Peacq.    Plaintiff,  to  show  user  of  the  corporate  name  and  franchise, 

//V^^-'^ffered  in  evidence  a  deed  of  land   to  said  Trustees ;  and  a  mortgage 

^    ^  ^2_  fi'O™  said  Trustees  to  Crook  and  Hiss,  Trustees. 

'         All  the  above  evidence  was  rejected,  and  plaintiff  excepted.     Verdict 
VA'^^^d  judgment  for  defendants.     Plaintiff  appealed. 
,  iV        Wm.  A.  Fisher  and  Orville  Horwitz,  for  appellant. 
Arthur  W.  Machen^  for  appellee. 

Stewart,  J.  .  .  .  But  the  appellant  has  undertaken  to  offer  evidence 

of  certain  acts  and    proceedings   of  the  appellee,  referred  to  in  the 

xceptions,  to  show  that  it  held  itself  out  as  a  corporation,  and  treated 

ith-tue  appellant  as  such,  and  is  estopped  from  denying  its  liability  as 

corporation. 

/    We  think  it  would  be  extending  the  doctrine  of  estoppel  to  an  extent, 

not  justified  by  the  principles  of  public  policy,  to  allow  it  to  operate 

through  the  conduct  of  the  parties  concerned,  to  create  substantially'  a 

de  facto  corporation,  with  just  such  powers  as  the  parties  may  by  their 

acts  give  to  it. 

This  would  be  substituting  the  dealings  of  the  parties,  for  compliance 
with  the  requirements  of  the  law,  and  giving  to  them  the  same  effect 
tiu-ough  the  aid  of  the  Courts.  Thus,  virtually,  through  the  Courts, 
recognizing  the  existence  of  the  corporation,  in  manifest  disregard  of 
the  written  law. 

It  has  been  determined  by  this  Court,  that  a  corporation  cannot  bind 
itself  in  excess  of  its  powers.  Penna.  tSteam  Navigation  Co.  vs. 
Dandridge,  8  G.  &  J.,  319. 

Whilst  denying  its  capacity  upon  any  principle  of  estoppel,  to  make 
contracts  ultra  vires,  to  bind  itself;  it  would  not  be  consistent  with 
that  tlieoiy  to  recognize  its  existeyice  ad  Ubition,  according  to  the  con- 
duct of  the  parties  concerned. 

Such  a  principle  would  seem  to  affix  no  otlier  limit  to  the  existence 
of  the  coi-poration  de  facto,  or  the  extent  of  its  power  than  the  deal- 
ings of  tlic  parties,  tlnough  the  recognition  of  the  Courts,  might,  upon 
the  doctrine  of  estopiK;!,  prescribe. 

.  1  Stateiiicnt  abridged.     Arguments,  and  part  ui  (;i)iuioii,  omitted.  —  Ed. 


BOYCE   V,   TKUSTEES   OF   TOWSONTOWN   STATION.  211 

It  would  be  more  reasonable  to  hold  corporations  to  their  contracts, 
though  ultra  vires,  of  which  they  have  received  the  benefit,  or  to  pre- 
vent parties  who  have  contracted  with  them,  and  received  the  bene- 
fit therefrom,  from  defeating  their  liability,  on  the  ground  of  want  of 
power  in  the  corporation,  as  is  held  in  quarters  of  high  authority, 
(see  note  and  references  in  2/ul  ICent,  351,)  than  to  hold  that  corpora- 
tions should  be  deemed  to  have  existence,  because  they  had  so  held 
themselves  out. 

The  statute  law  of  the  State,  expressl}'  requiring  certain  prescribed 
acts  to  be  done  to  constitute  a  corporation,  to  permit  parties  indirectlj', 
or  upon  the  principle  of  estoppel,  virtually  to  create  a  corporation  for 
any  purpose,  or  to  have  acts  so  construed,  would  be  in  manifest  opposi- 
tion to  the  statute  law,  and  clearly  against  its  policy,  and  justified 
upon  no  sound  principle  iu  the  administration  of  justice. 

Judgment  affirmed. 


212  THRASHER  V.   PIKE   COUNTY   R.   CO. 


CHAPTER  V. 

ACQUISITION  OF  MEMBERSHIP  — SUBSCRIPTIONS  FOR 

ST0CK.1  Ua    a  d^tryb  %,  ^ 

^'^'^^riRASHER  V.  PIKE  COUNTY  R.  CO. 

\l  ^  yAj^  1861.     25 ///mow,  393.2 

\ij  A^m.  A''^^  .BfeEESE,  J.     The  appellee,  who  was  plaintiff  in  the  court  below, 
IV'     (^ges  several  reasons  justifying  a  recovery  in  this  case,  which  it  is 
Ji^  i(       necessary  to  notice.     The  declaration  contains  a  special  count,  aver- 
I /^T^  Vjrmng,  that  on  the  nineteenth  of  March,  1856,  the  plaintiffs  were  a  body 
\  '      [Lpolitic  and  corporate,  with  power  to  construct  and  operate  a  railroad 
•  .^)rH^  within  the  county  of  Pike,  and  authorized  by  law,  as  such  corporation,  to 
V*""^*'   Insecure  subscriptions  to  the  capital  stocli  of  the  company  to  the  amount 
^i  /'jj-V^  A)f  one  million  of  dollars,  in  shares  of  one  hundred  dollars  each,  and, 
V      ^r       ^       desiring  to  ascertain  what  amount  of  stock  would  be  subscribed,  and 
r/'Mv     nO^    ^  ^0^  having  opened  regular  subscription  books,  but  intending  so  to  do, 
■  '       ^    M  i/^       agreed  with  the  defendant  that  they  would,  in  a  reasonable  time  there- 
\jLji'^ t"/^  4fter,  open  books  for  the  purpose  of  securing  such  subscriptions,  and 

.(^  ,  Ik^  K  ■(      wA    that  they  would  permit  and  allow  the  defendant,  when  the  books  should 
■\  ,j<^t  t^       be  opened,  to  subscribe  to  the  capital  stock  of  the  company  thirty 
^^^  shares  of  one  hundred  dollars  each,  and  upon  payment  therefor,  the 

defendant  should  be  the  owner  of  thirty  shares  of  the  capital  stock  of 
the  company.  It  is  then  averred,  that  the  defendant,  in  consideration 
of  this  promise,  undertook  and  promised  the  plaintiff  that  he  would 
subscribe  to  the  stock  of  this  company  the  sum  of  three  thousand  dol- 
lars, when  the  books  should  be  opened  for  subscriptions ;  that  this 
promise  was  by  a  writing,  signed  by  the  defendant,  and  by  him  de- 

1  The  effect  of  fraud  in  obtaininj^  suljscriptions  is  not  dealt  with  as  a  specific  topic  in  this 
book.  Tlie  fjeneral  rule  of  law,  tliat  a  contract  induced  by  fraudulent  representations  is 
voiilable  at  the  option  of  the  innocent  party,  "ai)plies  with  full  force  both  to  contracts  of 
membership  and  to  contracts  to  jiurchase  or  to  take  shares  in  a  corporation  at  a  future  time." 
Hut,  of  course,  the  riRht  to  avoid  a  subscrijition  induced  by  fraud  may  bebarred  by  laches. 
And,  in  view  of  the  peculiar  character  of  the  contract  of  membership,  "and  the  e(|uitable 
relations  which  it  creates  as  between  the  shareholders  and  creditors  atid  between  the  share- 
holders themselves,"  the  person  defrauded  "must  proceed  with  the  utmost  dilijifence  if  he 
desires  to  annul  his  contract."  See  1  Morawetz  on  Private  Corporations,  2d  ed.  ss.  94  and 
108.  —  En. 

2  Statement  omitted.  Only  so  much  of  the  opinion  is  given  as  relates  to  a  single  point. 
—  Ed. 


Qr^^ 


THRASHER  V.  PIKE   COUNTY   R.   CO.  213 

livered  to  the  plaintiff.  It  is  then  averred,  that  on  the  same  day,  sub- 
scription books  to  the  capital  stock  of  the  company  were  opened,  of 
which  the  defendant  had  notice.  The  breach  is,  that  the  defendant 
neglected  and  refused  to  subscribe  anything  to  the  capital  stock,  ac- 
companied by  an  averment  that  the  subscription,  when  the  books  were 
opened,  was  due  and  payable  before  the  commencement  of  the  suit, 
and  although  notified  thereof,  the  defendant  has  refused  to  pay  any 
part  of  the  sura  of  three  thousand  dollars.  The  common  counts  are 
added,  in  one  of  which  the  indebtedness  is  alleged  to  be  for  one  hun- 
dred shares  of  the  stock  of  the  Pike  County  B^ailroad,  before  that  time 
bargained  and  ^old  to  the  defendant. 

This  is  the  cause  of  action  as  set  forth  by  the  plaintiffs,  and  it  is 
claimed  by  them,  that  they  are  entitled  to  recover  as  damages  the  par 
value  of  the  stock,  or  the  amount  of  calls  made  from  time  to  time  upon 
it,  and  which,  at  the  commencement  of  the  suit,  amounted  to  fourteen 
installments,  of  five  per  cent,  each,  making,  in  all,  twenty-one  hundred 
dollars. 

This,  we  do  not  think,  is  a  fair  view  of  the  defendant's  liability  upon  I 
his  promise,  if  one  was  made  to  the  plaintiffs.  His  undertaking  is,  I 
to  subscribe  a  certain  amount  of  stock,  when  the  subscription  books 
should  be  opened.  This  promise  does  not  make  him  a  stockholder, 
and,  as  such,  liable  to  calls.  The  company  has  parted  with  no  stock 
to  him,  and  can  only  claim  as  damages,  the  actual  loss  sustained  by 
them  by  his  failure,  or  refusal  to  subscribe,  when  he  was  notified  the 
books  were  opened  for  such  purpose.  The  company  has  the  stock 
which  the  defendant  promised  to  take,  but  did  not  take.  His  promise 
is  like  any  other  promise,  or  agreement  to  purchase  any  specific  article 
of  property.  If  the  property  contracted  for  be  retained  by  the  vendor, 
and  there  is  no  delivery  to  the  purchaser,  or  offer  to  deliver,  the  dam 
ages  must  not  be  measured  by  the  value  of  the  prop'srty  ;  for  it  would 
not  be  just,  in  such  cases,  that  the  vendor  should  retain  the  property, 
and  recover,  also,  the  value  of  it  from  the  promisor.  Some  damag 
might  result  from  the  loss  of  a  bargain,  and  to  such  the  vendor  woul 
be  entitled,  if  the  extent  could  be  established.  In  many  cases,  they 
would  be  merely  nominal.  On  an  agreement  for  the  sale  and  purchase 
of  stocks,  and  a  refusal  by  the  purchaser  to  take  the  stocks,  the  mea- 
sure of  damages,  ordinarily,  might  be  the  difference  between  the  par 
value  of  the  stocks  and  their  market  value,  or  between  them  and 
money.  As  well  argued  by  the  appellant,  the  defendant  having  vio- 
lated his  promise  by  failing  to  subscribe,  he  has  acquired  no  right  to 
stock  ;  nor  could  a  recovery  in  this  action  entitle  him  to  become  a 
stockholder.  The  company  retains  its  stock,  and  the  defendant  his 
money.  A  stock  certificate  of  three  thousand  dollars  would  represent 
a  value  to  the  company  equivalent  to  so  much  money,  and,  in  a  state- 
ment of  their  liabilities,  this  would  appear  against  the  company  as  so 
much  held  by  the  stockholders,  for  which  the  company  was  respon- 
sible.    If  there  is  no  actual  subscription,  the  company  does  not  incur 


A 


214  WINDSOR   ELECTRIC   LIGHT   CO.   V.   TANDY. 

this  liability.  There  being  no  special  damages  alleged,  or  proved,  we 
do  not  think  the  plaintiffs  could  recover  under  this  declaration,  as  they 
have  done,  the  par  value  of  the  stock  the  defendant  promised  and 
af^reed  to  take.  A  proper  count  might  doubtless  be  so  framed  as  to 
justify  a  full  recovery,  under  sufficient  proof. 
[Remainder  of  opinion  omitted.] 

f  Judgment  reversed. 

(j^    ,   f^y    WINDSOR  ELECTRIC  LIGHT  CO.   v.  TANDY. 

'-       jT      ^  1893.    66  Ve,rm.ont,  248.1 

^  .     Y  Tyler,  J.     This  is  an  action  of  general  assumpsit  brought  by  the 

^^^  -f^  plaintiff  company  to  recover  of  the  defendant  an  assessment  upon  his 

(y^    ^*^  subscription  for  shares  of  the  plaintiff's  capital  stock.     After  the  de- 

,J^  y^jLl  V^     fendant  had  rested  the  court  directed  a  verdict  upon  the  ground  that 

'    A/      U^  ^  /^    jithe  action  could  not  be  maintained  in  the  absence  of  an  express  jpror. 
^u^W  /V'^^^se. 
\  \>-      1         /A\     A    ,  /  It  appeared  in  evidence  that  the  defendant  and  eight  other  persons, 
'*'       "^  on  Feb.  21,  1890,  associated  themselves  together  as  ^  corporation, 
under  ch.  153,  R.  L.,  as  follows  : 
\       ''  We,  the  subscribers,  hereby  associate  ourselves  together  as  a  cor- 
\  poration  under  the  laws  of  the  state  of  Vermont,  to  be  known  by  the 
name  of  the  Windsor  Electric  Light  Co.,  for  the  purpose  of  furnish- 
ing electric  light,  electric  heat  and  electric  power  at  Windsor,  in  the 
county  of  Windsor,  in  the  state  of  Vermont,  with  a  capital  stock  of 
five  thousand  dollars,  divided  into  two  hundred  shares  of  twenty-five 
dollars  each.     Dated  at  said  Windsor,  this  21st  day  of  February,  A. 
D.  1890." 

The  articles  of  association  were  duly  recorded  July  3,  1890,  in  the 
office  of  the  secretary  of  state,  whereupon  the  corporation  was  organ- 
ized, by-laws  were  adopted  and  officers  were  elected  as  provided  by 
the  statute.  At  a  meeting  held  Nov.  29,  1890,  it  was  voted  to  assess 
the  stock  one  hundred  cents  on  each  dollar  subscribed,  and  the  Assess- 
ment was  made  payable  Dec.  15,  1890. 

The  defendant's  subscription  was  as  follows  : 
«  Frank  H.  Tandy,  .....         80  shares," 

following  which  were  the  names  and  subscriptions  of  the  other  eight 
subscribers. 

Section  3260,  R.  L.,  ch.  152,  provides  that  when  a  proprietor  in  any 
corporation  does  not  pay  a  tax  or  assessment  laid  or  assessed  by  such 
corporation,  agreeably  to  the  by-laws  thereof,  the  treasurer  may  sell, 
by  public  auction,  the  shares  of  the  delinquent  under  such  regulations 
as  the  corporation,  by  its  by-laws,  directs.  There  was  no  provision  in 
1  Statement  and  arguments  omitted;  also  part  of  the  opinion.  —  Ed. 


WINDSOK   ELECTRIC   LIGHT   CO.   V.    TANDY.  215 

the  by-laws  that  the  plaintiff  might  sell  delinquent  stock,  as  is  per- 
mitted by  this  section  of  the  statute. 

The  plaintiff  claims  that  the  defendant's  subscription  to  the  capital 
stock  raised  an  implied  promise  by  him  to  pay  all  assessments  law- 
fully laid  upon  his  stock,  and  that  the  statutory  remedy  was  merely 
cumulative.  The  defendant  contends  that,  as  there  is  no  provision 
for  the  enforcement  of  payment  of  assessments  either  in  chapter  153, 
in  the  by-laws,  or  in  the  articles  of  association,  the  plaintiff's  only 
remedy  is  by  a  forfeiture  and  sale,  as  provided  in  section  3260. 

When  the  defendant  and  others,  by  articles,  had  associated  them- 
selves together  pursuant  to  the  provisions  of  the  statute,  and  the  arti- 
cles had  been  recorded  and  certified  by  the  secretary  of  state,  and  the 
corporation  had  been  organized,  and  all  the  conditions  precedent  re- 
quired by  the  statute  had  been  complied  with,  those  persons  became  a 
body  politic  and  corporate  under  the  laws  of  the  state.  The  plain- 
tiff's corporate  existence  was  then  and  thereby  established,  and  the 
defendant  became,  by  the  act  of  subscription,  a  stockholder.  His 
subscription  is  presumed  to  have  been  accepted  by  the  plaintiff,  and 
it  was  binding  upon  it  and  upon  the  defendant,  the  prospective  rights 
of  membership  being  a  sufficient  consideration  to  support  the  con- 
tract. Beach  on  Pri.  Cor.,  ss.  63  and  513 ;  HaHford  &  Neiv  Haven 
R'.  Co.  V.  Kennedy,  12  Conn.  499. 

Whether  the  defendant,  by  becoming  a  stockholder,  incurred  a  per- 
sonal liability  to  pay  his  proportion  of  such  assessments  as  should  be 
laid  upon  the  stock,  can  best  be  determined  by  inquiring  what  the 
relation  was  which  he  assumed  towards  the  corporation  by  the  act  of 
subscription.     By  agreement  the  entire  capital  was  to  be  five  thou- 
sand dollars,  divided  into  two  hundred  shares  of  twenty-five  dollars 
each.    The  defendant  subscribed  for  and  agreed  to  take  eighty  shares, 
and  the  corporation,  by  accepting  his  subscription,  became  obligated' 
to  assign  that  number  of  shares  to  him.     It_seems  clear,  then,  that  i      n 
the  defendant  impliedly  promised^ta^contribute,  toTvards  the  entire  I    /j 
capital  as  miic5£dhey  as  his  number  oX  shares  represented,^  and  in  ' 
such  instalments  and  at  such  times  as  the  cojpQration  should  require. 
'^n  Lake  Ontario,  etc.,  R.  Co.  v.  Mason,  16  N.  Y.  451,  it  was  held  that] 
the  defendant's  subscription  to  the  articles  was,  in  effect,  a  contract 
to  pay  for  the  shares  for  which  he  subscribed.     Dayton  v.  Boist,  31 
N.  Y.  435  ;  Phoejiix  Warehouse  Co.  v.  Badger,  67  N.  Y.  294 ;  Merri- 
mac  Mining  Co.  v.  Levy,  54  Penn.  St.  227. 

Morawetz  on  Pri.  Cor.,  s.  56,  says  that  such  a  subscription  does  not 
constitute  a  mere  executory  contract  of  sale^  but  that  the  liability  to 
m\Lthe  amount  of  the  shares  is  an  incident  of  the  contract  ol"  mem- 
bership ;    that  the~moraent  tlie  "suBscriber  assumes' the  statuS^f  a  / 
sliareholder  he  becomes  entitled  to  the  rights  and  privileges  incident/ 
to  membership,  and  is  liable  to  all  the  obligations  of  a  stockholder,) 
and  must  contribute  the  amount  of  capital  subscribed  by  him.     In 
section  128  the  same  writer  says  that  the  liability  is  not  merely  to 


216  ATHOL   MUSIC   HALL   CO.   V.   CAREY. 

pay  for  the  shares  for  which  he  has  subscribed,  but  to  contribute  to 
the  capital  of  the  company  in  proportion  to  the  number  of  shares  he 
has  taken.  See  notes  to  same  section.  In  Massachusetts,  Maine  and 
New  Hampshire  a  different  rule  has  obtained.  In  those  states  it  has 
been  held  that,  unless  there  is  an  express  promise  to  pay  for  the 
shares,  the  subscriber  incurs  no  personal  liability. 

[After  commenting  upon  Essex  Bridge  Co.  v.  Tuttle,  2  Vermont, 
393 ;  Conn.  &  Pass.  B.  Co.  v.  Baileij,  24  Vermont,  465 ;  and  B.  &  B. 
B.  Co.  V.  Thrall,  35  Vermont,  536.] 

Judge  Aldis  said  in  the  opinion  [in  B.  &  B.  B.  Co.  v.  Thrall]  : 

"  At  an  early  day  in  railway  enterprises  it  was  claimed,  that  where 
provisions  for  forfeiture  were  embodied  in  the  charter,  the  corpora- 
tion could  not  sue  for  subscriptions,  but  must  and  could  enforce  the 
payment  of  them  only  by  proceedings  in  forfeiture.  But  it  has  long 
been  held  that  the  right  to  sue  and  to  declare  stock  forfeited  co-exist, 
and  that  the  latter  proceeding  is  merely  cumulative.  Such  it  was 
intended  to  be  in  this  charter."  ... 

While  the  case  cannot  be  regarded  as  authority  upon  the  point  here 
in  controversy,  we  think  that  the  rule  stated  in  the  extract  quoted 
from  the  opinion  is  the  more  just,  and  ought  to  be  adopted  rather 
than  the  one  that  prevails  in  some  of  the  other  states. 

It  was  not  necessary  that  the  defendant  should  expressly  promise  to 
pay  for  his  shares,  or  to  contribute  his  proportionate  amount  of  the 
$5,000  capital.  The  promise  is  clearly  implied,  and  the  action  can 
be  maintained  upon  it.    The  remedy  by  forfeiture  is  only  cumulative. 

Judgment  reversed  and  cause  remanded,^ 

ATHOL   MUSIC   HALL  COA.  CAREY. 

J  ^.  1875.     UG  Massachusetts,  i71.^ 

L     //^^  ij^       L^      jCoNTRACT  on  the  following  agreement : 

"■^        <y\x(  ^    Ji      "We,  the  undersigned,  severally  promise  and  agree  to  and  with 

'H     A «-        .d  ^   -each  other  that  we  will  associate  ourselves  into  a  corporation,  the 

name  whereof  shall  be  determined  by  the  members  thereof,  and  pay 

/    /to  the  treasurer  of  said  corporation  the  amount  of  the  several  shares 

set  against  our  respective  names,  for  the  purpose  of  purchasing  the 

omestead  of  Washington  H.  Amsden,  in  Athol,  on  Main  Street,  and 

•    ±-   ^      erecting  a  public  hall  thereon.     The  amount  of  the  capital  stock  of 

^v^l    iA^  '  M^        J^F^  corporation  to  be  not  less  than  twenty  thousand  dollars. 

"V   P  '    Jr'^^  j'^  Names.  No.  of  shares.  Amount. 

^  0.^   .y'  John  Carey,  One,  $100." 

f^    .    ^     /*^         fl/     y       ^  For  an  exhaustive  argument  in  support  of  this  view,  see  the  opinion  of  Huntington, 
;    ly^  f  J.,  in  Hartford  ,f  N.  TJ.  R.  Co.  v.  Kennedy,  12  Conn.  499.  —Ed. 

JL  L/€t     \  3  ytatement  abridged.  —  Ed. 


ATHOL   MUSIC   HALL  CO.   V.    CAREY.  217 

The  declaration  alleged  that  the  defendant  entered  into  and  signed 
the  above  contract,  (a  copy  whereof  was  annexed,)  and  thereby  agreed, 
in  consideration  of  other  parties  signing  similar  agreements,  to  pay  to 
the  treasurer  of  the  Athol  Music  Hall  Company,  the  sum  of  $100,  for 
one  share  in  the  capital  stock  of  said  corporation  when  it  should  be 
organized.  It  then  alleged  the  organization,  the  purchase  of  the 
homestead  of  Amsden,  the  building  of  a  public  hall  thereon,  a  demand 
for  the  $100,  readiness  to  deliver  the  stock,  and  the  refusal  of  the 
defendant  to  pay. 

At  the  trial  in  the  Central  District  Court  of  Worcester,  the  defend- 
ant asked  the  judge  to  rule  that  the  action  could  not  be  maintained 
on  the  pleadings.     This  request  was  refused. 

There  was  evidence  tending  to  show  that  in  December,  1870,  the 
defendant  signed  the  agreement  declared  upon  ;  that  the  act  of  incor- 
poration was  passed  on  March  3,  1871 ;  that  the  corporation  was  duly 
organized  on  March  18,  1871,  and  that  the  name  of  the  defendant  was 
entered  on  the  books  of  the  corporation  as  a  stockholder  and  notices 
were  issued  and  directed  to  him  of  all  the  meetings. 

The  defendant  then  asked  the  judge  to  instruct  the  jury  that  if 
they  were  satisiied  upon  the  evidence  that  the  defendant  never 
attended  any  meeting  of  the  corporation  at  the  time  of  its  organiza- 
tion, or  after  its  organization,  the  action  could  not  be  maintained, 
although  the  corporation  still  retained  his  name  upon  its  books,  and 
sent  him  notices  of  the  meetings  ;  that  it  was  not  enough  for  the 
plaintiff  to  show  that  it  retained  Carey's  name  upon  its  books,  and 
otherwise  considered  him  as  entitled  to  a  share  in  the  capital  stock, 
unless  they  are  also  satisfied  that  Carey  did  some  act  after  its  organi- 
zation in  ratification  of  his  agreement. 

The  judge  refused  to  give  these  instructions,  but  instructed  the 
jury  that  if  the  plaintiff  entered  the  defendant's  name  on  the  books 
of  the  corporation,  as  a  stockholder,  issued  and  directed  notices  to 
him  of  all  its  meetings,  and  gave  him  the  same  opportunities  to  attend 
the  meetings  and  participate  in  the  proceedings  thereof  as  were  given 
to  other  stockholders,  they  were  authorized  to  find  that  the  defendant's 
offer  was  accepted,  and  that  he  was  received  as  a  member  of  the  cor- 
poration. The  jury  found  for  the  plaintiff,  and  the  defendant  alleged 
exceptions. 

H.  L.  Parker,  for  the  defendant. 

W.  W.  Rice  &  F.  T.  Blackmer,  for  the  plaintiff. 

Wells,  J.  In  agreements  of  this  nature,  entered  into  before  the 
organization  is  formed,  or  the  agent  constituted  to  receive  the  amounts 
subscribed,  the  difficulty  is  to  ascertain  the  promisee,  in  whose  name 
alone  suit  can  be  brought.  The  promise  of  each  subscriber,  "  to  and 
with  each  other,"  is  not  a  contract  capable  of  being  enforced,  or  intended 
to  operate  literally  as  a  contract  to  be  enforced  between  each  sub- 
scriber and  each  other  who  may  have  signed  previously,  or  who  should 


218  ATHOL   MUSIC   HALL   CO.   V.   CAREY. 

sign  afterwards,  nor  between  each  subscriber  and  all  the  others  collec- 
tively as  individuals.  The  undertaking  is  inchoate  and  incomplete  as 
a  contract  until  the  contemplated  organization  is  effected,  or  the  mutual 
agent  constituted  to  represent  the  association  of  individual  rights  in 
accepting  and  acting  upon  the  propositions  offered  by  the  several 
subscriptions.  When  thus  accepted,  the  promise  may  be  construed 
to  have  legal  effect  according  to  its  purpose  and  intent,  and  the  prac- 
tical necessity  of  the  case ;  to  wit,  as  a  contract  with  the  common 
representative  of  the  several  associates. 

In  Thompson  v.  Page,  1  Met.  565,  and  Ives  v.  Sterling,  6  Met.  310, 
individuals  subsequently  selected  by  voluntary  associations  to  receive 
and  expend  subscriptions,  in  accordance  with  the  terms  of  the  agree- 
ment of  association,  were  allowed  to  maintain  actions  against  indi- 
vidual subscribers  for  the  amount  of  their  several  subscriptions.  Being 
thus  constituted  the  payees,  they  were  construed  to  have  become  also 
the  promisees  under  the  written  agreement.  The  same  principle 
applies  where  the  agreement  contemplates  the  organization  of  a  cor- 
poration, and  refers  the  payment  of  the  subscriptions  to  the  proper 
[officers  of  such  corporation.  See  Feojjle's  Ferry  Co.  v.  Balch,  8  Gray, 
1303,  311. 

In  this  agreement  the  treasurer  of  the  corporation  to  be  established 
'is  expressly  made  payee.  The  corporation  is  the  aggregate  of  the 
several  individuals  entering  into  the  agreement,  one  of  whose  terms 
was  that  they  should  thus  associate  and  confer  their  individual  rights 
upon  the  corporation.  We  are  of  opinion  that  the  corporation,  and  the 
corpora.tion  alone,  is  the  proper  party  to  bring  an  action  upon  such  an 
agreement. 

The  corresponding  agreements  of  the  other  subscribers,  the  organi- 
zation of  the  corporation,  and  the  allotment  to  the  defendant  of  the 
shares  for  which  he  subscribed,  furnish  sufficient  consideration  for  his 
promise  to  take  and  pay  for  those  shares.  Although  his  promise  was 
originally  voluntary,  or  in  the  nature  of  a  mere  open  proposition,  yet 
having  been  accepted  and  acted  on  by  the  party  authorized  so  to  do, 
before  he  attempted  to  retract  it,  he  has  lost  the  right  to  revoke. 
His  proposition  has  become  an  accepted  mutual  contract,  and  is  bind- 
ing upon  him  as  well  as  upon  the  corporation.  The  votes  of  the  cor- 
poration indicate  sufficient  authority  for  the  institution  of  this  suit  in 
the  corporate  name  and  behalf. 

These  considerations  dispose  of  all  the  objections,  taken  in  various 
forms,  to  the  maintenance  of  the  action. 

Exceptions  overruled} 

1  As  to  the  question  of  "consideration,"  where  the  agreement  to  take  shares  is  made 
simply  bj-  the  subscribers  among  themselves;  see  the  discussion  in  Taylor  on  Corporations, 
4th  ed.  88.92,  93,  94.  — Ed. 


Bryant's  pond  steam-mill  go.  v.  felt.  219 


BRYANT'S  POXD  STEAM-MILL  CO.  v.  FELT. 

1895.     87  Maine,  234.1 

Walton,  J,     The  only  question  we  find  it  necessary  to  consider  isK 
whether  a  subscriber  to  the  capital  stock  of  an  unorganized  corpora-\ 
tion  has  a  right  to  withdraw  from  the  enterprise,  provided  he  exer-^ 
cises  the  right  before  the  corporation  is  organized  and  his  subscrip-j 
tion  is  accepted.     We  think  he  has.     Such  a  subscription  is  not 
completed  contract.     It  takes  two  parties  to  make  a  contract.     A  non- 
existing  corporation  can  no  more  make  a  contract  for  the  sale  of  its! 
stock  than  an  unbegotten  child  can  make  a  contract  for  the  purchase/ 
of  it. 

The  right  of  subscribers  to  the  capital  stock  of  a  proposed  corpora- 
tion to  withdraw  their  subscriptions  at  any  time  before  the  organiza- 
tion of  the  corporation  is  completed  has  been  affirmed  in  several 
recent  and  well  considered  opinions.  The  right  rests  upon  the  im- 
pregnable ground  of  the  legal  impossibility  of  completing  a  contract 
between  two  parties  only  one  of  which  is  in  existence.  Xhfirfi-Can^be 
naja^eting_of,ji£_.minxla^ol_tiie^  parties.  There  can  be  no  acceptance 
of  the  subscriber's  proposition_to  become  a  stockhold.ei.__  There  can 
bejio  inutualityof  rightsqr  obligations.  There  can  be  no  considera- 
tion  for  the  subscriber^s_j2romise.  As  said  in  one  of  our  own  deci- 
sIoiTs,  it  is  a  mere  nudum  pactum,  —  a  promise  without  a  promisee,  —  a 
contractor  without  a  contractee.  In  fact,  every  element  of  a  binding 
contract  is  wanting.  If  the  subscriber's  promise  to  take  and  pay  for 
shares  reniains  unrevokeB  till  the  organization  of  the  proposed  cor-_y^/J^^^^^^^^^ 
poration  is  effected,  and  his  promise  has  been  accepted,  then  we  have_/  <L^i.j^.^x^gc,-^ 
alljthe^ements^of^a  validT contract  Competent  parties.  Mutuality 
of  duties  and  obligations.  A  valid  consideration,  the  promise  of  one 
party  being  a  sufficient  consideration  for  the  promise  of  the  other. 
A  promise  as  well  as  a  promisor.  A  contractee  as  well  as  a  con- 
tractor. In  fact,  all  the  elements  of  a  valid  contract  are  present,  and 
the  subscription  has  become  binding  upon  both  of  the  parties.  But,'] 
till  the  corporation  has  come  into  existence,  all  these  elements  are 
necessarily  wanting,  and  the  subscriber's  promise  amounts  to  no  more/ 
than  an  offer,  which,  like  all  mere  offers,  may  be  withdrawn  at  any 
time  before  acceptance.  When  accepted,  it  becomes  binding.  Till] 
accepted,  it  remains  revocable.  This  conclusion  is  sustained  by  rea- 
son and  authority. 

In  Hudson  Real  Estate  Co.  v.  Tower,  156  Mass.  82  (1892),  the 
action  was  founded  on  a  subscription  to  the  capital  stock  of  an  un- 
organized corporation,  and  the  defense  was  based  on  an  alleged  with- 
drawal of  the  subscription.     The  right  to  withdraw  was  controverted. 

1  Statement  and  part  of  opinion  omitted.  —  Ed. 


220  LINCOLN   SHOE   MFG.   CO.   V.   SHELDON. 

The  court  held  that  at  the  time  when  the  defendant  signed  the  sub- 
scription paper  declared  on,  it  Avas  not  a  contract,  for  want  of  a  con- 
tracting party  on  the  other  side ;  that  while  such  a  subscription  may 
become  a  contract  after  the  corporation  has  been  organized,  still,  until 
the  organization  is  effected,  and  the  subscription  is  accepted,  it  is  a 
mere  proposition  or  offer,  which  may  be  withdrawn,  like  any  other 
unaccepted  proposition  or  offer. 

It  is  urged  by  the  counsel  for  the  plaintiff  corporation  that  such 
subscriptions  create  binding  and  enforceable  contracts  between  the 
subscribers  themselves,  and  are  therefore  irrevocable,  except  with  the 
consent  of  all  the  subscribers  ;  and  some  of  the  authorities  cited  by 
him  seem  to  sustain  that  view.  But  we  find,  on  examination,  that 
such  views,  when  expressed,  are  in  most  cases  mere  dicta,  and  that 
the  cases  are  very  few  in  which  such  a  doctrine  has  been  acted  upon. 
Reason  and  the  weight  of  authority  are  opposed  to  such  a  view.  Of 
course,  subscription  papers  may  be  so  worded  as  to  create  binding 
contracts  between  the  subscribers  themselves.  But  we  are  not  now 
speaking  of  such  subscriptions ;  or  of  voluntary  and  gratuitous  sub- 
scriptions to  public  or  charitable  objects,  which,  when  accepted  and 
(acted  upon,  become  binding.  We  are  now  speaking  only  of  subscrip- 
tions to  the  capital  stock  of  proposed  business  corporations.  With 
regard  to  such  subscriptions,  we  regard  it  as  settled  law  that  they  do 
not  become  binding  upon  the  subscribers  till  the  corporations  have 
been  organized  and  the  subscriptions  accepted  ;  and  that,  till  then,  the 
subscribers  have  a  right  to  revoke  their  subscriptions.  And,  in  view 
of  the  fact  that  such  subscriptions  are  often  obtained  by  over  persua- 
sion, and  upon  sudden  and  hasty  impulses,  we  are  not  prepared  to  say 
that  the  rule  of  law  which  allows  such  a  revocation  is  not  founded  in 
wisdom.     We  think  it  is. 

.  Judgment  for  defendant 

J     / 

r  fX^^}r[y   (  ^/^NCOLN   SHOE   MFG.   CO.    v.   SHELDON. 

V^      l\r  I  y  r  jg,)5_     44  Nebraska,  279.1 


.  itO^    y*     ^)^         The  petition  contains  (/?(!'«r  o/i'a)  the  following  allegations: 


\V       "^  Error  from  the  District  Court  of  Lancaster  County. 
U^^         The  petition  contains  {inter  alia)  the  following  allegf 
/  c^      '  Plaintiff  is  a  corporation,  organized  and  incorporated  Feb.  10,  1890, 


rb  ^^'  tV  nnder  the  general  laws  of  Nebraska  relating  to  manufacturing  corpo- 
I  -r^*.  f^*  X  ^Jii  '''^^^^"^  5  having  a  capital  stock  of  $100,000,  divided  into  2000  shares 
^  Jf"^  yj-^  jj^  *'^>f  ^^^  each,  of  which  more  than  10  per  cent  has  been  subscribed. 
Jf^^  ty^  '<  ^"  March  22,  1890,  the  defendant,  with  other  persons,  became  a  sub- 
flj>^   f       aaV        scriber  to  the  capital  stock  by  severally  executing  and  delivering  the 


Jt  ^  ^  Statement  abridged.     Arguments  and  part  of  opinion  omitted.  — Ed. 


LINCOLN   SHOE   MFG.    CO.    V.   SHELDON. 


221 


signed  subscribers,  hereby  bind  ourselves  to  purchase  the  number  of 
shares  of  stock  set  opposite  our  names  in  the  Lincoln  Shoe  Me 
turiug  Company  at  fifty  (^50)  dollars  per  share  ;<  one  fourth  of  the 
amount  so  by  us  subscribed  respectively  to  be  paid  when  the  founda- 
tion of  the  building  is  laid ;  one  fourth  when  the  building  is  undei 
roof,  the  balance  on  call  of  the  directors.  /"Tn  consideration  of  the 
building  being  erected  on  the  west  half  oithe  northeast  quarter  of 
section  twenty  eight  (28),  town  ten  (10),  range  six  (6),  along  the  line 
of  the  Lincoln  &  Northwestern  railroad.  Witness  our  hands  on  this 
22d  day  of  March,  1890."  Defendant  placed  the  number  of  fifty 
shares  opposite  his  name  ;  and  thereby  agreed  to  take  that  number  of 
shares  and  agreed  to  pay  the  plaintiff  therefor  the  sum  of  $2500. 
After  more  than  10  per  cent  of  the  capital  stock  had  been  subscribed, 
the  plaintiff  company  commenced  the  erection  of  a  building.  The 
foundation  was  laid  June  10, 1890  ;  and  on  Sept.  1, 1890,  the  building 
was  erected  and  under  roof  ;  and  it  was  on  the  land  described  in  the 
agreement.  Plaintiff,  before  the  beginning  of  the  action,  demanded 
of  defendant  payment  of  the  two  instalments  of  one  fourth  each 
which  had  thus  become  due,  and  tendered  certificates  of  stock  to  de- 
fendant, who  has  not  paid  said  instalments.  Plaintiff  prays  judgment 
for  $1250,  with  interest. 

A  demurrer  to  this  petition  was  sustained  by  the  District  Court. 
Plaintiff  brought  error. 

Thomas  C.  Munger,  for  plaintiff  in  error.  y(rH. 

Pound  &  Biirr,  contra.  tf^    (J«^ 

Ragan  C.  [after  stating  the  case]  :  "^-Z    //        ^   ^       ' 

Two  arguments  are  relied  upon  here  to  sustain  the  judgment  of  tHa.'p  .  ,^^\jc^\  V / 


district  court. 

1.   The  first  contention 


//-' 


is  that  the  contract  of  Sheldon  made 


t^.« 


basis  of  this  suit  is  an  agreement  to  purchase  certain  shares  of  stock  l  M'     nJ^^^r  M 
of  the  manufacturing  company,  and  not  a  subscription  to  the  stock  of/  •■,j~f-'\  «<> 
such  company  ;  and  that  the  measure  of  the  manufacturing  company's';'         ~* 
damages  is  the  difference  in  the  actual  value  of  the  stock  and  the  price 


ia<^: 


^ 


.n5> 


which  Sheldon  agreed  to  pay  for  it  at  the  date  of  the  breach  of  his,  »  .^ 

contract;  and  since  the  petition  does  not  allege  what  the  value  of  t\ied  <  ^^J{tJ^'^'^ 


stock  was  at  the  date  Sheldon  refused  to  take  it,  that  it  does  not  state 
a  cause  of  action.     Is  the  contract  of  Sheldon  a  contract  to  purchase 
stock  in  the  manufacturing  company,  or  is  it  a  contract  of  subscrip-",^  '^' 
tion  to_  the  capital  stock  of  such  corporation  ?     Whether  one  or  the" 
otKer  is  a  matter  of  construction  for  the  court,  and  to  be  determined^ 
from  the  intention  of  Sheldon,  gleaned  from  the  contract  itself  and 
the  law  in  force  applicable  to  the  subject-matter  of   the  contract. 
The  manufacturing  company  is  a  corporation  organized  under  chapter 
16,  Compiled  Statutes,  1893,  entitled   "Manufacturing  Companies." 
Section  37  of  that  chapter  provides  that  whenever  any  number  of 
persons  associate  themselves  together  for  the  purpose  of  engaging  in 
the  business  of  manufacturing  they  shall  make  a  certificate  specify- 


222  LINCOLX   SHOE   MFG.    CO.   V.   SHELDON. 

ing  the  amount  of  capital  stock  necessary,  the  amount  of  each  share, 
the  name  of  the  place  where  the  corporation  shall  be  located,  and  the 
name  by  which  it  shall  be  known ;  that  such  certificate  shall  be  certi- 
fied and  forwarded  to  the  secretary  of  state  and  by  him  recorded ; 
and  when  these  things  are  done  that  the  persons  so  associating  them- 
selves together  are  authorized  to  carry  on  manufacturing  operations 
by  the  name  they  have  adopted ;  and  section  39  of  the  chapter  pro- 
vides :  "  The  persons  named  in  the  certificate  of  incorporation,  or  a 
majority  of  them,  shall  be  commissioners  to  open  books  for  the  sub- 
scription to  the  capital  stock  of  said  company,  at  such  times  and 
places  as  they  shall  deem  proper,  and  the  said  company  are  [is]  au- 
thorized to  commence  operations  upon  the  subscription  of  ten  per 
cent  of  said  stock."  It  appears  from  the  petition  that  on  the  10th  of 
February,  1890,  certain  gentlemen  associated  themselves  together  for 
the  purpose  of  organizing  the  manufacturing  company  ;  that  they 
made  the  certificate  contemplated  by  said  section  37  on  that  date  and 
tiled  it  with  the  secretary  of  state ;  and  on  the  22d  of  March  afterwards 
Sheldon  signed  the  contract  sued  upon  in  this  case.  The  presump- 
tion then  is  that  the  gentlemen,  or  a  majority  of  them,  who  executed 
the  certificate  of  incorporation  provided  for  by  said  section  37,  after 
it  was  executed  and  filed  with  the  secretary  of  state,  opened  books  to 
enable  persons,  who  might  desire  to  do  so,  to  subscribe  for  the  capital 
stock  of  the  corporation,  and  that  the  contract  sued  upon  was  made 
by  Sheldon  at  such  time.  The  law  does  not  require  that  the  capital 
stock  of  a  corporation  like  this  shall  be  subscribed  before  its  certifi- 
cate of  incorporation  is  executed  and  filed  with  the  secretary  of  state ; 
indeed  the  statute  contemplates  that  the  certificate  of  incorporation 
shall  be  first  made  and  filed  and  afterwards  the  stock  books  opened. 

The  language  of  the  contract  in  suit  is  :  "We,  the  undersigned  sub- 
scribers, hereby  bind  ourselves  to  purchase  the  number  of  shares  of 
stock  set  opposite  our  names  in  the  Lincoln  Shoe  Manufacturing 
Company  at  fifty  dollars  per  share  ;  one-fourth  of  the  amount  so 
by  us  subscribed,  respectively,  to  be  paid  when  the  foundation  of 
the  building  is  laid  ;  one-fourtli  when  the  building  is  under  roof ; 
the  balance  on  call  of  the  directors."  While  it  is  true  that  the 
word  "purchase"  is  in  the  contract,  yet  we  are  unable  to  construe 
this  contract  as  a  contract  of  sale  of  stock.  The  corporation  did 
not  own  any  stock.  The  averments  of  the  petition  exclude  the  pre- 
sumption that  this  manufacturing  company  on  the  20th  of  March, 
1890,  was  the  owner  of  any  of  its  stock  and  that  it  agreed  on  that 
day  to  sell  its  stock  or  any  of  it  to  Sheldon.  When  we  take  into 
consideration  the  law  under  which  this  incorjioration  was  organized ; 
that  it  was  authorized  to  commence  business  wlien  ten  per  cent  of  its 
capital  stock  had  been  subscribed ;  that  after  its  articles  or  certificate 
of  incorporation  had  been  filed  with  the  secretary  of  state,  that  the 
persons  executing  such  certificate  had  the  right  to  open  books  for 


LINCOLN   SHOE   MFG.   CO.   V.   SHELDON. 


223 


.1  ) 


^  /^ 


subscriptions  to  the  capital  stock  of  the  corporation ;  that  the  con- 
tract bound  the  signer  of  it  to  pay  one-fourth  of  the  value  of  fifty- 
shares  of  stock  at  fifty  dollars  a  share  when  the  foundation  of  the 
building  to  be  used  by  the  manufacturing  company  should  be  laid, 
and  a  like  one-fourth  when  such  building  should  be  under  roof,  and 
the  remainder  of  the  value  of  said  fifty  shares  at  fifty  dollars  per 
share  on  call  of  the  directors,  we  are  forced  to  the  conclusion  that  by 
the  contract  in  suit  Sheldon  subscribed  and  agreed  to  pay  for,  in  the 
manner  stated  in  the  contract,  fifty  shares  of  the  capital  stock  of  the 
manufacturing  company.  For  the  purposes  of  this  case,  however,  we 
think  it  entirely  immaterial  whether  the  contract  of  Sheldon  is  one 
to  purchase'  fifty  shares  of  stock  of  this  manufacturing  company,  or| 
whether  by  the  contract  he  subscribed  for  fifty  shares  of  this  stock. 
The  petition  alleges  that  before  the  bringing  of  this  suit  the  founda- 
tion of  the  building  to  be  used  by  tlie  manufacturing  company  had 
been  laid  and  such  building  was  under  roof,  and  that  the  manufactur- 
ing company  demanded  of  Sheldon  that  he  pay  it  ^1250,  the  agreed 
value  of  twenty-five  shares  of  said  stock,  and  at  the  same  time  ten- 
dered him  certificates  of  the  stock  of  said  corporation  for  the  amount 
of  money  claimed.  So  that  if  we  should  adopt  the  construction  of 
this  contract  claimed  by  Sheldon  he  would  still  be  liable  to  the  manu- 
facturing company  for  the  agreed  price  of  the  shares  of  stock.  As 
Sheldon's  having  agreed  to  purchase  fifty  shares  of  this  stock  at  fifty 
dollars  per  share,  and  the  manufacturing  company  having  tendered 
him  the  stock,  it  would  be  entitled  to  recover  the  contract  price  of 
the  stock.     (3  Parsons,  Contracts  [5th  ed.],  209. 

[After  referring  to  Wasson  v.  Palmer,  17  Nebr.  330 ;  Thrasher  v. 
Pike  County  R.  Co.,  25  111.  393 ;  and  Thompson  v.  Alger,  53  Mass. 
428.] 

These  decisions  are  but  applications  of  the  well  known  rule  that 
where  a  vendee  refuses  to  perform  his  contract  the  vendor  has  either  , 
one  of  two  remedies :  he  may  keep  the  property  made  the  subject  of  ' 
the  contract  and  sue  the  vendee  for  his  failure  to  perform,  and  in  I 
such  case  his  measure  of  damages  will  be  the  difference  between  the  ■ 
contract  price  of  the  property  and  its  actual  value  at  the  date  of  the  ! 
breach  of  the  contract ;  or  the  vendor  may  tender  the  property  made  ' 
the  subject  of  the  contract  to  the  vendee,  and  then  in  a  suit  upon  the 
contract  the  vendor's  measure  of  damages  will  be  the  contract  price  • 
of  the  property. 

2.    The  second  contention  is  that  the  petition  fails  to  state  a  cause  I       _^^    jj''  t 
of  action  for  the  reason  that  it  shows  that  the  whole  amount  of  cap-/  >•    iM/^'^^JL' /^ 
ital  stock  provided  by  the  articles  of  incorporation  of  the  manufac-i      •  I    A*      lO'c,  <^, 
turing  company  has  not  been  subscribed.     To  sustain  this  contention'     t^  ~^  ^<>^ 
we  are  cited  to  Livesey  v.  Omaha  Hotel  Co.,  5  Keb.  50,  in  which  it  was     rM^, 
held :  "  When  the  subscription  contract  or  charter  of  a  corporation     a    \ 
specifically  fixes  the  capital  stock  at  a  certain  amount,  divided  into     ^ 
shares  of  a  certain  amount  each,  the  capital  so  fixed  must  be  fully 


/ 


224  LINCOLN   SHOE   MFG.   CO.    V.   SHELDON. 

subscribed  before  an  action  will  lie  against  a  subscriber  to  recover 
assessments  levied  on  the  shares  of  stock,  unless  there  is  a  clear  pro- 
'vision  in  the  contract  to  proceed  with  the  accomplishment  of  the  main 
desitrn  with  a  less  subscription  than  the  whole  amount  of  capital 
specified,  or  there  is  a  waiver  of  the  condition  precedent,"  and  Hale  v. 
Sanborn,  16  Neb.  1,  and  Hards  v.  Platte  Valley  Imj^rovement  Co.,  35 
Neb.  263.  The  general  rule  announced  in  the  case  in  5  Neb.  was  fol- 
lowed and  adhered  to  in  the  cases  in  the  16th  and  35th ;  but  these 
cases  are  not  in  point  here.  In  the  case  in  5  Neb.  the  corporation 
was  a  hotel  company,  in  16  Neb.  the  corporation  was  a  flouring  mill, 
and  in  35  Neb.  the  corporation  was  organized  for  the  erection  and 
operation  of  a  hall  for  the  use  of  societies,  organized  meetings,  and 
for  such  other  purposes  as  the  trustees  of  the  corporation  might  deem 
for  the  benefit  of  the  stockholders.  In  other  words,  none  of  the  cor- 
porations were  manufacturing  corporations.  The  corporations  men- 
tioned in  those  cases  were  organized  under  the  general  incorporation 
laws  of  the  state,  and  there  is  no  provision  in  this  general  law  by 
which  a  corporation  is  authorized  to  commence  the  transaction  of 
business  until  all  its  capital  stock  is  subscribed.  In  the  case  at  bar 
the  corporation  is  a  manufacturing  corporation  and  expressly^arrthbr- 
ized  by  the  statute  under  which  it  was  incorporated  to  commence 
business  when  ten  per  cent  of  its  capital  stock  should  be  subsciobed. 
Cook,  in  his  work  on  Stock  and  Stockholders,  after  stating  the  gen- 
eral rule  that  it  is  an  implied  part  of  a  contract  of  subscription  to 
the  capital  stock  of  a  corporation  that  the  contract  is  to  be  binding 
and  enforceable  against  the  subscriber  only  after  the  full  capital 
stock  of  the  corporation  has  been  subscribed,  says :  "  The  act  of  in- 
corporation may  of  course  vary  this  rule.  Thus,  it  is  well  established 
that  where  the  charter  authorizes  the  organization  of  the  company, 
and  the  commencement  of  corporate  work  after  a  certain  amount  of 
the  capital  stock  has  been  subscribed,  such  a  charter  provision  is 
equivalent  to  an  express  authority  to  the  corporation  to  call  in  the 
subscriptions  as  soon  as  this  organization  is  effected.  Subscriptions 
to  the  full  amount  of  the  capital  stock  are  held  not  to  be  necessar3^ 
The  defence  is  not  good."  (1  Cook,  Stock  &  Stockholders,  sec.  177.) 
,In  this  state  the  legislature  does  not  by  a  special  act  charter  a  corpo- 
ration, but  all  corporations  are  formed  under  general  laws,  and  these 
laws  and  the  articles  of  incorporation  adopted  in  pursuance  of  and  in 
conformity  with  such  laws  constitute  the  charter  of  a  corporation  of 
|;his  state. 

In  Jewett  v.  Valley  R.  Co.,  34  0.  St.,  601,  the  contract  sued  upon 
was  in  the  following  language :  " '  We,  the  undersigned,  hereby  re- 
spectively subscribe  to  and  agree  to  take  of  the  capital  stock  of  the 
Valley  Railway  Company  the  number  of  shares,  of  fifty  di)llars  each, 
sot  oj)posite  our  I'espective  signatures,' "  etc.  The  capital  stock  of 
the  railway  company  was  fixed  by  its  certificate  of  incorporation  at 
three  millions  of  dollars.     Jewett  subscribed  for  one  hundred  shares 


LINCOLN   SHOE   MFG.   CO.   V.   SHELDON.  225 

of  its  stock  amounting  to  $5,000.  A  law  in  force  in  Ohio  at  the  time 
provided  that  railroad  corporations,  so  soon  as  ten  per  cent  of  their 
capital  stock  should  be  subscribed,  might  give  notice  to  the  stock- 
holders to  meet  for  the  purpose  of  choosing  directors  and  construct 
and  maintain  a  railroad.  The  railroad  company  sued  Jewett  on  his 
subscription,  and  he  defended  on  the  ground  that,  as  the  entire  amount 
of  the  capital  stock  authorized  by  the  certificate  of  incorporation  had 
not  been  subscribed,  he  was  not  liable.  The  court  said :  "  Can  assess- 
ments be  made  and  enforced  on  subscriptions  for  shares  of  the  capital 
stock  of  a  railroad  corporation  before  the  whole  amount  of  stock, 
mentioned  in  the  certificate  of  incorporation,  has  been  subscribed  ? 
In  the  absence  of  both  legislation  and  express  agreement  on  the  sub- 
ject, they  cannot."  The  court  then  cites  Salem  MUl-Dam  Corjioratioii 
V.  Ropes,  6  Pick.  [Mass.],  23,  and  other  cases  supporting  the  general 
doctrine,  and  continues :  "  In  most  states,  however,  provision  has 
been  made  by  statute ;  and  it  is  well  settled  that  '  contracts  must  be 
expounded  according  to  the  laws  in  force  at  the  time  they  are  made, 
and  the  parties  are  as  much  bound  by  a  provision  contained  in  a  law 
as  if  that  provision  had  been  inserted  in  and  formed  a  part  of  the 
contract.'  ...  A  careful  consideration  of  the  enactments  set  forth  in 
the  statement  of  this  case,  and  other  cognate  statutory  provisions, 
leaves  with  us  no  doubt  that  when  ten  per  cent  of  the  capital  stock 
had  been  subscribed  the  company  may  organize  by  the  election  of 
directors,  who  may  '  transact  all  business  of  the  corporation,'  and, 
looking  to  the  duties  imposed  on  the  directors,  it  is  clear  that  the 
residue  of  the  stock,  beyond  the  ten  per  cent,  .  .  .  must  '  be  paid  in 
such  installments  and  at  such  times  and  places,  and  to  such  persons 
as  may  be  required  by  the  directors  of  such  company,'  though  the 
whole  amount  of  the  capital  stock  may  not  have  been  subscribed.  .  .  . 
The  terms  of  the  subscription  on  which  this  suit  was  brought  are  in 
harmony  with  the  statutory  provisions  as  we  have  construed  them  ; 
and  hence  the  fact  that  the  whole  of  the  capital  stock  had  not  been 
taken  afforded  no  defence  to  this  action."  (See,  also.  Hunt  v.  Kansas 
&  Missouri  Bridge  Co.,  11  Kan.  412.) 

We  conclude,  therefore,  that  the  fact  that  all  the  stock  authorized 
by  the  articles  of  incorporation  of  a  manufacturing  company  has  not 
been  subscribed  is  not  a  defence  to  a  subscriber  for  such  stock  when 
sued  on  his  contract  of  subscription,  if  ten  per  cent  of  the  stock  of 
such  manufacturing  corporation  has  been  subscribed.  The  judgment 
of  the  district  court  is  reversed  and  the  cause  remanded. 

Reversed  and  remanded. 


i{p\  U\y>^t^^(r< 


^"\ 


INNEAYOLiafcHK 


I 

ESHING  MACHINE   CO.   |&/ DAVIS, 


V 


r 


1889.     40  Minnesota,  110,1 


MiNNllA!|>OLIS  THRESHING  MACHINE  CO.-,t!.  DAVIS. 

y.V^^     J^IiTCHELL,  J.     This  was  an  action  to  recover  instalments  due  on 
(?  subscriptions  to  stock  of  the  plaintiff.     The  facts  fully  appear  from 
the  findings  of  the  court,  in  connection  with  Exhibits  A  and  B  at- 
tached to  the  complaint.     Those  material  for  present  purposes  are 
that,  a  scheme  having  been  started  to  organize  a  manufacturing  cor- 
poration with  $250,000  capital,  whose  works  should  be  located   at 
Junction  City,  near  Minneapolis,  and  one  McDonald  having  proposed 
that  if  the  citizens  of  Minneapolis  would  subscribe  $190,000  to  the 
capital  stock,  he  would  subscribe  the  remaining  $60,000,  one  Janney, 
a  promoter,  but  not  a  subscriber  to  the  stock  of  the  proposed  corpora- 
tion, acting  as  a  voluntary  solicitor,  having  with  him  the  subscription 
j,«^r,  (Exhibits  A  and  B,)  about  April  1,  1887,  proceeded  to  canvass 
j^  L'^i\v  subscriptions  to  the  stock  of  the   proposed  corporation,  on  the 
'       terms  and  conditions  embodied  in  the  paper.     He  first  applied  to  de- 
fendant, who  subscribed  $5,000  of  stock.     Afterwards,  and  about  the 
same  date,  o|lK(r  citizens  respectively  subscribed  to  the  stock,  on  the 
same  papepj^to  the  aggregate  amount,  including  defendant's  subscrip- 
tion, of$ttyO,000,  of  which  over  $65,000  has  been  paid  in  to  plaintiff. 
I^lpon  McDonald,  in  accordance  with  his  proposition,  subscribed 
emaining  $60,000,  which  he  has  paid  up  in  full.     All  the  condi- 
expressed  in  the  written  subscription  (Exhibit  A)  having  been 
K    ''     ju^'\  f^^lly  performed  and   complied  with,   the  proposed   corporation  was 
"  J  i/^        afterwards,  about  April  25,  1887,  organized,  and  these  subscriptions  to 
*  *      (uA        its  stock  delivered  over  to  it.     The  corporation,  acting  in  good  faith 
upon  such  subscriptions,  including  that  of  defendant,  expended  large 
sums  of  money  in  locating  and  constructing  its  works,  and  entered 
into  large  contracts,  and  incurred  liabilities  to  the  amount  of  over 
$J5,000.     During  all  this   time,  the    corporation  had   no  notice  or 
nowledge  of  any  coiulition  being  attached  to  defendant's  subscription 
other  than  those  expressed  in  the  subscription  paper  itself.     Neither 
is  it  found  or  claimed  that  any  of  the  other  subscribers  to  the  stock 
had  any  such  notice  or  knowledge.     Defendant  was  not  present  at  the 
/Vorganization  of  the  corporation,  and  never  attended  or  took  part  in 
"^  any  of  its  meetings,  and  had  no  notice  or  knowledge  that  the  sub- 
scription pai)er  had  been  transferred  or  delivered  over  to  the  plain- 
tiff, or  that  plaintiff  relied  on  it,  until  about  November,  1887,  just 
])rior  to  the  commencement  of  this  action. 

Upon  the  trial  the  defendant  was  permitted,  against  plaintiff's  ob- 
jection and  exception,  to  testify  that  he  signed  or  subscribed  to  the 
stock  only  upon  the  express  oral  condition  and  agreement,  then  had 
between  him  and  Janney,  that  the  latter  should  retain  in  his  possession 
1  Statement  omitted.  — Ed. 


^s^r-'C-^*^ 


V"   >r  V-  r'  .V      ;\^  ^  ^^, 

MINNEAPOLIS   THRESHING  MAClili[E   CO.   V.   DAVIS^       <^527 

said  agreement  with  his  name  signed  thereto,  and  noTcfeliver  it  to  any 
one,  or  use  it  in  any  way,  until  certain  four  i)ersons  should  subscribe 
to  the  stock,  each  in  the  sum  of  $5,000;  that  Janney  took  the  agree- 
ment from  defendant  on  that  express  condition  and  understanding, 
and  not  otherwise ;  that  none  of  these  four  persons  ever  did  subscribe 
to  the  stock  of  the  plaintiff ;  and  that  defendant  never  authorized 
Janney  or  any  one  to  deliver  said  agreement  to  any  one  except  upon 
the  condition  referred  to.  The  court  found  the  facts  to  be  in  accord- 
ance with  the  testimony,  and  upon  that  ground  found  as  a  conclusion 
of  law  that  defendant  never  became  a  subscriber  to  the  plaintiff's 
stock.  The  competency  of  this  evidence  is  the  sole  question  in  this 
case. 

Under  the  elementary  rule  of  evidence  that  a  written  agreement 
^nnot^be  varipHjTrfljdRfnx)^^^^  paroIT  it  is  not  competent  for  a  sub:. 
scrjLigr  to_  stock  to  allege  that  he  is  but  a  conditional  subscriber.  The 
condition  must  be  inserted  in  the  writing  to  be  effectual.  This  rule 
applies  with  special  force  to  a  case  like  the  present,  where  to  allow 
the  defendant  now  to  set  up  a  secret  parol  arrangement  by  which  he 
may  be  released,  while  his  fellow-subscribers  continue  to  be  bound, 
would  be  a  fraud^  not' only  upon  them,  but  upon  the  corporation  which 
has  been  organized  on  the  faith  of  these  subscriptions  and  upon  its 
creditors.  The  defendant  of  course  does  not  attempt  to  controvert  so 
elementary  a  rule  as  the  one  suggested,  but  contends  that  the  effect  of 
this  evidence  was  not  to  vary  or  contradict  the  terms  of  the  writing,, 
but  to  prove  that  there  was  never  any  delivery  of  it,  and  hence  that 
there  never  was  any  contract  at  all,  delivery  being  prerequisite  to  the, 
very  existence  of  a  contract.  His  claim  is  that  the  subscription  paper 
Avas  given  to  and  received  by  Janney  merely  as  an  escrow,  or  as  ill 
the  nature  of  an  escrow,  only  to  be  delivered  or  used  upon  the  perr 
formance  of  certain  conditions  precedent,  and  that  until  they  were 
performed  there  could  be  no  valid  delivery. 

In  determining  this  question  it  becomes  important  to  consider  the 
nature  of  a  subscription  to  the  stock  of  a  proposed  corporation,  and 
the  relation  of  the  different  parties  to  each  other,  under  the  facts  of 
this  case.     A  subscription  by  a^umber  ofjersons  to  the  stock  of  a 
corporationtojbej^i  erea^    r  formed  by  theni_has  in  Jaw_a  double 
character  :  Firsts,     It  is  a  contract  between  the  subscribers  themselves       -^ 
to  become  stBfCkholders  without  further  act  on  their  part  immediately      \I) 
upon  the  formation  of  the  corporation.     As  such  a  contract  it  is  binding 
and  irrevocable  from  the  date  of  the  subscription,  (at  least  in  the 
absence  of  fraud  or  mistake,)  unless  cancelled  by  consent  of  all  the 
subscribers  before  acceptance  by  the  corporation.     Second,     It  is  also      ^ 
in  the  nature  of  a  continuing  offer  to  the  proposed  corporation,  which,      Ci- 
upon  acceptance  by  it  after  its  formation,  becomes  as  to  each  sub- 
scriber a  contract  between  him  and  the  corporation,     1  Mor.  Priv. 
Corp.  §  47  et  seq.  ;  Red   Wing  Hotel  Co.  v.  Frederick,  26  Minn.  112, 
(1  N.  W.  Rep.  827.)     Janney,  the  promoter  who  solicited  and  obtained 


t 


228  MINNEAPOLIS   THRESHING  MACHINE   CO.    V.  DAVIS. 

the  subscriptions,  occupied  the  position  of  agent  for  the  subscribers 
as  a  body,  to  hold  the  subscriptions  until  the  corporation  was  formed 
in  accordance  with  the  terms  and  conditions  expressed  in  the  agree- 
ment, and  then  turn  it  over  to  the  company  without  any  further  act 
of  delivery  on  part  of  the  subscribers.  The  corporation  would  then 
become  the  party  to  enforce  the  rights  of  the  whole  body  of  subscrib- 
ers. It  follows,  then^  that,  considering  the  subscription  as  acontract 
between  the  subscribers,  a  delivery  to  Jaiiiiey  by  a  subscriber  was  a 
complete  and  valid  delivery,  so  that  his  subscription  became_£Q  iw- 
stanti  aJ)i_ndi^o  contract.  The  case  stands  precisely  as  a  case  where 
a'contract  is  delivered  by  the  obligor  to  the  obligee.  It  cannot  there- 
fore_b£_treated  as  a  case  where  a  writing  has  been  delivered  to  a  third 
party  in  escrow;^. 

The  defendant,  however,  attempts  to  bring  the  case  within  the  rule 
of  Westman  v.  Krumweide,  30  Minn.  313,  (15  N.  W.  Rep.  255,)  in 
which  this  court  held  that  parol  evidence  was  admissible  to  show  that 
a  note  delivered  by  the  maker  to  the  payee  was  not  intended  to  be 
operative  as  a  contract  from  its  delivery,  but  only  upon  the  happen- 
ing of  some  contingency,  though  not  expressed  by  its  terms  ;  that  is, 
that  the  delivery  was  only  in  the  nature  of  an  escrow.  We  so  held 
upon  what  seemed  the  great  weight  of  authority,  although  the  doc- 
trine, even  to  the  extent  it  was  applied  in  that  case,  is  a  somewhat 
dangerous  one.  The  distinction  between  proving  by  parol  that  the 
delivery  of  a  contract  was  conditional,  and  that  the  contract  itself 
contained  a  condition  not  expressed  in  the  writing,  is  one  founded 
more  on  refinement  of  logic  than  upon  sound  practical  grounds.  It 
endangers  the  salutary  rule  that  written  contracts  shall  not  be  varied 
by  parol.  Said  Erie,  J.,  in  Pym  v.  Campbell,  6  El.  &  Bl.  370,  in  sus- 
taining such  a  defence:  "I  grant  the  risk  that  such  a  defence  may 
be  set  up  without  ground,  and  I  agree  that  a  jury  should  therefore 
look  on  such  a  defence  with  suspicion."  And  in  all  the  cases  where 
such  a  defence  has  been  sustained,  so  far  as  we  can  discover,  they 
have  been  cases  strictly  between  the  original  parties,  and  where  no 
one  has  changed  his  situation  in  reliance  upon  the  contract  and  in 
ignorance  of  the  secret  oral  condition  attached  to  the  delivery,  and 
hence  no  question  of  equitable  estoppel  arose.  Many  of  the  cases 
have  been  careful  to  expressly  limit  the  rule  to  such  cases.  Benton 
V.  Martin,  52  N.  Y.  570  ;  Sweet  v.  Stevens,  7  R.  I.  375. 

Conceding  the  rule  of  Westman  v.  Krumiveide,  supra,  to  its  full  ex- 
tent, there  are  certain  well-recognized  doctrines  of  the  law  of  equita- 
ble estoppel  which  render  it  inapplicable  to  the  facts  of  the  present 
case.  This  subscription  agreement  was  not  intended  to  be  the  sole 
contract  of  defendant.  It  was  designed  to  be  also  signed  by  other 
7)arties,  and  from  its  very  nature  defendant  must  have  known  this. 
Each  s\icceeding  subscriber  executed  it  more  or  less  upon  the  faith 
of  the  subscriptions  of  others  preceding  his.  The  paper  purports  on 
its  face  to  be  a  completed  contract,  containing  all  the  terms  and  con- 


MINNEAPOLIS   THRESHING   MACHINE   CO.   V.  DAVIS.  229 

ditions  which  the  subscribers  intended  it  should.  When  this  agree- 
ment was  presented  to  others  for  subscription,  defendant  had  not 
only  signed  it  in  this  form,  but  he  had  also  done  what,  under  the 
facts,  constituted,  to  all  outward  appearances  at  least,  a  complete  and 
valid  delivery.  He  had  placed  it  in  the  proper  channel  according  to 
the  ordinary  and  usual  course  of  procedure  for  passing  it  over  to  the 
corporation  when  organized,  and  clothed  Janney  with  all  the  indicia 
of  authority  to  hold  and  use  it  for  that  purpose  without  any  other  or 
further  act  on  his  part,  untrammelled  by  any  condition  other  than 
those  expressed  in  the  writing.  In  reliance  upon  this,  others  have 
not  only  subscribed  to  the  stock,  but  have  since  paid  in  a  large  share 
of  it.  The  corporation  has  been  organized  and  engaged  in  business, 
expending  large  sums  of  money,  and  contracting  large  liabilities,  all 
upon  the  strength  of  these  subscriptions  to  its  stock,  and  in  entire 
ignorance  of  this  secret  oral  condition  which  defendant  now  claims  to 
have  attached  to  the  delivery.  To  permit  defendant  to  relieve  him- 
self from  liability  on  any  such  ground,  under  this  state  of  facts,  would 
be  a  fraud  on  others  who  have  subscribed  and  paid  for  stock,  upon 
the  corporation  which  has  been  organized  and  incurred  liabilities  in 
reliance  upon  the  subscriptions,  and  on  creditors  who  have  trusted  it. 
The  familiar  principle  of  equitable  estoppel  by  conduct  applies,  viz. : 
Where  a  person,  by  his  words  or  conduct,  wilfully  causes  another  to 
believe  in  the  existence  of  a  certain  s.tate  of  facts,  and  induces  him  to 
act  on  that  belief  so  as  to  alter  his  own  previous  condition,  he  is 
estopped  from  denying  the  truth  of  such  facts  to  the  prejudice  of  the 
other. 

We  have  examined  all  of  the  numerous  cases  cited  by  defendant's 
counsel,  and  fail  to  find  one  which,  in  our  judgment,  is  analogous  in 
its  facts,  or  the  law  of  which  wilt  cover  the  present  case.  The  two 
which  at  first  sight  might  seem  most  strongly  in  his  favor  are  Beloit 
&  Madison  R.  Co.  v.  Palme)',  19  Wis.  574,  and  Oftaiva,  etc.,  H.  Co.  v. 
Hall,  1  Bradw.  612.  But  an  examination  of  those  cases  will  show 
that  in  neither  did  or  could  any  question  of  estoppel  arise,  and  in  both 
the  court  held  that  the  person  to  whom  the  instrument  was  delivered 
after  signature  was  a  stranger  to  it,  so  that  it  was  strictly  a  delivery 
in  escrow  to  a  third  party.  Cases  are  cited  where  a  surety  signed  a' 
bond  or  non-negotiable  note,  and  delivered  it  to  the  principal  obligor  /y( 
upon  condition  that  it  should  not  be  delivered  to  the  obligee  until/ 
some  other  person  signed  it,  and  where,  without  such  signature,  the 
principal  obligor  delivered  it  to  the  obligee  and  yet  the  courts  held 
that  the  surety  was  not  liable,  although  the  obligee  had  no* 
notice  of  the  condition.  Such  cases  seem  usually  to  proceed  upon 
the  theory  that  a  delivery  to  the  principal  obligor  under  such  cir- 
cumstances is  a  mere  delivery  in  escrow  to  a  stranger ;  the  term 
"  stranger,"  in  the  law  of  escrows,  being  used  in  opposition  merely  to 
the  party  to  whom  the  contract  runs.  It  may  well  be  doubted  whether 
in  such  cases,  where  the  instrument  is  complete  on  its  face,  the  courts 


^. 


230  PACIFIC   NATIONAL   BANK   V.   EATON. 

have  not  sometimes  ignored  the  law  of  equitable  estoppel.  No  such 
defence  would  be  allowed  in  the  case  of  negotiable  paper,  and  it  is  not 
clear  why  the  distinction  should  be  drawn  on  that  line.  The  doctrine 
of  estoppel  rests  upon  totally  different  grounds,  and  operates  inde- 
pendently of  negotiability,  being  founded  upon  principles  of  equity. 
But  whether  the  cases  referred  to  be  right  or  wrong,  we  do  not  see 
that  they  are  in  point  here.  Our  conclusion  is  that  the  court  erred  in 
admitting  the  evidence  objected  to,  and  for  that  reason  a  new  trial 
must  be  awarded.  '\         ;,'r        i 


*^^:^y 


A  \  or     'Pacific  national^  tojyfe'v^vEtoit. 

A.   ff^ty   '     J.  -  f Error  to  Supreme  Court  of  Massachu's^tts.  V    A^ 
''l/P|v  nr    ^{y  Action  at  law  by  Mary  J.  Eaton,  to  recover  from  th 

^  Jiyv         /     »  .}     amount  paid  in  as  a  subscription  to  an  increase  of  its  stock. 
^y^    'ktL  tlr     y^n  Sept.  28,  1881,   paid   the   bank  for   the  stock ;    and 


1^ 


"^"^        ■  '*'         Action  at  law  by  Mary  J.  Eaton,  to  recover  from  the  bank  an 

Plaintiff 
ypu  oepii.  ^o,  xoox,  paiu  uiic  uaiiii.  lur  uiic  Qtuuiv  ^  ciiiu  received  a 
gj^  y  ■  TV  receipt  —  "Eeceived  of  Mary  J.  Eaton  four  thousand  dollars  on 
^  jX^y^^j  /]  J  account  of  subscription  to  new  stock."  Certificates  for  the  new 
stock  were  made  out  in  a  book,  Avith  stubs  to  indicate  their  contents, 
and  were  delivered  to  the  stockholders  as  they  called  for  them.  Such 
a  certificate  was  made  out  for  Miss  Eaton,  but  she  never  called  for  it,- 
though  she  was  registered  in  the  stock  register  of  the  bank  as  owner 
thereof  without  her  knowledge.  On  Jan.  10,  1882,  the  plaintiff  de- 
manded of  the  bank  repayment  of  said  four  thousand  dollars,  upon 
the  ground  that  the  conditions  upon  which  it  was  received  had  not 
been  performed.  The  Supreme  Court  of  Massachusetts  sustained 
this  contention  of  the  plaintiff. 

A.  A.  Ranney,  for  plaintiff  in  error. 

J.  H.  Benton,  Jr.,  for  defendant  in  error. 

Bradley,  J.     [After  deciding  another  point.] 

The  only  question  to  be  considered,  therefore,  is  whether  the  fact 
that  the  defendant  in  error  did  not  call  for  and  take  her  certificate  of 
stock  made  any  difference  as  to  her  status  as  a  stockholder.  We  can- 
not see  how  it  could  make  the  slightest  difference.  Her  actually 
going  or  sending  to  the  bank  and  electing  to  take  her  share  of  the 
new  stock,  and  paying  for  it  in  cash,  and  receiving  a  receipt  for  the 
same  in  the  form  above  set  forth,  are  acts  which  are  fully  equivalent 
to  a  subscription  to  the  stock  in  writing,  and  the  payment  of  the 
money  therefor.  She  then  became  a  stockholder.  She  was  properly 
entered  as  such  on  the  stock  book  of  the  company,  and  her  certificate 
of  stock  was  made  out  ready  for  her  when  she  should  call  for  it.  It 
was  her  certificate.  She  could  have  compelled  its  delivery  had  it 
1  Only  so  much  of  the  report  is  given  as  relates  to  a  single  point.  —  Ed. 


> 


PACIFIC   NATIONAL   BANK   V.   EATON.  231 

been  refused.     Whether  she  called  for  it  or  not  was  a  matter  of  no 
consequence  whatever  in  reference  to  her  rights  and  duties. 

The_case  is  not  like  that  of  a  deed  for  lands,  which  has, no  foi:cfi, 
and  is  not  a  deed,  anH']gasses  no  estate,  until  it  is  delivered.     In  that 
case  everything  deijgnds  on  the  delivery.     But  with  capitaLatockit—      / 
_is_differenti_  Witliout  exjpress   regulation  to  the  contrary,  a  persoji       // 
becflmiSg  a  stocSSSder  by  subscribing  for  stock,  paying  the  amounj;_tiL.    '  * 
the  company  or  its  proper  officer,  and  being  entered  on  the  stock  book 
as  a  stockholder.     He  may  take  out  a  certificate  or  not,  as_  he  sees  fit._ 
Millions  of  dollars  of  capital  stock  are  held  without  any  certificate ; 
or,  if  certificates  are  made  out,  without  their  ever  being  delivered.-   A 
certificate  is  authentic  evidence  of  title  to  stock ;  but  it  is  not  the 
stock  itself,  nor  is  it  necessary  to  the  existence  of  the  stock.     It  cer- 
tifies to  a  fact  which  exists  independently  of  itself.     And  an  actual 
subscription  is  not  necessary.     There  may  be  a  virtual  subscription, 
deducible  from  the  acts  and  conduct  of  the  party. 

Judgment  reversed,  and  the  cause  remanded  for  further  proceedings 
not  inconsistent  with  this  ojnnion. 


ERLANGER   V.   NEW   SOMBRERO   PHOSPHATE 


Y^    V\  A^  y^   (F  EEEA^ER  V.  NEW   SOMBRERO  PHOSPHArf  CQ^' ^sj.^ 

.  ik/^\      ^    Ji^^      J^^Jf^  1878.     Law  Reports,  3  Appeal  Cases,  1218.'^  ti  ^ \,^    AA^' 

K^  /o-'^j  Jk^  APPEAL  against  a  decision  of  the  Court  of  Appeal  \vnicn  Ji^d/re- 

w  V       ^    (Versed  a  decree  of  Vice  Chancellor  Malins.  WrljA^ 

i*'  J^    ^   ^ ijf         Sombrero,  a  small  island  in  the  West  Indies,  the  property %f  the 

fir      S^'       -^  >[>Cro\vn,  had  been  leased  out  by  the  Crown  for  21  years  from  1865. 

>       J     C/*     \y      '-^^^^  lQSi?>e  had  been  assigned  to  "The  Sombrero  Company,"  which 

L,  ''^  Vv      ^    y         undertook  to  work  the  beds  of  phosphate  of  lime  with  which  the 

N  V^     0^  ry  -ik"^  island  abounded.     This  company  was  ordered  to  be  wound  up.     The 

i^^,  jj^'   i^,^  lease  was  ordered  to  be  sold  by  the  official  liquidator,  Mr.  Chatteris. 

"  r   nt'  i^     Erlanger  and  others  formed  a  syndicate  to  purchase  it,  and  did  pur- 

1/5    Jrr  A     chase  it  for  £55,000.    The  purchase  was  effected  by  a  provisional  con- 

\.Jf*\    ^y '       L/*  tract  Aug.  30,  1871,  though  not  formally  concluded  until  later.     The 

^r  Z''      f*^  ^  ^    syndicate  desired  to  resell  the  lease  at  a  profit ;  and  with  that  view 

/s^ift^    J      >/  A  "Z*^  proceeded  to  get  up  a  company  to  purchase  it  from  the  syndicate. 

'  1^  jJ        J^  iT      Erlanger,  who  acted  for  the  syndicate,  took  steps  to  form  a  com- 

\    mt^^j^    ii'         V^^Y)  under  the  Companies  Act.    A  memorandum  of  association  was 

\*^  J^  rS^  I        drawn  up  by  the  solicitor  of  the  syndicate,  and  was  signed  by  seven 

Aff     J(  ^     ^  persons  all  of  whom  were  mere  nominees  of  the  syndicate.     The  arti- 

i  Iv    \\^^^{k^ I    ^^^^  *^^  association  for  the  company  were  drawn  by  the  same  solicitor, 

ry  ♦'^   t^  |^>      -(Waiyi  bear  date  Sept.  20, 1871.    These  articles  provide  that  the  first  board 

\\f.  4  r     ^      ^v^     '^jo6i  directors  shall  consist  of  five  specified  persons  ;  that  two  directors 

\.^,     I      \j^  shall  be  a  quorum  for  the  transaction  of  business ;  and  that  the  direc- 

'         h-^ji/*      t^    tor^may,  without  any  further  authority  from  the  members,  adopt  and 

n/J  t     "^.tjl     1)    jMirry  into  effect  the  contract,  of  even  date,  for  the  assignment  to  the 

,  ,^^     ly^  i)^^jct>tnpany  of  the  island  of  Sombrero  for  the  residue  of  the  term  of  the 

lI  T     |w*A     If^  A  contract  had  also  been  drawn  up,  and  dated  Sept.  20,  for  the  sale 

A  1/  J  ^^  ^^^®  lease  to  the  new  company.  This  contract  purported  to  be 
^^^y^  ,jir^  •  made  between  Evans  as  vendor  and  Pavy  as  purchaser  on  behalf  of 
/^tA^  L*^  b^  i^A^ne  new  company.  Evans  was  a  trustee  or  agent  for  the  members  of 
'  '  f^      tX'     the  syndicate.     The  contracty^as,  on  the  face  of  it,  a  provisional  one, 

Case  abridged.     Arg umdnt^mitted ;  also  greater  nj^rt  of  the  opinions.  —  Ed. 


■^ 


ERLANGEK   V.   NEW    SOMBRERO   PHOSPHATE   CO.  233 

subject  to  the  formation  of  the  company,  and  the  adoption  of  the  con- 
tract by  it.  This  contract  recited  the  purchase  by  the  syndicate  on 
Aug.  30,  but  did  not  name  the  price  then  given.  The  price  to  the 
new  company  was  to  be  £110,000,  of  which  £80,000  was  to  be  paid 
down,  and  the  remaining  £30,000  to  be  satisfied  by  fully  paid-up 
shares  in  the  new  company.  The  money  was  to  be  obtained  by  the 
subscriptions  for  the  shares,  which  were  to  be  13,000  in  number  of  £10 
each. 

The  five  persons  specified  in  the  articles  as  directors  were  all  named 
by  the  syndicate.  Two  of  them  were  persons  not  likely  to  act,  and 
who  did  not  act,  in  the  early  proceedings  of  the  board.  The  other 
three  were  Evans,  Macdonald  and  Dakin.  Evans'  shares  were  given 
to  him  by  Erlanger.  Macdonald  held  shares  only  as  trustee  for 
Erlanger.  Dakin  had  not  sufficient  knowledge  of  the  facts  to  form 
an  independent  judgment.  The  first  meeting  of  the  directors  was 
held  Sept.  29,  1871 ;  and  was  attended  by  Evans,  Macdonald  and 
Dakin.  It  was  resolved  that  the  contract  of  purchase  for  £110,000 
"be  approved  and  confirmed."  A  prospectus  was  soon  issued;  and 
after  its  publication  the  number  of  applications  for  shares  became 
considerable. 

There  was  never  any  confirmation  of  the  purchase  by  vote  of  the 
stockholders. 

Subsequently,  after  new  directors  had  been  chosen,  the  bill  in  this 
suit  was  filed  by  the  company  against  Erlanger  and  all  the  members 
of  the  syndicate  ;  one  prayer  being  that  the  contract  of  Sept.  20 
might  be  set  aside  ;  and  the  purchase  money  repaid  to  the  company. 

The  case  was  heard  before  Vice  Chancellor  Malins,  who  ordered  the 
bill  to  be  dismissed,  but  without  costs.  On  appeal  by  the  company, 
the  contract  was  ordered  to  be  rescinded  as  to  all  members  of  the 
syndicate,  the  purchase  money  paid  by  the  company  repaid,  and,  on 
payment  of  the  money  so  ordered  to  be  repaid  to  the  company,  the 
island  was  to  be  restored  by  the  company  to  the  syndicate. 

Erlanger  et  als.  then  brought  the  present  appeal  to  the  House  of 
Lords. 

The  case  was  twice  argued. 

Southgate,  Q.  C,  and  Benjamin,  Q.  C.  (Ligle  Joyce  with  them),  for 
appellants. 

J.  Najner  Higghis,  Q.  C.,  and  Davey,  Q.  C.  {Alexander  Young  with 
them),  for  respondents. 

Lord  Penzance.     [After  stating  the  facts.] 

Can  a  contract  so  obtained  be  allowed  to  stand  ?  The  bare  state- 
ment of  the  facts  is,  I  think,  sufficient  to  condemn  it.  From  that' 
statement  I  invite  your  Lordships  to  draw  two  conclusions  :  first, 
that  the  company  never  had  an  opportunity  of  exercising,  through' 
independent  directors,  a  fair  and  independent  judgment  upon  the 
subject  of  this  purchase ;  and,  secondly,  that  this  result  was  brought 
about  by  the  conduct  and  contrivance  of  the  vendors  themselves.     It 


234 


ERLANGER   V.  NEW   SOMBRERO   PHOSPHATE   CO, 


was  the  vendors,  in  their  character  of  promoters,  who  had  the  power 
and  the  o[)portunity  of  creating  and  forming  the  company  in  sucli  a 
manner  that  with  adeqnate  disclosures  of  fact,  an  independent  judg- 
ment on  the  company's  behalf  might  have  been  formed.  But  instead 
of  so  doing  they  used  that  power  and  opportunity  for  the  advance- 
ment of  their  own  interests.  Placed  in  this  position  of  unfair  ad- 
vantage over  the  company  which  they  were  about  to  create,  they 
were,  as  it  seems  to  me,  bound  according  to  the  principles  constantly 
acted  upon  in  the  Courts  of  Equity,  if  they  wished  to  make  a  valid 
contract  of  sale  to  the  company,  to  nominate  independent  directors 
and  fully  disclose  the  material  facts.  The  obligation  rests  upon  them 
to  shew  they  have  not  made  use  of  the  position  which  they  occupied 
to  benefit  themselves ;  but  I  find  no  proof  in  the  case  that  they  have 
discharged  that  obligation.  There  is  no  proof  that  either  Sir  Thomas 
Dakbi  or  Admiral  Macdonald  was  aware  of  the  price  at  which  the 
property  had  just  been  brought  under  the  authority  of  the  Court  of 
Chancery,  nor,  indeed,  that  they  even  knew  that  the  real  vendors 
were  also  the  promoters  of  the  company.  And  there  is  certainly  no 
proof  that  in  the  selection  of  the  directors  who  were  to  be  the  com- 
pany's agents  for  accepting  and  affirming  the  proposed  purchase,  the 
vendors  used  their  power  as  promotors  in  such  a  way  as  to  create  an 
independent  body  capable  of  acting  impartially  in  defence  of  the 
company's  interests. 

A  contract  of  sale  effected  under  such  circumstances  is,  I  conceive^ 
upon  principles  of  equity  liable  to  be  set  aside. 

The  principles  of  equity  to  which  I  refer  have  been  illustrated  in. 
a  variety  of  relations,  none  of  them  perhaps  precisely  similar  to  that 
of  the  present  parties,  but  all  resting  on  the  same  basis,  and  one 
which  is  strictly__aEPlicable  to,ih.e__£3^sent  case^  The  relations  of 
principaTandagent,  trustee  and  cestui  qlifirust,  parent  and  child, 
guardian  and  ward,  priest  and  penitent,  all  furnish  instances  in  which 
the  Courts  of  Equity  have  given  protection  and  relief  against  the 
pressure  of  unfair  advantage  resulting  from  the  relation  and  mutual 
position  of  the  parties,  whether  in  matters  of  contract  or  gift ;  and 
this  relation  and  position  of  unfair  advantage  once  made  apparent, 
ourts  have  always  cast  upon  him  who  holds  that  position,  the 
burden  of  shewing  that  he  has  not  used  it  to  his  own  benefit. 

ave  no  difficulty,  therefore,  in  asking  your  Lordships  to  assent 
to  the  proposition  of  the  Lord  Chancellor,  that  if,  within  a  proper 
time  after  the  completion  of  this  purchase,  a  bill  had  been  filed  by 
the  company,  the  purchase  must  have  been  set  aside.  The  question 
remains  whether  the  present  bill  has  been  filed  with  sufficient  promp- 
titude for  that  purpose. 

[His  Lordship  held,  that  the  company  was  not  barred  by  laches. 
The  facts  relating  to  this  branch  of  the  case  have  been  omitted.] 

LoKi)  Caikns;  Lord  Chancellor. 

[After  referring  to  purchase  by  the  syndicate  on  Aug.  30,  1871.] 


ERLANGER  V.   NEW   SOMBRERO   PHOSPHATE   CO.  235 

My  Lords,  I  stop  at  this  point  for  the  purpose  of  saying  that  I 
think  it  to  be  clear  that  the  syndicate  in  entering  into  this  contract 
acted  on  behalf  of  themselves  alone,  and  did  not  at  that  time  act  in, 
or  occupy,  any  fiduciary  position  whatever.  It  may  well  be  that  the 
prevailing  idea  in  their  mind  was,  not  to  retain  or  work  the  island, 
but  to  sell  it  again  at  an  increase  of  price,  and  very  possibly,  to  pro- 
mote or  get  up  a  company  to  purchase  the  island  from  them  ;  but  they 
were,  as  it  seems  to  me,  after  their  purchase  was  made,  perfectly  free 
to  do  with  the  island  whatever  they  liked ;  to  use  it  as  they  liked, 
and  to  sell  it  how,  and  to  whom,  and  for  what  price  they  liked.  The 
part  of  the  case  of  the  Respondents  which,  as  an  alternative,  sought 
to  make  the  Appellants  account  for  the  profit  which  they  made  on 
the  re-sale  of  the  property  to  the  Respondents,  on  an  allegation  that 
the  Appellants  acted  in  a  fiduciary  position  at  the  time  they  made 
the  contract  of  the  30th  of  August,  1871,  is  not,  as  I  think,  capable 
of  being  supported,  and  this,  as  I  understand,  was  the  view  of  all  the 
Judges  in  the  Courts  below. 

[After  stating  the  subsequent  proceedings  up  to  and  including  Sept. 
20.] 

In  the  whole  of  this  proceeding  up  to  this  time  the  syndicate,  or 
the  house  of  Erlanger  as  representing  the  syndicate,  were  the  pro- 
moters of  the  company,  and  it  is  now  necessary  that  I  should  state  to 
your  Lordships  in  what  position  I  understand  the  promoters  to  be 
placed  with  reference  to  the  company  which  they  proposed  to  form. 
They  stand,   in   my  opinion,   undoubtedly    in_j^_fidiiiciary_position. 
They  have  in  their  hands  the  creatioiiancTmoulding  of  the  company^ 
they  have  the  power  of  defining  how,  and  when,  and  in  what  shape,/ 
and  under  what  supervision,  it  shall  start  into  existence  and  begin  toj 
act  as  a  trading  corporation.     If  they  are  doing  all  this  in  order  that/ 
the  company  may,  as  soon  as  it  starts  into  life,  become,  through  its 
managing  directors,  the  purchaser  of  the  property  of  themselves,  the 
promoters,  it  is,  in  my  opinion,  incumbent  upon  the  promoters  to  take 
care  that  in  forming  the  company  they  provide  it  with  an  executive 
that  is  to  say,  with  a  board  of  directors,  who  shall  both  be  awar 
that  the  property  which  they  are  asked  to  buy  is  the  property  of 
promoters,  and  who  shall  be  competent  and  impartial  judges  as  to 
whether  the  purchase  ought  or  ought  not  to  be  made.     I  do  not  say 
that  the  owner  of  property  may  not  promote  and  form  a  joint  stock 
company,  and  then  sell  his  property  to  it,  but  I  do  say  that  if  he 
does   he  is   bound   to   take   care  that    he   sells  it   to   the  company 
through  the  medium  of  a  board  of  directors  who  can  and  do  exercise! 
an   independent   and  intelligent   judgment  on  the    transaction,  and  I 
who  are  not  left  under  the  belief  that  the  property  belongs,  not  to] 
the  promoter,  but  to  some  other  person.  *-    '    " 

[His  Lordship  was  of  opinion  that  the  company  was  barred  by 
laches  from  obtaining  the  relief  prayed  for.] 


ivel 

are\  jj 

the/   //^^/ 


236  EELANGER   V.   NEW   SOMBRERO   PHOSPHATE   CO. 

Lord  Blackburn. 

Throughout  the  Companies  Act,  1862  (25  &  26  Vict.  c.  89),  the  word 
"  promoters  "  is  not  anywhere  used.  It  is,  however,  a  short  and  con- 
venient way  of  designating  those  who  set  in  motion  the  machinery 
by  which  the  Act  enables  them  to  create  an  incorporated  company. 

Neither  does  this  Act  in  terms  impose  any  duty  on  those  promoters 
to  have  regard  to  the  interests  of  the  company  which  they  are  thus 
empowered  to  create.  But  it  gives  them  an  almost  unlimited  power 
to  make  the  corporation  subject  to  such  regulations  as  they  please, 
and  for  such  purposes  as  they  please,  and  to  create  it  with  a  man- 
aging body  whom  they  select,  having  powers  such  as  they  choose  to 
give  to  those  managers,  so  that  the  promoters  can  create  siich  a  cor- 
poration that  the  corporation,  as  soon  as  it  comes  into  being,  may  be 
bound  by  anything,  not  in  itself  illegal,  which  those  promoters  have 
chosen.  And  I  think  those  who  accept  and  use  such  extensive  pow- 
ers, which  so  greatly  affect  the  interests  of  the  corporation  when  it 
comes  into  being,  are  not  entitled  to  disregard  the  interests  of  that 
corporation  altogether.  They  must  make  a  reasonable  use  of  the 
powers  which  they  accept  from  the  Legislature  with  regard  to  the 
formation  of  the  corporation,  and  that  requires  them  to  pay  some 
regard  to  its  interests.  And  consequently  they  do  stand  with  regard 
to  that  corporation  when  formed,  in  what  is  commonly  called  a  fidu- 
ciary relation  to  some  extent.  Some  reference  was  made  in  the  argu- 
ment to  the  Companies  Act,  1867  (30  &  31  Vict.  c.  131,  s.  38),  on  the  con- 
struction of  which  there  has  been  a  great  diversity  of  judicial  opinion. 
That  section  does  contain  the  word  "  promoters,"  which,  as  I  have 
already  observed,  is  not  to  be  found  in  the  Comjjanies  Act,  1862,  but 
it  imposes  no  fresh  duty  on  them  with  regard  to  the  company.  It 
imposes  a  fresh  duty  towards,  and  gives  a  new  cause  of  action  to,  per- 
sons who  take  shares  in  the  company  as  individuals ;  it  does  not 
alfect  the  obligation  of  the  promoters  towards  the  corporation.  I 
think  that  the  extent  of  that  fiduciary  relation,  which,  as  already 
said,  in  my  opinion,  the  promoters  bear  to  the  company,  is  a  very  im- 
portant consideration  in  construing  that  section ;  and  I  am  desirous 
to  avoid  prejudging  that  question  by  saying  in  this  case  more  than 
is  necessary  for  its  decision.  I^tliicki^as  already  said,  th^t  the  pro- 
moters are  in  a  situation  of  co^nfidence  to  some  extent  towards _the 
CO  nipan^jth  ey^o  rm . 

Where,  as  in  the  present  case,  the  company  is  formed  for  the  pur- 
pose of  becoming  purchasers  from  the  promoters  as  vendors,  the  in- 
terests of  the  promoters  and  of  the  company  clash.  It  is  the  vendors' 
interest  to  get  as  high  a  price  as  possible,  and  they  have  a  strong  bias 
to  overvalue  the  yiroperty  which  they  are  selling ;  it  is  the  purchas- 
ers' interest  to  give  as  low  a  price  as  possible,  and  to  secure  that  the 
price  actually  given  is  not  more  than  the  property  is  really  worth  to 
them. 


GREENWOOD   V.   LEATHER   SHOD-  WHEEL    CO 


237 


Lord  Melon,  in  Gibson  v.  Jeyes^  says  that  ''  it  is  a  great  rule  of  the 
Court  that  he  who  bargains  in  matters  of  advantage  with  a  person 
placing  confidence  in  him,  is  bound  to  shew  that  a  reasonable  use  has 
been  made  of  that  confidence — a  rule  applying  to  trustees,  attprnej'S, 
or  any  one  else."  I  think  persons  having  property  to  sell  may  form 
a  company  for  the  purpose  of  buying  it  in  such  a  manner  as  to  shew 
this,  and  when  they  do  so,  the  sale  will  be  unimpeachable.  I  will  not 
attempt  to  define  how  this  may  be  done.  Probably  there  are  many 
ways.  What  I  shall  do  is  to  inquire  what,  on  the  evidence,  appears 
to  have  been  done  in  this  case,  and  then  to  confine  myself  to  saying 
whether,  on  the  facts  of  this  particular  case,  it  appears  that  an  unrea- 
sonable use  has  been  made  of  that  confidence  which  the  pompfiny  rlid 
not  jjideed^plgLce  in  the  promoters,  for  the  company  did  not  then  exist, 
but  which  the  Legislature  did  place  in  them  for  the  company  when  ii. 
gave  thepromoters^pwer  to  create  it._ 


[Opinions  concurring  with  Lord  Penzance  were  delivered  by  Lords 
Hatherley,  0'HA,aAN,  Se^^qkne,  '9ytid  Gordon.]  v     ^ 

J.      V*"      Order  appealed  from  affirmed,  ijf^     jJ*"^  k<\ 


.<r 


LEATHER  SHOD  wrfE^)Vt5^\y<^/' ft  4^  ^^^  ,. 


Laio  Eepoi'ts  (WOO),  1  Chancery  Division,  421.2  "j   A^ 


"  Every  pro^'L^  i|^*>.' 


b 


LCTION  by  a  shareholder  in  the  defendant  company  agaMg^tngv^ 

)mpany,  the  directors,  and  the  promoter,  T.  H.  Lambert.      J'^^  ^  |»   ■<> 

The  company  was  registered  Feb.  12,  1897,  under  the  Compani^ 

Acts.     T.  H.  Lambert  was  the  promoter.     By  authority  of  the  direc-   a 

tors,  and  of  Lambert,  a  prospectus,  dated  Feb,  10,  1897,  was  issuecJ^. 

to  the  public  inviting  subscriptions  for  shares. 

Section  38  of  the  Companies  Act,  1867,  is  as  follows 
\%pectus  of  a  company,  and  every  notice  inviting  persons  to  subscribe  jf{^ 
I  for  shares  in  any  joint  stock  company,  shall  specify  the  dates  and  the  i  ^^  ^fjT'  .'ufi 
I  names  of  the  parties  to  any  contract  entered  into  by  the_comj3any,  or  \ily  '^    V*^^ 
,  the  promoters,  directors,  or  trustees  thereof,  before  the  issue  of  such  ^A 
I  prospectus  or  notice,  whether  subject  to  adoption  by  the  directors  of     M        ,      ^. 

the  company  or  otherwise ;  and  any  prospectus  or  notice  not  specify-  v"^  I    *t>*^ 

I  ing  the  same  shall  be  deemed  fraudulent  on  the  part  of  the  promoters,  ffi^   •  J'-^i  iJh^^ 
directors,  and  officers  of  the  company  knowingly  issuing  the  same,  as       ^  i**-"^^  i?-'^    A 
regards  any  person  taking  shares  in  the  company  on  the  faith  of sucli/'!L^C«^'    yi/^ 
prospectus,  unless. he  shall  have  had  notice  of  such  contract."  -    ^         ^       ily^ 


J^ 


At  the  end  of  the  prospectus  (issued  as  above  stated),  under  the 


1  6  Ves.  278. 

2  Statement  abridged, 
point.  —  Ed. 


■\ 


Only  so  much  of  the  report  is  given  as  relates  to  a  ftigljt'*'"'^  •  /fc_35» 


>a 


/ij 


AK5( 


e" 


238  GREENWOOD   V.  LEATHER   SHOD   WHEEL  CO. 

heading  in  large  print,  ''  The  following  agreement  has  been  entered 
into,"  was  a  paragraph  in  smaller  print  than  the  rest  of  the  prospectus, 
purporting  to  give  particulars  of  an  agreement  dated  Feb.  5, 1897,  (for 
the  sale  of  certain  patents  by  the  Coria  Syndicate,  Limited,  to  the  de- 
fendant company)  —  and  then  continuing  thus :  "  There  may  be  other 
agreements  as  to  the  formation  of  the  company,  the  subscription  to 
the  capital,  or  otherwise,  to  none  of  which  is  the  company  a  party,  and 
which  may  technically  fall  witliin  s.  38  of  the  Companies  Act,  1867. 
Subscribers  will  be  held  to  have  had  notice  of  all  these  contracts  and 
to  have  waived  all  right  to  be  supplied  with  particulars  of  such  con- 
tracts, and  to  have  agreed  with  the  company,  as  trustees  for  the  direc- 
tors and  other  persons  liable,  not  to  make  any  claims  whatsoever  or  to 
take  any  proceedings  under  the  saidsection,  or  otherwise  in  respect  of 
any  non-compliance  therewith." 

Plaintiff  received  a  copy  of  the  prospectus  ;  and,  on  the  faith  of  it, 
he  applied,  Feb.  15,  1897,  for  1000  shares  in  the  company,  by  filling 
)up  and  signing  a  printed  application  form,  part  of  which  was  as  fol- 
lows :  ..."  I  beg  to  apply  for  1000^.  ordinary  shares,  ...  on  the 
^terms  of  the  prospectus.  ...  I  further  agree  with  the  company,  as 
/trustee  for  the  directors  and  others  liable,  to  waive  any  claims  I  may 
have  against  them  for  non-compliance  in  the  said  prospectus  with 
s.  38  of  the  Com])anies  Act,  1867,  or  otherwise.  .  .  ."  The  1000 
shares  were  duly  allotted  to  the  plaintiff,  and  he  paid  the  full  amount 
of  lOOOZ.  thereon. 

Plaintiff  subsequently  discovered  that  an  agreement  had  been  en- 
tered into,  on  Dec.  3,  1896,  between  T.  H.  Lambert,  on  the  one  hand, 
and  the  Coria  Syndicate,  Limited  —  who  were  ultimately  the  ostensible 
vendors  to  the  defendant  company  —  on  the  other ;  whereby  it  was 
agreed  that  the  syndicate  should  purchase  a  number  of  leather  tire 
patents  from  one  Lembeke,  alleged  to  be  a  nominee  or  agent  of  T.  H. 
Lambert,  on  the  terms  of  allotting  half  of  its  share  capital  to  Lembeke, 
and  the  other  half,  less  the  seven  statutory  shares  allotted  to  the 
subscribers  to  tlie  syndicate's  memorandum  of  association,  to  T.  H. 
Lambert ;  who  thus  on  the  ultimate  sale  to  the  defendant  company 
acquired  a  substantial  interest  in  it. 

On  making  this  and  other  discoveries,  plaintiff,  on  Oct.  1,  1897,  re- 
pudiated his  shares  and  demanded  repayment.  On  the  company  deny- 
ing his  right  to  repudiate,  he  began  the  present  action. 

Kekewich,  J.,  after  trial,  gave  judgment,  that,  as  against  T.  H. 
Lambert,  the  prospectus  was  to  be  deemed  fraudulent  under  s.  38  of 
the  Companies  Act,  1867  ;  and  that  T.  H.  Lambert  should,  in  default 
of  payment  by  the  defendant  company,  pay  to  the  plaintiff  the  said 
sum  of  lOOOZ. 

The  defendants  appealed.  [The  argument  in  behalf  of  the  other 
defendants  is  omitted.] 

E.  Ford,  for  T.  H.  Lambert. 


GREENWOOD   V.   LEATHEK   SHOD   WHEEL  CO.  239 

•  •  •  The  question,  then,  is  whether  he  is  liable  under  s.  38,  for  non- 
disclosure of  that  agreement  [of  Dec.  3,  1896.]  I  submit  that  the 
waiver  clause  in  the  prospectus,  and  also  in  the  application  for  shares, 
debars  the  plaintiff  from  relying  on  the  section. 

[RoMER,  L.  J.  Your  contention  then  is  that,  no  matter  how  fraudu- 
lent a  contract  may  be,  there  is  nothing  in  the  Act  to  prevent  a  share- 
holder from  contracting  himself  out  of  the  Act.] 

[LiNDLEY,  M.  R.  Suppose  this  is  a  fraudulent  prospectus  as  against 
the  Company  and  you  the  promoter,  the  entire  prospectus  is  a  fraud 
including  this  waiver  clause.     What  then  becomes  of  the  waiver  ?] 

There  is  no  enactment  in  the  Act  that  a  shareholder  shall  not  con- 
tract himself  out  of  it. 

[RoMER,  L.  J.  Assume  that  there  was  a  contract  by  the  plaintiff 
not  to  take  advantage  of  the  Act,  how  can  you  bind  him  when  you 
state  in  your  prospectus  that  there  "  may  be  "  other  agreements  when 
you  knew  there  were  ?  In  your  case  you  are  a  promoter  knowing  of 
this  contract,  and  yet  you  put  in  a  misleading  statement  that  there 
"  may  be  "  other  agreements.  That,  surely,  is  not  a  case  in  which  you 
can  say  there  is  a  waiver.] 

I  rely  strongly  on  the  waiver  clause  in  the  application  form.  To 
say  that  the  plaintiff  is  not  bound  by  that  is  to  say  that  he  may  com- 
mit a  breach  of  contract.  After  that  contract  he  cannot  turn  round 
and  say  my  client  is  liable.  The  allotment  was  made  by  the  company 
upon  the  terms  stated  in  the  application  form,  and  upon  no  other. 

[LiNDLEY,  M.  R.  The  expression  in  the  application  form,  "  or  other- 
wise," is  very  significant.  It  covers  a  common  law  action  of  tort.  It 
means  that  the  shareholder  shall  not  sue  on  any  ground  at  all.] 

But  the  fact  remains  that  the  plaintiff  has  solemnly  contracted  him- 
self out  of  this  head  of  relief.  Whether  a  company  can  put  in  a  pro- 
spectus or  application  form  a  clause  to  protect  itself,  or  whether  a 
shareholder  can  contract  himself  out  of  the  Act,  has  never  yet  been 
decided ;  but  I  submit  that  such  a  clause  is  not  in  itself  unreasonable. 

Warmington,  Q.  C,  Renshaiv,  Q.  C,  and  Norman  Craig,  for  plaintiff. 

[Argument  omitted.] 

Cur.  adv.  vult. 

LiNDLEY,  M.  R.  [After  discussing  other  questions.]  One  part  of 
the  order,  however,  affects  Mr.  T.  H.  Lambert  alone,  and  it  raises  a 
very  important  question  as  to  the  effect  of  what  are  called  *'  waiver 
clauses  "  on  s.  38  of  the  Companies  Act,  1867.  The  prospectus  in  this 
case  omitted  all  reference  to  an  important  contract  of  December  3, 
1896,  by  which  Mr.  T.  H.  Lambert  was  to  obtain  considerable  benefits. 
There  can  be  no  doubt  that  this  contract  ought  to  have  been  disclosed 
in  the  prospectus.  Mr.  T.  H.  Lambert  has  been  held  to  have  in- 
fringed this  section,  and  an  order  has  been  made  against  him  as  to 
costs,  of  which  he  complains.  The  other  directors  apparently  knew 
nothing  of  the  contract  in  question,  and  no  similar  order  was  made 


240  GREENWOOD  V.  LEATHER   SHOD   WHEEL   CO. 

ao-ainst  them.  Kekewich,  J.'s  view  was  that  the  waiver  clause  could 
not  avail  Mr.  T.  H.  Lambert  because  the  plaintiff  was  not  suf- 
ficiently informed  of  what  he  was  waiving.  I  am  of  the  same  opinion, 
but,  as  this  matter  is  one  of  great  importance,  I  will  state  my  reasons 
for  ray  conclusion. 

The  first  part  of  s.  38  enacts  that  every  prospectus  of  a  company, 
and  every  notice  inviting  persons  to  subscribe  for  shares,  shall  specify 
the  dates  and  names  of  the  parties  to  any  contract  entered  into  by  the 
company,  or  the  promoters,  directors,  or  trustees  thereof,  before  the 
issue  of  such  prospectus  or  notice.  The  second  part  of  the  section 
enacts  that  every  prospectus  or  notice  not  specifying  the  same  shall  be 
deemed  fraudvilent  on  the  part  of  the  promoters,  directors,  and  officers 
of  the  company  knowingly  issuing  the  same,  as  regards  any  person 
taking  shares  in  the  company  on  the  faith  of  such  prospectus,  unless 
he  shall  have  had  notice  of  such  contract. 

A  prospectus,  therefore,  which  does  not  comply  with  the  first  half 
of  the  section  is  to  be  deemed  fraudulent,  as  between  the  persons  issu- 
ing it,  on  the  one  hand,  and  all  persons  taking  shares  on  the  faith  of 
it,  on  the  other,  except  only  in  one  case  —  namely,  if  they  have  notice 
of  the  contract,  of  which  some  particulars  have  to  be  given  in  compli- 
ance with  the  first  part  of  the  section. 

Considering  the  manifest  object  of  this  section,  which  is  to  compel 
the  persons  issuing  prospectuses  to  afford  to  persons  invited  to  take 
shares  the  information  required  by  the  section,  it  is  obvious  that  the 
words,  "  unless  he  shall  have  had  notice  of  such  contract,"  mean  a 
great  deal  more  than  "  unless  he  shall  have  some  vague  information 
which,  if  followed  up,  will  lead  to  such  notice."  Notice  in  the  section 
means,  not  what  is  called  "  constructive  notice,"  but  actual  notice, 
that  is,  notice  which  brings  home  to  the  mind  of  a  reasonably  intelli- 
gent and  carefiil  reader  such  knowledge  as  fairly,  and  in  a  business 
sense,  amounts  to  notice  of  a  contract.  Any  other  construction  would 
render  the  section  perfectly  useless.  Again,  what  is  to  be  deemed 
fraudulent  is  the  prospectus  as  a  whole.  It  may  contain  some  true 
statements,  but  the  introduction  of  these  will  not  save  the  prospectus 
from  being  deemed  fraudulent  as  a  whole.  The  introduction  into  the 
prospectus  of  a  tricky  waiver  clause,  instead  of  preventing  the  pro- 
spectus from  being  deemed  fraudulent,  affords  an  additional  reason  for 
holding  it  to  be  so  in  fact. 

The  waiver  clause  in  the  prospectus  of  this  company  is,  in  my  opin- 
ion, clearly  tricky  and  fraudulent  on  the  part  of  Mr.  T.  H.  Lambert. 
It  is  printed  in  small  type,  so  as  to  escape  attention  ;  it  is  worded  so 
as  to  conceal,  and  not  to  afford  notice  of,  the  contract  of  December  3, 
189G,  to  which  he,  the  promoter,  was  a  party.  The  language,  "there 
may  be  contracts  which  perhaps  ought  to  be  referred  to,"  when  it  was 
perfectly  well  known,  to  Mr.  T.  H.  Lambert  a.t  all  events,  that  there 
certainly  was  one  which  ought  to  have  been  disclosed,  stamps  the 
clause  as  tricky  and  dishonest,  so  far  as  he  is  concerned. 


GREENWOOD   V.   LEATHER   SHOD   WHEEL  CO.  241 

But  then  it  is  said  that  the  application  for  shares  contains  another 
waiver  chouse.  But  the  application  for  shares  refers  to  the  prospectus, 
and  was  sent  out  with  it,  and  the  waiver  clause  in  the  application  for 
shares  is  as  tricky  as  the  other,  and  is  even  worse  by  reason  of  the 
words  "  or  otherwise,"  which  increases  its  scope  beyond  all  reason- 
able bounds.  Literally  construed,  it  would,  if  effect  were  given  to  it, 
afford  a  defence  to  the  whole  action.  If  a  company's  prospectus  is 
fraudulent  at  common  law,  or  is  to  be  deemed  fraudulent  under  s.  38 
of  the  Companies  Act,  1867,  and  an  applicant  for  shares  signs  a  con- 
tract which  is  intended  to  deprive  him  of  his  right  to  redress,  he  is 
not  bound  in  equity  by  what  he  signs,  unless  his  attention  is  called  to 
the  existence  of  facts  which  render  the  prospectus  fraudulent.  The 
introduction  of  a  stipulation  that  an  applicant  for  shares  is  to  be 
deemed  .to  have  notice  of  what  is  in  fact  concealed  from  him,  is  sim- 
ply part  of  the  trick  had  recourse  to  in  order  to  evade  the  consequeuQfi^ 
of  the  improper  concealment.  Such  a  stipulation  in  a  tricky  waiver  / 
clause  like  the  one  before  us  affords  no  protection  to  the  person  wh;9/ 
seeks  protection  from  it.  The  principle  of  refusing  to  give  effect  to 
parts  of  documents  so  as  to  prevent  successful  deception  by  means  of 
them  is  quite  familiar  in  its  application  to  general  words  in  releases, 
and  to  catching  conditions  of  sale.  The  refusal  is  based  on  ordinary 
principles  of  honesty,  and  is  as  applicable  to  tricky  waiver  clauses  as 
to  other  tricky  documents. 

I  wish  to  guard  myself  against  being  supposed  to  go  further  than  I . 
intend.  I  have  no  doubt  that  a  person  who  takes  shares  on  the  faith . 
of  a  contract  which  is  fraudulent  at  common  law,  or  which  is  deemed 
to  be  fraudulent  under  s.  38  of  the  Companies  Act,  1867,  may  elect  to_ 
keep  his  shares,  and  may  agree  not  to  enforce  his  right  to  damages., 
Butjjn  order  to  bind  him  by  electionor  agreement,  he  must  be  fairly, 
dealt  with ;  and  his  attention  must  be  fairly  drawn  to  the  facts,  or  at. 
all  events  the  existence  of  facts,  which  confer  the  rights  which  he 
elects  or  agrees  not  t<i  enfoi-ce.  If  his  attention,  instead  of  being  drawn 
to  such  facts,  is  drawn  from  them,  the  attempt  to  catch  him  will  fail. 

I  am  aware  that,  owing  to  the  wide  language  of  s.  38,  there  is  some- 
times practical  difficulty  in  determining  whether  all  contracts  which 
apparently  come  within  it  are  really  such  as  to  require  notice  in  a  pro- 
spectus ;  and  to  put  in  a  long  list  of  contracts,  which  no  applicant  for 
shares  would  care  to  know  anything  about,  would  frighten  the  public 
and  do  no  good  to  any  one.  These  difficulties  have  given  rise  to  hon- 
est attempts  to  protect  honest  men  by  waiver  clauses  from  the  conse- 
quences of  honest  unintentional  breaches  of  the  law.  General  waiver 
clauses  in  prospectuses,  applications  for  shares,  articles  of  association, 
or  other  documents  addressed  to  large  numbers  of  persons  are,  how- 
ever, always  suspicious,  and  require  careful  scrutiny.  When  the  Court 
has  to  deal  with  an  honest  case  of  the  sort  above  mentioned,  the  Court 
will,  I  have  no  doubt,  be  able  to  come  to  a  just  conclusion,  and  will,  if 
necessary,  uphold  the  clause.     On  the  present  occasion  we  have  no 


fV 


242  McELHENNYS   APPEAL. 

such  case  to  deal  with.  Mr.  T.  H.  Lambert,  the  promoter,  has  ingen. 
iousiy  endeavored  to  shield  himself  from  the  consequences  of  conceal- 
ing a  contract  to  which  he  dared  not  allude,  and  his  appeal,  like  the 
others,  must  be  dismissed  with  costs.  ] 

[Sir  F.  H.  Jeune  and  Romer,  L.  J.,  concurred ;  the  latter  deliver- 
ing an  opinion  upon  another  branch  of  the  case.] 

[J  Appeal  disrtiisse^. 

I!'      P  Ury^r/k     )  "^  McELHENNY'S   APPEAL.       .^   ^{    jS 


'        J)  \t^(y^,rl     )  "^  McELHENNY'S   APPEAL.        ^   .(    J ^ 

,     )tA    •  y    f  a^  3869.     61  Pennsylvania  State,  1S8A       V>      \..  J 

I     tP"    (  ^  it'     1^  ■       r 

MT^  I    B^    ir\\  I/A    Bill  filed  by  Hubert  Oil  Company  against  thq  a-dmijiistrators  of 
^<'    M/  t^^^cElhenny's  estate.  \ 

^'^     .0     jJJ^     Q^    McElhenny  purchased  land,  probably  at  a  cost  of  \piuch  less  than 
i^.^     lr\A^   ,  N  $12,000.     This  land  he  sold  to  Baird  and  others ;  upon  their  agree- 
I  kjJ^    '  -vA      AdJ^^^^^^^  ^-^^^  ^^®  should  receive  $12,000;  and  should  also  receive  a  share 
M^  /C/'O^J  *^^  2  9f  the  profits  to  be  made  by  the  purchasers  from  him,  in  case  they 


v: 


i^^aT  ment  that  he  should  receive  $12,000;  and  should  also  receive  a  share 

r^  2  (j)f  the  profits  to  be  made  by  the  purchasers  from  him,  in  case  thej 

j^p^  it  into  a  company  at  the  sum  of  $40,000.     Baird  et  als.  then  prO' 


mptfdJJie  formation  of  the  plaintiff  corporation.     Stock  was  sub- 
scrLDJ^a  to  the  amount  of   more   than  $40,000 ;   McElhenny's  name 
Appearing  as  a  subscriber  to  the  extent  of  $2000.      The  promoters 
'   sold  the  land  to  the  corporation  for  $40,000.     Out  of  this  sum  Mc- 
Elhenny was  paid  the  $12,000,  due  from  Baird  et  als.  as  purchase 
"/(Pfbney.      The  balance  of  $28,000  was  divided  as  profit  among  the 
-    >^•'^promoters ;  McElhenny  receiving  as  his  share  the  sum  of  $2083.84. 
\V^        The  sale  to  the  corporation  was  made  under  such  circumstances  that 
j^  j^'Xa       the  promoter-vendors  were  compellable  to  refund  to  the  corporation 

M\   ^  fJ^\Ar'    ^^6  profit  they  received. 
\y    \  A      ^*^      '^       corporation  claimed  that  McElhenny  should  account  to  it  for 
(^  p^\j.     fl/tiie^rofit  received  by  McElhenny  on  the   sale  which  he  made  to 
\   J-y  vA^    1^  Jimrd  et  als.,  as  well  as  the  profit  received  by  McElhenny  on  the  sale 
^Jj}    jL/f^  -  J*       ""^  Baird  et  als.  to   the   corporation.     The  court  below,  apparently 
»\  Ik^  n-y  (^       adopting  this  basis,  decreed  that  the  administrators  should  pay  to 
\    ^n      t        •  1&^^  corporation  the  sum  of  $9083.84. 
^^         Js^J^     From  this  decree,  the  administrators  appealed. 

jji^'^  y^ \  ^    ^"^  order  to  bring  the  intestate's  estate  into  liability  to  the  com- 

'     ^^1    i^H  ^^"y  -°^  money  received  by  him  in  payment  for  the  land,  it  must  be 

^^i.  .  '"    J-'iv'.  niadaJzTappear  that  he  occupied  some  fiduciary  relation  to  it,  so  that 

.      i^*^    vv\       lA^     »^         ^  Statement  abridged.    Arguments  and  part  of  opinion  omitted. — Ed. 


Archer,  Jr.  (L.  C.  Cassidy  with  him),  for  appellants. 
E.  S.  Miller  (C.  B.  Penrose  with  him),  for  appellees. 


b-^ 


^ 


mcelhenny's  appeal.  243 

the  receipt  of  the  money,  although  received  by  him  for  his  own  use, 
was,  by  means  of  the  fraud  practised  in  his  fiduciary  relation,  money_, 
of  thejcompany.  It  is  not  damages  in  a  case  like  this  that  equity 
gives,  it  is  restoration  of  the  thing  wrongfully  taken,  viz.  the  money 
received,  or  an  equal  sum  and  interest. 

It  nowhere  appears  that  McElhennjj,  the  purchaser  from  Hubert, 
the  original  owner,  did  it  as  the  agent  of  Messrs.  Baird,  Boyd  & 
Co.  and  others,  although  he  bought  it  to  sell  again,  no  doubt. 

If  the  property  was  not  purchased  by  McElhenny  for  the  use  and 
as  agent  of  the  company,  but  for  his  own  use  (and  this  is  the  proof  in 
the  ease),  he  might  sell  it  at  a  profit  most  assuredly.  No  subsequent  q 
purchasers^  jromjiis^  vendees  would  have  any  right  to  call  upon  him  "cD 
to_account_  for  the  profits^  made  on  his  sale.  The  parties  to  whom  he 
sold  have  never  asked  him  to  account  to  them  for  the  profit  at  which 
he  sold  to  them.  They  have  not  pretended  that  he  was  their  agent 
in  making  the  purchase,  and  I  am  unable  to  understand  the  ground 
of  a  right  in  the  company  to  demand  it.  The  difference  between  the 
sum  he  paid  and  that  at  which  he  sold,  he  was  as  fairly  entitled  to 
as  to  the  svim  paid.  Seeing  no  evidence  of  agency,  or  of  a  trust,  or  a 
fiduciary  relation  between  the  plaintiff  and  the  defendant's  intestate 
thus  far,  we  are  of  opinion  that  there  was  error  in  decreeing  payment 
of  any  portion  of  the  profits  made  by  him  in  the  sale  to  the  promoters 
of  the  Hubert  Oil  Co. ;  and  to  the  extent  of  $7000  the  decree  is  to 
be  modified. 

At  this  point  another  inquiry  arises,  is  the  estate  of  McElhenny 
liable  in  equity  to  refund  to  the  company  the  share  of  the  profits  re- 
ceived by  him  over  the  sum  of  $12,000  ?  We  are  inclined  to  think 
it  is. 

After  selling  to  Baird,  Boyd  and  others^  and  then  joining  them  in 
selling  to  the  company^  he__assumed  their  position  and  Uabilities,  and 
if  they~could  not  make  a  profit,  he  could  not. 


[^Decree  against  McElhenny^ s  estate  for  $2083.84.  j 
Sharswood,  J.,  dissented. 


BAXTER. 


KELNEE  V.  BAXTSEK 


~f '«  La     t'^  ^'  v^ 

•■^  (^'^/J  ■'■^^^"     Law  Reports,  2  Common  Pleas,  TlIA-X^    '- 

fi  itT         ff^  The  declaration  was  for  goods  sold  and  delivered,  goods  bargained 
ff^/]jK^      ^^^  ^°-^^'  interest,  and  upon  accounts  stated. 
■        K^    [Pleas  omitted.] 

[r         At  the  trial  before  Erie,  C.  J.,  at  the  sittings  in  London  after  last 
1 1  /iTrinity  Term,  the  following  facts  appeared  in  evidence  :  —  The  plain- 
A^   tiff  was  a  wine  merchant,  and  the  proprietor  of  the  Assembly  Rooms 
at  Gravesend.     In  August,  1865,  it  was  proposed  that  a  company 
should  be  formed    for  establishing  a  joint-stock  hotel  company  at 
Gravesend,  to  be  called  The  Gravesend  Royal  Alexandra  Hotel  Com- 
pany, Limited,  of  which  the  following  gentlemen  were  to  be  the  direc- 
tors, viz.,   Mr.  L.  Calisher,  Mr.  T.  H.  Edmands,  Mr.  M.  Davis,  Mr. 
Macdonald,  Mr.  Hulse,  Mr.  N.  J.  Calisher  (one  of  the  defendants),  and 
the  plaintiff.     The  plaintiff  was  to  be  the  manager  of  the  proposed 
company,  and  Mr.  Dales  (another  of  the  defendants)  was  to  be  the 
permanent  architect.     One  part  of  the  scheme  was  that  the  company 
.^/M'shoald  purchase  the  premises  of  the  plaintiff  for  a  sum  of  5000Z.,  of 
j         which  3000/.  was  to  be  paid  in  cash,  and  2000Z.  in  paid  up  shares,  the 
p   x/^   stock,  &c.,  to  be  taken  at  a  valuation ;  and  this  was  carried  into  effect 
"^^^^ ^f^  and  completed,  the  other  defendant  (Baxter)  being  the  nominal  pur- 
i     7^  i    ^^'^'S^r  on  behalf  of  the  company.     In  December  a  prospectus  was  set- 
t*      .J^,  ,tled.     On  the  9th  of  January,  1866,  a  memorandum  of  association  was 


i^' 


"i'i^^executed  by  the  plaintiff  and  the  defendants  and  others. 

ending  the  negotiations  the  business  had  been  carried  on  by  the 
iff,  and  for  that  purpose  additional  stock  had  been  purchased  by 
im  ;  and  on  the  27th  of  January,  1866,  an  agreement  was  entered 
•^^  j.j^v  .  r         into  for  the  transfer  of  this  additional  stock  to  the  company,  in  the 

y>*^         /  IkM^  I  following  terms  :  — 

'''  -  '        »  -i  '  ^  "January  27th,  1866. 

0  John  Dacier  Baxter,  Nathan  Jacob  Calisher,  and  John  Dales,  on 
behalf  of  the  proposed  Gravesend  Royal  Alexandra  Hotel  Com- 
pany, Limited. 
J  /-  i'^'^\)  OA-z^^^^l^men,  — I  hereby  propose  to  sell  the  extra  stock  now  at  the 

M^      1     L^        (\>'^ssembly  Rooms,  Gravesend,  as  per  scliedule  hereto,  for  the  sum  of 
^M  ^ '  *  >tV     /I    000/.,  payable  on  the  28th  of  February,  1866. 

r     .  ,U^       flfJAf  (Signed)     "  John  Reiner." 

«  •'  Then  followed  a  schedule  of  the  stock  of  wines,  &c.,  to  be  purchased, 

P  I    /^-iid.  at  the  end  was  written  as  follows  :  — 


Pleadings  aud  arguments  omitted.  — Ed. 


,  t) 


4^ 


^t 


&. 


^ 


KELNER  V.   BAXTER. 


245 


"To  Mr.  John  Kelner. 

"  Sir,  —  We  have  received  your  offer  to  sell  the  extra  stock  as  above, 
and  hereby  agree  to  and  accept  the  terms  proposed. 

(Signed)     "  J.  D.  Baxter, 
"  N.  J.  Calisher, 
"J.  Dales, 
"  On  behalf  of  the  Gravesend  Royal  Alexandra 
Hotel  Company,  Limited." 

In  pursuance  of  this  agreement  the  goods  in  question  were  handed 
over  to  the  company,  and  consumed  by  them  in  the  business  of  the 
hotel ;  and  on  the  1st  of  February  a  meeting  of  the  directors  took 
place,  at  which  the  following  resolution  was  passed :  "  That  the  ar- 
rangement entered  into  by  Messrs.  Calisher,  Dales,  and  Baxter,  on 
behalf  of  the  company,  for  the  purchase  of  the  additional  stock  on  the 
premises,  as  per  list  taken  by  Mr.  Bright,  the  secretary,  and  pointed 
out  by  Mr.  Kelner,  amounting  to  900/.,  be,  and  the  same  is  hereby 
ratified."  There  was  also  a  subsequent  ratification  by  the  company^ 
viz.,  on  the  11th  of  April,  but  this  was  after  the  commencement  of  the 
action. 

The  articles  of  association  of  the  company  were  duly  stamped  on  the 
13th  of  February,  and  on  the  20th  the  company  obtained  a  certificate 
of  incorporation  under  the  25  &  26  Yict.  c.  89. 

The  company  having  collapsed,  the  present  action  was  brought 
against  the  defendants  upon  the  agreement  of  the  27th  of  January. 

On  the  part  of  the  defendants  oral  evidence  was  tendered  for  the  ' 
jjurpose  of  showing  that  it  never  was  intended  that  they  should  be 
personally  liable ;  but  his  Lordship  rejected  it.  It  was  then  submit- 
ted that,  inasmuch  as  the  agreement  was  not  entered  into  by  the  de- 
fendants personally,  but  only  as  agents  for  the  hotel  company,  they 
thereby  incurred  no  personal  obligation  to  the  plaintiff,  who  was  him- 
self one  of  the  promoters. 

For  the  plaintiff  it  was  insisted  that,  there  being  no  company  in  ex- 
istence at  the  time  of  the  agreement,  the  parties  thereto  had  rendered 
themselves  personally  liable /"and  that  there  could  be  no  ratification 
of  the  contract  by  a  subsequently  created  company.t/' 

A  verdict  was  taken  for  the  plaintiff  for  900/.,  subject  to  leave  re- 
served to  the  defendants  (upon  giving  security)  to  move  to  enter  a 
nonsuit,  on  the  ground  that  the  agreement  of  the  27th  of  January  did 
not  make  them  personally  liable. 

Nov.  6, 1866.  Seymour,  Q.  C,  obtained  a  rule  nisi  accordingly,"  and 
also  for  a  new  trial  on  the  ground  of  misdirection  on  the  part  of  the 
learned  judge,  "  in  not  allowing  witnesses  to  be  called  to  contradict 
the  plaintiff  as  to  the  defendants'  personal  liability." 

J.  Brown,  Q.  C.,  and  Thesiger,  shewed  cause. 

Seymour,  Q.  C.,  in  support  of  the  rule. 

Erle,  C.  J.  I  am  of  opinion  that  this  rule  should  be  discharged. 
The  action  is  for  the  price  of  goods  sold  and  delivered  :  and  the  ques- 


•A 


>f' 


,y^ 


(P, 


^ 


246  KELNER  V.    BAXTER. 

tion  is  whether  the  goods  were  delivered  to  the  defendants  under  a 
contract  of  sale.  The  alleged  contract  is  in  writing,  and  commences 
with  a  proposal  addressed  to  the  defendants,  in  these  words  :  —  "I 
hereby  propose  to  sell  the  extra  stock  now  at  the  Assembly  Rooms, 
Gravesend,  as  per  schedule  hereto,  for  the  sum  of  900/.,  payable  on  the 
28th  day  of  February,  1866."  Nothing  can  be  more  distinct  than  this 
as  a  vendor  proposing  to  sell.  It  is  signed  by  the  plaintiff,  and  is  fol- 
lowed by  a  schedule  of  the  stock  to  be  purchased.  Then  comes  the 
other  part  of  the  agreement,  signed  by  the  defendants  in  these  words, 
—  "  Sir,  We  have  i-eceived  your  offer  to  sell  the  extra  stock  as  above, 
and  hereby  agree  to  and  accept  the  terms  proposed."  If  it  had  rested 
there,  no  one  could  doubt  that  there  was  a  distinct  proposal  by  the 
vendor  to  sell,  accepted  by  the  purchasers.  A  difficulty  has  arisen 
because  the  plaintiff  has  at  the  head  of  the  paper  addressed  it  to  the 
defendants,  "on  behalf  of  the  proposed  Gravesend  Royal  Alexandra 
Hotel  Company,  Limited,"  and  the  defendants  have  repeated  those 
words  after  their  signatures  to  the  document ;  and  the  question  is, 
whether  this  constitutes  any  ambiguity  on  the  face  of  the  agreement, 
or  prevents  the  defendants  from  being  bound  by  it.  I  agree  that  if  the 
Gravesend  Royal  Alexandra  Hotel  Company  had  been  an  existing 
company  at  this  time,  the  persons  who  signed  the  agreement  would 
have  signed  as  agents  of  the  company,  ^ut,  as  there  was  no  company 
m  existence  at  t^tjme,^  the  agreement  would  be  wholly  inoperative 
unless  it  were  h_eM.  to  be  biiiding_onThe, defendants  personally.  Thg 
cases  referred  to  inj,he  course  of  the  argument  fully  bear  out  the  pro- 
position jhaty-wJiere^  a  contract  is  signed  by  one  who  professes  to  be 
signing_^as  agent,"  but  who  has^io_principal  existing  at  jthe_tirne, 
andtliejjontract  would  be  altogether  inoperative  unless  bintoi£_upon 
the  person  who  signed  itj  he  is  abound  therebyj_and  a  stranger  can- 
not  by  a  subsequent  ratification  relieve  him  from  that  responsibility. 
When  the  company  came  afterwards  into  existence  it  was  a  totally 
new  creature,  having  rights  and  obligations  from  that  time,  but  no 
rights  or  obligations  by  reason  of  anything  which  might  have  been 
done  before.  It  was  once,  indeed,  thought  that  an  inchoate  liability 
might  be  incurred  on  behalf  of  a  proposed  company,  which  would  be- 
come binding  on  it  when  subsequently  formed :  but  that  notion  was 
manifestly  contrary  to  the  principles  upon  which  the  law  of  contract 
is  founded.  Therejnust  be  twoparties  to  a  contractj  and_the  rights 
and  obligations  which  it  creates  cannot  be  transferred  by  one  of  them 
to  a  tlnrcl  person  who  was  not  in  a  condition  to  be  bound  by  it  at  the 
time_it  was  made.  The  history  of  this  company  makes  this  construc- 
tion to  my  mind  perfectly  clear.  It  was  no  doubt  the  notion  of  all  the 
parties  that  success  was  certain  :  but  the  plaintiff  parted  with  liis  stock 
upon  the  faith  of  the  defendants'  engagement  that  the  price  agreed  on 
should  be  paid  on  the  day  named.  It  cannot  be  supposed  that  he  for 
a  moment  contemplated  that  the  payment  was  to  be  contingent  on  the 
formation  of  the  company  by  the  28th  of  February.      The  paper 


KELNER  V.    BAXTER. 


247 


expresses  in  terms  a  contract  to  buy.  And  it  is  a  cardinal  rule  that  no 
ora  evidence  shall  be  admitted  to  shew  an  intention  diiferent  from 
that  which  appears  on  the  face  of  the  writing.  I  ccme,  therefore,  to 
the  conclusion  that  the  defendants,  having  no  principal  who  was  bound 
originally,  or  who  could  become  so  by  a  subsequent  ratification,  were 
themselves  bound,  and  that  the  oral  evidence  offered  is  not  admissible 
to  contradict  the  written  contract. 

WiLLEs,  J.  I  am  of  the  same  opinion.  Evidence  was  clearly  inad- 
missible to  shew  that  the  parties  contemplated  that  the  liability  on  this 
contract  should  rest  upon  the  company  and  not  upon  the  persons  con- 
tracting on  behalf  of  the  proposed  company.  The  utmost  it  could 
amount  to  is,  that  both  parties  were  satisfied  at  the  time  that  all  would 
go  smoothly,  and  consequently  that  no  liability  would  ensue  to  the  de- 
fendants. The  contract  is,  in  substance,  this,  —  "  I,  the  plaintiff,  agree 
to  sell  to  you,  the  defendants,  on  behalf  of  the  Gravesend  Royal 
Alexandra  Hotel  Company,  my  stock  of  wines  ; "  and,  "  We,  the  de- 
fendants, have  received  your  offer,  and  agree  to  and  accept  the  terms 
proposed ;  and  you  shall  be  paid  on  the  28th  of  February  next.''  Who 
is  to  pay  ?  The  company,  if  it  should  be  formed.  But,  if  the  com- 
pany should  not  be  formed,  who  is  to  pay  ?  That  is  tested  by  the  fact 
of  the  immediate  delivery  of  the  subject  of  sale.  If  payment  was  not 
made  by  the  company,  it  must,  if  by  anybody,  be  by  the  defendants. 
That  brings  one  to  consider  whether  the  company  could  be  legally 
liable.  I  apprehend  the  company  could  only  become  liable  upon  a  new 
contract.  It  would  reqidre  the  assent  of  the  plaintiff  to  discharge  the 
defendants.  Could  the  company  become  liable  by  a  mere  ratification  ? 
Clearly  not.  Ratification  can  only  be  by  a  person  ascertained  at  the 
time  of  the  act  done,  —  by  a  person  in  existence  either  actually  or  in 
contemplation  of  law ;  as  in  the  case  of  assignees  of  bankrupts  and 
administrators,  whose  title,  for  the  protection  of  the  estate,  vests  by 
relation.  The  case  of  an  executor  requires  no  such  ratification,  inas- 
much as  he  takes  from  the  will.  It  is  unnecessar}^,  however,  to  pur- 
sue this  further.  In  addition  to  the  cases  cited  at  the  bar,  I  would 
refer  to  Gunn  v.  London  and  Lancashire  Fire  Lnsurance  Company,^ 
where  this  Court,  upon  the  authority  of  Payne  v.  Neiv  South  Wales 
Coal  and  International  Steam  Navigation  Company ^^  held  that  a  con- 
tract made  between  the  projector  and  the  directors  of  a  joint-stock 
company  provisionally  registered,  but  not  in  terms  made  conditional 
on  the  completion  of  the  company,  was  not  binding  upon  the  subse- 
quent completely  registered  company,  although  ratified  and  confirmed 
by  the  deed  of  settlement :  and  Williams,  J.,  said,  that,  "  to  make  a 
contract  valid,  there  must  be  parties  existing  at  the  time  who  are 
capable  of  contracting."  That  is  an  authority  of  extreme  importance 
upon  this  point ;  and,  if  ever  there  could  be  a  ratification,  it  was  in 
that  case.  Both  upon  principle  and  upon  authority,  therefore,  it  seeing 
to  me  that  t^  company  ne^ver'couIdrbCIiaiIe.upon_this_^on^ 

1  12  C.  B.  (N.  S.)  694.  2  10  Ex.  283  ;  24  L.  J.  (Ex.)  117. 


Oim 


ciAA^MTV- 


.-e 


248  KELNER   V.    BAXTER. 

as  was  put  by  my  Lord,  construing  this  document  tit  res  nuigis  valeat 
guanTpereat,  we  niust  assume  that  the  parties  contemplated  that  the 
persons  sio^ning  it  would  be  pei-sonally  liable-  Putting  in  the  words 
*'  on  behalf  of  the  Gravesend  Royal  Alexandra  Hotel  Company,"  would 
operate  no  more  than  if  a  person  should  contract  for  a  quantity  of  corn 
"on  behalf  of  my  horses."  As  to  the  suggestion  that  there  should 
have  been  a  special  count,  that  is  quite  a  mistake.  There  need  not  be 
a  special  count  unless  there  was  a  person  existing  at  the  time  the  con- 
tract was  made  who  might  have  been  principal.  The  common  count 
perfectly  well  represents  the  character  of  the  liability  which  these  de- 
fendants incurred.  It  is  quite  out  of  the  question  to  suppose  that 
there  was  any  mistake.  The  document  represents  the  real  transaction 
between  the  parties.  I  think  that  the  course  taken  at  the  trial  was 
perfectly  correct,  and  that  the  rule  should  be  discharged. 

Byles,  J.  I  am  of  the  same  opinion.  At  first,  I  must  confess,  I 
entertained  some  doubt,  the  contract  appearing  on  the  face  of  it  to 
have  been  entered  into  by  the  defendants  on  behalf  of  the  company. 
The  true  rule,  however,  is  that  stated  by  Mr.  Thesiger,  viz.,  that  j)er- 
sons  who  contract  as  agents  are  generallyj)ei;sonaIly_resj2onsiblewhere 
tliiere  is  no  other  person  who  is  responsible  as  principal.  Suppose  this 
company  never  came  into  existence  at  all,  could  it  be  doubted  that  these 
defendants  must  be  held  to  have  bound  themselves  personally  ?  Then, 
was  it  contemplated  that  the  liability  was  conditional  only  until  the 
company  should  be  formed  ?  It  is  said  that  the  contract  was  ratified 
by  the  company  after  it  came  into  existence.  Tjiere  could,  however,  be 
no  ratifica^on.  Omiiis  ratlhabitio  retrotrahitur,  et  Tnandato  priori  ceQvi- 
faratur :  but  the  ratification  must  be  by  an  existing  person,  on  wh_ose 
behalf  the^ontract  might  have  been  made  at  the  time..  That_could 
not  be  so  here :  a  subsequent  ratification  by  Ihe  company  could  only 
be  with  the  assent  of  the  plaintiff  ^  and  ..then  it  would  be  a  new  con- 
tract. Mr.  Seymour  contended  that  the  contract  might  amount  to  a 
personal  undertaking  on  the  part  of  the  defendants  that  the  company 
shall  pay.  That  would  make  them  equally  liable.  Any  objection  on 
the  score  of  the  Statute  of  Frauds  would  be  cured  by  the  Mercantile 
Law  Amendment  Act,  19  &  20  Vict.  c.  97.  In  no  way,  therefore,  in 
which  it  can  be  put,  could  the  company  become  responsible. 

[The  concurring  opinion  of  KeatinGj  J.,  is  omitted.] 

Rule  discharged. 


i^bo 


/ 


A- 

igNDM'AN 


jU 


V.    ENTWISTLE. 


Ifyigi^ 


>\LANDMAN" 


1852. 


ENTWISTLE./ 

7  Exchequer,  632.1 


M  V-  j^. 

•1^    ih-\,^ 


^ 


Assumpsit  to  recover  61&.  18s.  M.,  claimed  by  plaintiff  for  his  serP 
vices  as  the  engineer  of  a  projected  railway,  called  the  Kentish  Rail- 
way Company,  of  which  the  defendant  was  one  of  the  provisional/^ 
committee.  nf^ 

At  a  meeting  of  the  provisional  committee,  on  Avig.  12,  1844,  at  ^[j^ 
which  plaintiff  was  present,  one  of  the  resolutions  was  :  — ''  That  the 


K 


provisional   committee   disclaim  the   intention  of   taking   on   them-'Ajli^ 
selves  any  personal  responsibility  as  regards  the  expenses  incurred  or  '    1 
to  be  incurred  in  or  about  the  Company,  and  that  no  such  resjionsi-  ^  ^- 
bility  shall  attach  to  them."     Another  of  the  resolutions  at  the  same  ^ 
meeting  was  :  —  "  That  it  be  a  recommendation  to  the  committee  of  i' 
management  to  endeavour  to  secure  the  valuable  services  of  J.  Locke,/  ?^^ 
Esq.,  the  eminent  engineer,  in  addition  to  those  of  Colonel  Landman,   n  ^ ^    \  v 
the  original  projector  of  the  railway,  it  being  clearly  understood  that   V^   \    ^^ 
neither  of  those  gentlemen  shall  have  any  personal  claim  against  any'"^ 
member  of  the  provisional  committee." 

Oct.  11,  1844,  plaintiff  wrote  to  the  solicitors  of  the  Company :  — 
"I  never  understood  that,  unless  the  project  were  successful,  the 
engineers  were  to  abandon  all  claim ;  but  I  did  understand  that  the 
individuals  comprising  the  committee  were  not  to  be  held  personally 
liable.  I  am  perfectly  ready  to  continue  to  devote  my  time  and  atten- 
tion to  the  perfecting  of  the  survey  and  getting  up  of  the  parliament- 
ary documents,  without  making  any  charge  for  the  same  until  suffi- 
cient funds  may  have  been  collected." 

At  a  meeting  of  the  committee  of  management,  on  Oct.  17,  1844,  at 
which  plaintiff  was  present,  it  was  "Resolved,  that  Messrs.  Lake 
&  Co.  be  requested  to  forward  the  survey  in  such  manner  as  may  be 
found  advisable.  Colonel  Landman  [the  plaintiff]  stating  that  he  would 
render  every  assistance  in  his  power,  and  that  he  would  make  no  claim 
for  his  personal  services,  or  for  those  of  his  assistant,  Mr.  Pinhorn, 
until  there  should  be  sufficient  funds  of  the  Company  to  meet  any 
demand  he  might  be  entitled  to  make." 

At  a  meeting  of  the  committee  of  management  on  Oct.  29,  1844, 
one  of  the  resolutions  was  as  follows  :  "  And  it  appearing  to  the  com- 
mittee that  it  is  absolutely  necessary  to  provide  a  fund,  in  order  that 
the  surveys  of  the  line  may  be  immediately  proceeded  with,  it  was 
(on  the  motion  of  Mr.  Entwistle)  —  Resolved,  that  the  committee 
bind  themselves  to  be  answerable  to  the  extent  of  1000^.,  to  be  applied 
to  engineering  and  surveying  purposes." 

At  a  meeting,  on  Nov.  18,  1844,  the  committee  resolved,  that  it  is 
expedient  that  the  Kentish  Railway  Company  should  withdraw  from 

1  Statement  abridged.    Arguments  omitted.  —  Ed. 


t 


250  LANDMAN  V.   ENTWISTLE. 

this  undertaking  in  favour  of  the  South  Eastern  Eailway  Company. 
The  resolution  recited  that  there  was  an  engagement  by  the  South 
Eastern  E.  Co.  "  to  reimburse  to  this  committee  the  expenses  hitherto 
incurred." 

The  scheme  was  thereupon  abandoned,  and  the  deposits  on  shares, 
which  amounted  to  4168Z.  were  returned  to  the  subscribers. 

At  the  trial,  after  the  foregoing  facts  had  been  proved,  Pollock, 
C.  B.,  directed  a  nonsuit,  reserving  leave  for  the  plaintiff  to  enter  a 
verdict  for  him,  if  the  Court  should  be  of  opinion  that  he  was  entitled 
to  recover. 

A  rule  nisi  having  been  obtained  accordingly,  the  Attor?iey  General 
{Hoggins  and  Sinythies  with  him)  showed  cause. 

Sir  A.  Cockburn,  Bmmwell,  and  Wilkinson  supported  the  rule. 

Parke,  B.  The  rule  must  be  discharged.  It  is  clear  that  the 
plaintiff  undertook  to  do  the  work,  not  upon  a  contract  with  the  pro- 
visional committee,  but  looking  to  the  chance  of  the  scheme  succeed- 
ing, and  of  there  being  funds  available  for  the  payment  of  his  claim. 
The  plaintiff's  letter,  of  the  11th  of  October,  shews  that  there  was  no 
contract  on  the  part  of  the  provisional  committee  that  he  should  be 
,paid  at  all  events.  In  the  majority  of  cases  of  this  kind,  the  contract 
is  that  the  party  shall  look  only  to  the  funds  of  the  Company,  and  not 
to  the  responsibility  of  the  individuals  who  manage  it. 

Platt,  B.  I  am  of  the  same  opinion.  This  action  cannot  be 
maintained,  unless  there  was  a  personal  responsibility  on  the  part  of 
the  defendant  to  pay  the  plaintiff.  But,  by  the  resolution  of  the  12th 
|of  August,  the  provisional  committee  distinctly  repudiate  any  per- 
onal  liability ;  and  it  appears  from  the  resolution  of  the  17th  of 

ctober,  that  the  plaintiff  agreed  to  make  no  claim  for  his  services 
"until  there  should  be  sufficient  funds  of  the  Company  to  meet  any 
demand  he  might  be  entitled  to  make."  That  must  surely  mean  suf- 
ficient funds  of  that  description  which  the  committee  could  properly 
apply  in  satisfaction  of  the  plaintift''s  claim.  Now,  the  sum  of  4168^., 
which  consisted  of  deposits,  was  not  a  fund  of  that  description ;  for, 
pn  the  abandonment  of  the  scheme,  all  the  depositors  were  entitled  to 
pall  for  repayment  of  their  deposits,  the  consideration  upon  which 
rheir  duty  to  pay  was  founded  being  at  an  end.  The  sum  in  ques- 
/tion,  therefore,  was  not  available  in  satisfaction  of  the  plaintiff's 
I  demand,  and  there  were  no  funds  out  of  which  he  was  entitled  to  be 
\  paid. 

Martin,  B.  I  am  of  the  same  opinion.  The  case  has  been  put 
to  us  much  in  the  same  way  that  a  counsel  puts  a  case  to  a  jury. 
He  tells  them  that  the  plaintiff  has  done  the  work,  and  that  he  is 
entitled  to  be  paid  for  it;  and  laying  aside  the  documents  upon 
Avhich  the  contract  is  founded,  he  calls  upon  the  jury,  and  frequently 
with  success,  to  infer  a  contract  which  renders  the  defendant  liable. 
The  answer  is,  that  the  true  contract  between  the  parties  must  be 
looked  at  for  the  purpose  of  ascertaining  with  whom  the  liability 


McARTHUR  V.    TIMES   PRINTING   CO. 


251 


rests.  Now,  in  this  case,  was  there  any  obligation  on  the  part  of  the 
provisional  committee  to  go  on  with  the  scheme  ?  There  certainly 
was  not.  They  were  at  liberty  in  that  respect  to  act  as  they  pleased, 
and  the  engineer  had  no  right  to  compel  them  to  go  on.  He  took  the 
chance  of  payment  provided  the  scheme  succeeded,  in  which  case  he 
would  no  doubt  have  been  paid  oi£tpf  the  profits. 

Pollock,  C.  B.     I  agree  with  \\he  rest  of  the  Court  that  there  is 
no  foundation  for  setting,  ))isidjeXhe  nbiWint. 


cARTHfl 


FEINTING  CO. 


Mule  discharged. 


l/^ 


^ 


lPf^l  V)y  defendant,  TraiesTPrinting  Company,  from  an  order^oftM 
the  district  court  of  Hennepin  county.   Canty,  J.,  made  August  4, 
1891,  denying  its  motion  for  a  new  trial.  f-    a 

Action  brought  by  D.  A.  Mc Arthur  to  recover  damages  sustained/}^ 
by  him  from  the  breach  of  a  contract  made  by  defendant  with  him,' 
He  was  employed  by  it  for  a  year  from  October  1,  1889,  to  solicit 
advertisements  for  its  newspaper,  and  was  to  receive  $20  a  weeK? 
during  October,  and  $30  a  week  for  the  residue  of  the  year,  and  was 
also  to  receive,  at  the  end  of  the  year,  five  shares  of  its  stock,  of 
$100  each.  He  was  discharged  April  12,  1890.  After  the  year  ex-j' 
pired  he  brought  this  suit.  It  was  tried  May  5,  1891,  and  plaintiff 
had  a  verdict  for  $450.  Defendant  moved  for  a  new  trial.  Th 
motion  was  denied,  and  it  appealed 

Geo.  F.  Edwards,  for  appellant. 

F.  B.  Wright,  for  respondent.  '  '  v-   I?       .    "  ^    .  ' 

Mitchell,  J.     The  complaint  alleges  that  about  October  1,  1889^: V)'^jU^  ^i-'^ 
the  defendant  contracted  with  plaintiff  for  his  services  as  advertis-^  A-^  \  '  t^ 
ing  solicitor  for  one  year ;  that  in  April,  1890,  it  discharged  him,  in   ^t  aL-U  '   ^^^t 'i    t 
violation  of  the  contract.     The  action  is  to  recover  damages  for  the../^        ..        j^^ 
The  answer  sets  up  two  defenses:   (1)  That^    /V*^*" 


breach  of  the  contract. 


plaintiff's  employment  was  not  for  any  stated  time,  but  only  from  ^-      ^ 
week  to  week;  (2)  that  he  was  discharged  for  good  cause.     Upon.  J^\ 


^r' 


the  trial  there  was  evidence  reasonably  tending  to  prove  that  in  Sep- 
tember, 1889,  one  C.  A.  Nimocks  and  others  were  engaged  as  proA"'^      ^^ 
moters  in  procuring  the  organization  of  the  defendant  company  tO;;  v^"^^      (/^^^^    ij^ 
publish  a  newspaper;  that,  about  September  12th,  Nimocks,  as  such,  j      n^''\   ^  a./^. 
promoter,  made  a  contract  with  plaintiff,  in  behalf  of  the  contem.-'          ,' '  ^tj^^  jS 

plated  company,  for  his  services  as  advertising  solicitor  for  the  pe-;,  ^o         f~  \    l^P*'^ 
riod  of  one  year  from  and  after  October  1st,  —  the  date  at  which  it '  -iuV^ 
was  expected  that  the  company  would  be  organized;  that  the  corpo-  ■^..    tr-^ 
ration  was  not,  in  fact,  organized  until  October  16th,  but  that  thervj*""^  ^,A-  /  {tJ^^ 
publication  of  the  paper  wis  commenced  by  the  promoters  October     '>^^i>^>A'        </^ 


U 
t^- 1 


(>-< 


(Kj^V^ 


t'J^-x^\::>^' 


.V^.;^^ 


^-^ 
^ 


>^^ .  <^< 


252  MCAKTHUR   V.    TIMES   PRINTING  CO. 

1st,  at  which  date  plaintiff,  in  pursuance  of  his  arrangement  with 
Nimocks,  entered  upon  the  discharge  of  his  duties  as  advertising 
solicitor  for  the  paper ;  that  after  the  organization  of  the  company  he 
continued  in  its  employment  in  the  same  capacity  until  discharged, 
the  following  April ;  that  defendant's  board  of  directors  never  took 
any  formal  action  with  reference  to  the  contract  made  in  its  behalf 
by  ^imocks,  but  all  of  the  stockholders,  directors,  and  officers  of 
the  corporation  knew  of  this  contract  at  the  time  of  its  organization, 
or  were  informed  of  it  soon  afterwards,  and  none  of  them  objected  to 
or  repudiated  it,  but,  on  the  contrary,  retained  plaintiff  in  the  em- 
^   Ay  ployment  of  the  company  without  any  other  or  new  contract  as  to 

-^  his  services. 

There  is  a  line  of  cases  which  hold  that  where  a  contract  is  made 
in  behalf  of,  and  for  the  benefit  of,  a  projected  corporation,  the  cor- 
poration, after  its  organization,  cannot  become  a  party  to  the  con- 
'W  "  \  .f;  7  tract,  either  by  adoption  or  ratification  of  it.  Abbott  v.  Hapgood,  150 
<  ^4L»^  I  ^ass.  248,  (22  K  E.  Eep.  907;)  Beach,  Corp.  §  198.  This,  how- 
ever, seems  to  be  more  a  question  of  name  than  of  substance ;  that 
is,  whether  the  liability  of  the  corporation,  in  such  cases,  is  to  be 
placed  on  the  grounds  of  its  adoption  of  the  contract  of  its  promot- 
ers, or  upon  some  other  ground,  such  as  equitable  estoppel.  This 
court,  in  accordance  with  what  we  deem  sound  reason,  as  well  as  the 
weight~of  authority,  has  held  that,  while  a  corporation  is  not  bound 
by  engagements  made  on  its  behalf  by  its  promoters  before  its  or- 
ganization, it  may,  after  its  organization,  make  sucli_ engagements 
its~qwn^on tracts^  And  this  it  may  do  precisely  as  it  might  make 
similar  original  contracts ;  formal  action  of  its  board  of  directors 
Being  necessary  only  where  it  would  be  necessary  in  the  ease  of  a 
similar  original  contract.  That  it  is  not  requisite  that  such  adoption 
or  acceptance  be_expressed,"1out~Tr  maynpe  inferred  from  acts  OT_ac- 
quiescence  on  part  of  the  corporation,  or  its^  authorized  agents,  as 
any  similar  original  contract_might  be  shown.  Battelle  v.  North- 
western Cement  &  Concrete  Pavement  Co.,  37  Minn.  89,  (33  N.  W.  Rep. 
327.)  See,  also,  Mor.  Corp.  §  548.  The  right  of  the  corporate  agents 
to  adopt  an  agreement  originally  made  by  promoters  depends  upon 
the  purposes  of  the  corporation  and  the  nature  of  the  agreement. 
Of  course,  the  agreement  must  be  one  which  the  corporation  itself 
could  make,  and  one  which  the  usual  agents  ot  the  cx)mpany  have 
express  rn-  implied  authority  to  niake.  Tliat  tlie  contract  in  this  case 
was  oOhat  J^miLlalYery  clearj  and  the  acts  and  acquiescence  of  the 
corporate  officers,  after  the_organization  of  the  company,  fully  justi- 
fiecl  the  juryln  finding  that  it  had  adopted  it  as  its  own. 

The  defendaht,  however,  claims  that  the  contract  was  void  under 
the  statute  of  frauds,  because,  "  by  its  terms,  not  to  be  performed 
within  one  year  from  the  making  thereof,"  which  counsel  assumes 
to  be  September  12th,  —  the  date  of  the  agreement  between  plaintiff 
and  the   promoter.     This   proceeds  upon  the  erroneous  theory  that 


IN   KE   EMPRESS   ENGINEERING  CO.  253 

the  act  of  the  corporation,  iu  such  cases,  is  a  ratification,  which 
relates  back  to  the  date  of  the  contract  with  the  promoter,  under  the 
familiar  maxim  that  "  a  subsequent  ratification  has  a  retroactive 
effect,  and  is  equivalent  to  a  prior  command."  But  the  liability  of 
the  corporation,  under  such  circumstances,  does  not  rest  upon  any 
principle  of  the  law  of  agency,  but  upon  the  immediate  and  voluntary 
act  of  the  company.  Although  the  acts  of  a  corporation  with  refer- 
ence to  the  contracts  ^  made  by  promoters  iu  its  behalf  before  its 
organization  are  frequently  loosely  termed  "  ratification,"  yet  a  "  rati- 
fication," properly  so  called,  implies  an  existing  person,  on  whose 
behalf  the  contract  might  have  been  made  at  the  time.  Therecan-_ 
not,  in  law,  be  a  ratification  of  a  contract  which  could  not  have  been 
made  binding  on  the  ratifier  at  the  time  it  was  made,  because  the 
ratifier  was  not  then  in  existence.  In  re  Emjyress  Enrjineering  Co., 
16  Ch.  Div.  128 ;  Melhado  v.  Porto  Alegre,  N.  H.  &  B.  Ry:  Co.,  L.  K. 
9  C.  P.  505 ;  Kelner  v.  Baxter,  L.  R.  2  C.  P.  185.  What  is  called 
"  adoption,"  in  such  cases,  is,  in  legal  effect,  the  making  of  a  contract 
of  the  date  of  the  adoption^  and  not  as  of  some  former  date.  Thg 
contract  in  this  case  was,  therefore,  not  within  the  statute  of  frauds. 
The  triaTcourt  fafrly  submitted  to  the  jury  all  the  issues  of  factTn 
this  case,  accompanied  by  instructions  as  to  the  law  which  were 
exactly  in  the  line  of  the  views  we  have  expressed;  and  the  evidence 
justified  the  verdict. 

The  point  is  made  that  plaintiff  should  have  alleged  that  the  con- 
tract was  made  with  Nimocks,  and  subsequently  adopted  by  the  de- 
fendant. If  we  are  correct  in  what  we  have  said  as  to  the  legal  effect 
of  the  adoption  by  the  corporation  of  a  contract  made  by  a  promoter 
in  its  behalf  before  its  organization,  the  plaintiff  properly  pleaded 
the  contract  as  having  been  made  with  the  defendant.  But  we  do 
not  find  that  the  evidence  was  objected  to  on  the  ground  of  variance 
between  it  and  the  complaint.  The  assignments  of  error  are  very 
numerous,  but  what  has  been  already  said  covers  all  that  are  entitled 
to  any  special  notice,  •  vj  / 

K^  ■  \  >^  Order  affirmed^ 

ZM-^-  EMPRESS  ENGINEERING  ^t^^yT^l^'.l/^l 

\P       ^    1880.     Law  Reports,  \Q  Chancery  Division,  I2b.^     \    ^/^^'^^    V^a   J -■  S^^  2 

Appeal  from  Vice-Chancellor  of  Court  of  Chancery  of  the^ounty*  ~j^<^^  ^A-  ""iX:  ij 
Palatine  of  Lancaster.  V^  4ir^  i  >    .  ^    t 

By  an  agreement,  dated  May  2,  1879,  between  G  and  A  on  the  one'^  ^  ..  /^  <-^  yf^ 
part,  and  C,  for  and  on  behalf  of  a  company  intended  to  be  registered /fh  *'^jn/*'''\L*o    aV 


as  a  limited  company  and  to  be  called  "  The  Empress  Engineering     ^^        ^,      /i*v- -.a, 
Company,"  of  the  other  part,  it  was  agreed  that  the  company  shouldAJ^,   '*^JV  ^  f.J(^ 
1  Statement  abridged.     Argument  and  part  of  opinions  omitted.  —  Ed.  ,y*^     •\'^    'v~        • 


t.'^feJ5r^ 


-A 


f 


254  IN   KE   EMPRESS   ENGINEERING   CO. 

purchase  of  G  and  A  certain  property ;  and  also  that  sixty  guineas 
should  be  paid  by  the  company  to  Jones  &  Pride,  solicitors,  for  the 
incorporation  thereof,  such  sum  to  include  the  preparation  of  the 
necessary  documents  and  certain  expenses. 

The  company  was  incorporated  under  a  memorandum  of  association, 
dated  jNIay  9,  which  adopted  said  agreement.  The  directors,  on  June 
23,  1879,  ratified  the  agreement. 

Dec.  10,  1879,  an  order  was  made  for  winding  up  the  company. 
Jones  &  Pride  made  a  claim  for  the  amount  of  the  above-mentioned 
£63.     The  claim  was  disallowed,  and  they  appealed. 

Snow,  for  appellants. 

[After  arguing  other  points.]  If  the  court  is  against  me  on  that 
ground,  I  submit  that  the  claimants  can  make  out  their  case  on  the 
principle  of  Li  re  Hereford  and  South  Wales  Waggon  and  Engineering 
Company,  L.  R.  2  Chan.  Div.  621,  where  it  was  held  that  there  was.  a 
good  equitable  claim  for  services  rendered  before  the  formation  of  the 
company,  of  which  the  company  had  the  benefit. 

[James,  L.  J.:  —  The  question  has  never  been  tried  whether  the 
company  has  had  the  benefit  of  the  claimant's  services. 

Jessel,  M.  R.  :  —  That  is  a  question  of  quantum  merwi^,.  and  the 
subject  for  a  distinct  application.] 

Gazdar,  for  the  liquidator,  was  not  called  upon, 

Jessel,  M.  E,.  I  must  say  that  I  do  not  see  how  it  was  possible  for 
the  Vice-Chancellor  to  have  decided  otherwise  than  he  did.  The  con- 
tracf;  between  the  promoters  and  the  so-called  agent  for  the_com^any 
of  course  was  not  a  contract  binding  upon  the  company,  for  the  com- 
pany  had  then  no  existence,  nor  could  it  become  binding  on  thfi_com- 
ipany  by  ratification,  becausej^has  been  decided,  and,  as  it  appears  to 
me,  well  decided,  that  there  cannot  in  law  be  an  effectual  ratification 
of  a  contract  which  could  not  have  been  made  binding  on  the  ratifier 
^t_the  tJm.eit  was  made,  because  the  ratifier  was  not  then  in  existence. 

does  not  follow  from  that  that  acts  may  not  be  done  bjjthe  com- 
fpany^fter  its  fonnation  which  make  a  new  contract  to  the  same  effect 
ias_the  old^nei^but  that  stands  on  a  differenj  principle.  lam  of  opin- 
ion, therefore,  that  there  was  no  contract  binding  the  company  to  pay 
,this  £63  tx)  Messrs. ~Jones  &  Pride.         "^ 

Supposing,  however,  that  there  was,  it  is  then  contended  that  a 
mere  contract  between  two  parties  that  one  of  them  shall  pay 'a  cer- 
tain sum  to  a  third  person,  not  a  party  to  the  contract,  will  make 
tliat  third  person  a  cestui  que  trust.  As  a  general  rule  that  will  not 
be  so.  .  .  . 

There  is  another  ground  suggested,  namely,  that  as  the  company 
has  had  the  benefit  of  the  registration  they  ought  to  pay  for  it.  But 
the  answer  to  that  is  this — that  was  not  the  claim  brought  forward. 
The  claim  brouglit  forward  was  for  an  agreed  sum  of  £63,  and  any 
order  we  make  (I  do  not  know  whether  it  is  necessary  to  express  it) 


WEATHERFORD,   &c.   R.   CO.   V.   GRANGER.  255 

will  not  prejudice  that  claim,  which  is  merely  for  an  amount  due  foi 
services  the  benefit  of  which  has  been  taken  by  the  company. 
James,  L.  J. 

The  only  thing  that  results  from  what  is  called  ratification  or 
adoption  of  such  a  contract  is  not  the  ratification  or  adoption  of  a 
contract  (pia  contract,  but  the  creation  of  an  equitable  liability  de- 
pending upon  equitable  grounds.     It  is  inequitable  for  a  man  not  tc 


:  it 

James,  L.  J.     The  appeal  will  be  dismissed  with  costs.     It  will  be  /    ^.  vy,    ^     /r- 
without  prejudice  to  any  equitable  claim  on  a  quantum  meruit.  .  .  /yt^    at       iir^  ^, 


pay  for  the  services  of  which  he  has  taken  the  benefit.  ...  ^      i[L. 

-R^x^r^rr,  T     T  Qoncurred.  ii^M^^  it 

.     The  appeal  will  be  dismissed  with  costs.     It  will  be/  ^.  v        aJP" 

lice  to  any  equitable  claim  on  a  quantum  meruit.  .  ,  tp^  at       i}J^^  j^^ 


4^-5^    WEATHERFORD,   &c.  R.   CO.  v.  G^AfNG^.'T  ^    .     (^   fi^L 


v^vj*  Gaines,  Associate  Justice.    This  suit  was  brought/ %  the  ^fenda^r*^-'  ^'^^    •  "        ^ 


ment,  which  was  affirmed  by  the  Court  of  Civil  Appeals.     This  writi^  v    r      jj^  'Li'' 
of  error  is  sued  out  for  the  purpose  of  reversing  that  judgment.  (/^•j\t.^\    ^  '^ 

,    The  plaintiff  in  error,  the  defendant  in  the  trial  court,  is  a  corpora^L^  'X  ^J}^    A. 
A^ioH,\ organized  under  the  general  law  of  the  State  for  the  purpose     4^        t/^  A^> 
'^  of  (constructing  and  operating  a  railroad.      The  defendant  in  erroi^^^    ^.    ^^^{Uj 
C /the  plaintiff  in  the  trial  court,  is  a  practising  attorney  at  law.     TheJ^    v-*^    J/f' 
^      ^'"'  .services  for  which  a  recovery  was  sought  were  for  aiding  to  raise  a2/^  -Vp.    1) 
-Vj^  ~j}fbonus  and  fojj'iegal  advice  and  assistance,  and  were  rendered  both//1^-^  It^*^' 
y      y^   l^fore  and  after  the  filing  with  the  Secretary  of  State  the  company's]  # ,'  '^ ^'f^ 
\^~  ^  ->articles  t)l  incorporation.  I|\t '' 

\        y^         The  testimony,  as  shown  by  the  statement  of  facts,  in  so  far  as  ill  ^    IV^,  ^^ 

^vT.    V .  briars  upon  the  question  before  the  court,  is  in  substance  as  follows  :      Xj,  ^  \^  «  "     '{j^ 
^ \r^,\/\    -Hie  plaintiff  testified,  that  in  jVIarch,  1889,  he  was  employed  by        ,    ^  nr'^  X 
'    ]r^,  pfle  Anderson  to  assist  in  raising  a  bonus  for  the  defendant  company,^(>^     t^^^  U^ 


and  "agreed  that  the  said  company  would  pay  him  well  for  his  ser-  .^    .  '^ 

J  ^     vices  ;  "  that  Anderson  was  a  promoter  of  the  corporation,  and  repre-^"^^^^'    ^ 

{'.    .sented  himself  as  its  general  manager,  and  employed  plaintiff  notr^  rt^  ^  _,j^      ii 

^^^'only  to  assist  in  procuring  the  bonus,  but  to  attend  to  all  the  com-y         yf'     p'  ft 

^'  ^"^^  pany's  business  as  its  attorney;  that  in  September,  1889,  AndersonJ!  IaK>^  'f  ' 

o    '  ^!r^  ?.yowed  his  account,  and  was  at  that  time  the  owner  of  a  majority  ov    ^^f^j 

^\    '"-^    /the  stock,  which  he  subsequently  transferred  to  one  Stone,  the  presi-iV^'^  v'i/^ 

^"^    C-^ '^ dent  of  the  compan}^,  and  his  associates.  'fif^         '^ 

^     i^       C"    Stoce  testified,  on  behalf  of  the  company,  that  in  the  spring  of   ' 

,jK^  5^^"^!^^^'^  iians^-'City,   Missouri,  he  employed  Anderson  to  go  to 

eA    NT  /-^V^      '\    V'-^'  1  Arguments  0 

v>     \s^    ^P^  jO^    ^;^_  v>^ 


uments  omitted.  — Ed. 


256  WEATHERFORD,   &  c   R.    CO.   V.    GRANGER. 

Weatherford,  and  to  procure  a  bonus  of  $40,000  and  survey  the  right 
of  way  for  a  railroad  from  tliat  city  to  Mineral  Wells,  and  to  pay  him 
$1000  for  his  services  ;  that  he  had  paid  Anderson  according  to  his 
agreement ;  that  he  did  not  know  that  Anderson  had  ever  employed 
plaintiff  for  any  purpose  ;  that  Anderson  was  never  general  manager 
for  the  company,  and  held  no  office  in  it  excej)t  that  of  director ;  that 
he  knew  that  the  plaintiff  was  interesting  himself  in  procuring  the 
bonus,  but  supposed  he  was  working  for  one  Johnson,  who  was  one  of 
the  charter  members,  and  who  owned  certain  coal  lands  which  he 
wished  to  sell  to  the  projectors  of  the  railroad ;  that  plaintiff  never 
said  anything  to  him  about  the  company  owing  him  anything,  and 
that  the  iirst  he  knew  of  plaintiff's  claim  was  when  this  suit  was 
brought. 

There  was  further  testimony  tending  to  show,  that  Anderson  was 
the  chief  active  promoter  of  the  enterprise,  and  that  he  had  the  prin- 
cipal management  of  the  business  from  its  inception  in  March  until 
he  retired  in  September,  1889 ;  and  that  during  this  time  the  plaintiff 
was  frequently  in  attendance  upon  him,  aiding  and  assisting  him  in 
procuring  the  bonus,  and  otherwise  promoting  the  objects  of  the  com- 
pany. 

No  controversy  is  raised  in  this  court  as  to  the  fact  of  plaintiff's 
services,  or  as  to  their  value. 

The  trial  judge,  as  conclusions  of  fact,  found,  in  substance,  that 
some  kind  of  a  company  was  formed  to  build  the  railway  from 
Weatherford  to  Mineral  Wells  ;  that  Anderson  was  "  the  principal 
mover  in  said  scheme,  and  was  so  recognized  by  all  parties  ;  "  that 
he  employed  plaintiff  to  assist  him  in  procuring  a  bonus  and  in  other- 
wise advancing  the  enterprise,  and  that  the  plaintiff  rendered  service 
under  said  employment,  both  before  and  after  the  articles  of  the  com- 
pany were  filed;  that  the  bonus  was  raised,  and  was,  after  its  incor- 
poration, accepted  by  said  company. 

The  Court  of  Civil  Appeals  adopt  the  findings  of  the  trial  judge, 
and  add  additional  findings  as  follows  :  "  The  charter  of  the  defend- 
ant company  was  signed  and  acknowledged  about  June  1,  1889,  and 
was  filed  in  the  office  of  the  Secretary  of  State  at  Austin,  July  2, 
1889.  The  bonus  or  subsidy  was  not  secured  until  after  the  filing  of 
the  charter.  The  records  woiildhave  justified  the  trial  ^"purt,  and 
so  justifies_us^n  findingj_as  w£_do,  JJi£Lfact^to  be.  that_^in  availing 
kself  oJL.the_  subsidy  secured,  -tJie  company  knew  of  the  services  of 
thejjlaintiff'  in  raising  the  bonus." 

Under  the  statute,  the  corporation  came  into  existence  when  its 
articles  of  incorporation  were  filed  in  the  office  of  Secretary  of  State. 
Kev.  Stats.,  arts.  4104,  4105.  Although  the  trial  court  found  that 
the  services  for  which  plaintiff  sued  were  rendered  in  part  'before 
and  in  part  after  the  filing  of  the  articles,  their  value  was  assessed 
as  an  entirety  at  $500,  and  judgment  was  rendered  for  the  whole 
amount.     In  this  there  was  error.     We  d,re  of  opinion,  that  under  the 


WEATHERFORD,   &c.    R.    CO,   V.   GRANGER.  257 

circumstances  of  tliis  case,  as  shown  by  thejgviclprip.p,  t.he  flefen^lapt 
corporation  can  not  be  Iield  liable  to  the  plaintiff  Jorjinj^sei'^^'^ss  ren- 
dered by  him  before  it  was  brought  into  legal  existence. 

Upon  the  question  as  to  the  liability  of  a  corporation  growing  out 
of  contracts  made  on  its  behalf  by  its  promoters,  there  is  considerable 
diversity  and  some  conflict  of  opinion.  But  there  are  some  proposi- 
tions affecting  this  question  upon  "v^hich  the  authorities  seem  to  be  in 
substantial  accord.  A  promoter,  though  he  purport  to  act  on  behalf 
of  tlig  projected  corporatioii,  and  not  for  himself,  can  not  be  treated  ag 
a^ent,  because_the^ominal  principal  is  not  then  in  existence, ;  and 
Eeiice  when  there  is  nothin.ia;  more  than  a  contract  by  a  promoter,  in 
which  he  undertakes  to  bind  the  future  corporation,  it  is  generaljx 
conceded  that  it  can  not  be  enforced.  Kelner  v.  Baxter,  L.  R.,  2  Com. 
fr7l74;  MdhachY.  Eallwai/,  L.  E.,  9  Com.  PL,  503. 

The  promoters^jthemselves  are  liable  upon  the  contract,  unless  the 
person  with  whom  they  engage  agrees_to  look  to  some  other  fund  foj 
payment.     Kerrid(/e  v.  Hesse,  9  Carr.  &  P.,  200. 

The  statute,  however,  which  authorizes  the  incorporation  may  pro- 
vide that  the  corporation,  when  formed,  shall  pay  the  necessary  ex- 
penses of  promoting  the  scheme  ;  in  such  a  case,  though  the  right  of 
action  is  dependent  upon  the  contract,  the  liability  is  created  by  the 
statute.     Re  Botherham,  etc.,  Co.,  L.  T.  Rep.,  N.  S.,  217. 

It  is  now  held  in  England,  that  although  the  articles  of  association 
bind  the  company  to  pay  the  expenses  of  its  promotion,  a  third  party 
can  not  avail  himself  of  such  a  provision  so  as  to  maintain  an  action 
against  the  company.  Re  Rotherham,  etc.,  Co.,  supra  ;  Elerj  v.  Assur- 
ance Co.,  34  L.  T.  Rep.,  N.  S.,  190. 

It  is  also  generally  held,  that  contracts  by  promoters  made  on  be- 
half of  the  corporation,  within  the  scope  of  its  general  authority,  may 
be  adopted  by  the  latter  after  its  organization.  Some  of  the  courts 
say  they  may  be  ratified;  Irut  ratification  presupposes  a  principal 
existing  at  the  time  of  the  agent's  action,  and  it  seems  to  us,  there'_ 
fore,  that  the~term  is  not^applicable  in  its  technical  sense.  McArthur 
V.  Printing  Co.,  51  N.^W.  Rep.,  215;  SjjiUer  v.  Paris  Skating  Rink 
Co.,  1  Ch.  Div.,  368. 

With  the  exception  of  the  law  courts  of  England,  the  rule  is  also 
very  generally  recognized,  that  if  a  contract  be  made  on  behalf  of  a 
(corporation  by  its  promoters,  and  the  corporation,  after  its  organiza- 
,tion,  with  a  knowledge  of  the  facts,  accept  its  benefits,  it  must  take 
'it  with  its  burdens ;  and  if  the  other  party  has  performed  the  stipula- 
tion binding  upon  him,  it  may  be  enforced  as  against  the  corporation. 
Spiller  V.  Rink  Co.,  supra  ;  Loucke  v.  Warehousing  Co.,  6  Ch.,  67. 

But  as  to  the  application  of  the  rule  last  announced,  the  courts 
differ  in  opinion.  A  leading  case  upon  this  subject  is  Edwards  v. 
Grand  Junction  Railway  Company,  1  Milne  &  Cr.,  650.  There  the 
promoters  of  the  railway  company  had  entered  into  a  contract  with 
the  trustees  of  a  turnpike  company,  in  which  the  latter  agreed  to  with- 


-^itr 


258  WEATHEEFOED,   &c.   E.    CO,   V.    GEANGEE. 

draw  their  opposition  to  an  act  of  Parliament  for  the  incorporation  of 
the  railway  company,  in  consideration  of  an  agreement  by  the  pro- 
moters to  insert  certain  clauses  in  the  act  as  to  the  nature  of  the 
necessary  constructions  at  the  crossing  of  the  railway  and  the  turn- 
pike road,  and  the  opposition  was  withdrawn,  but  the  clauses  were 
not  inserted ;  and  it  was  held,  that  the  railway  company  should  be 
enjoined  from  constructing  the  crossing  in  a  manner  different  from 
that  specified  in  the  clauses  which  had  been  agreed  upon  and  had 
been  omitted.  The  correctness  of  the  ruling  in  this  case  was  seri- 
ously questioned  in  the  House  of  Lords  in  Preston  v.  Railway,  5 
House  of  Lords,  605,  and  in  Caledonian  Railway  Co.  v.  Helensburg, 
2  McQueen,  391.  Same  case,  2  Jur.,  N.  S.,  695.  We  presume  the 
doubt  as  to  this  case  arises  from  the  fact  that  the  only  benefit  ac- 
cepted by  the  defendant  company  was  the  exercise  of  the  powers 
conferred  upon  it  by  the  act  of  li^arliament. 

When  the  promoters  of_^a_railway  company  have  agreed  with  a 
lan^Ied  proprietor  through  whose  estates  the  road  is  projected  to  run, 
to  take  the  requisite  quantity  of  his  land  at  a  stipulated  price,  and 
af teethe  corporation  is  formed  it  takes  the  land,  it  is  certainly  equita- 
ble^thatj:;he  company  should  be  made  to  pay  the  agreed  compensa- 
tion;  andthe  doctrine  is  recognized  in  many  English  equity  cases. 
'Stanley  v.  Railway,  3  ]\Iilne  &  Cr.,  773  ;  Gooday  v.  Colchester  Railway 
Co.,  L.  E..,  15  Eq.,  596;  Preston  v.  Liverpool  Railway  Co.,  L.  E,.,  7 
Eq.,  124;  Edwards  v.  Grand  Junction  Railway  Co.,  1  JNIilne  &  Cr., 
650. 

The  same  rule  has  been  announced  also  in  many  American  cases. 
Little  Rock  Railway  Co.  v.  Perry,  37  Ark.,  164;  Paxton  Cattle  Co.  v. 
Bank,  21  Neb.,  621 ;  Grape  Sugar  Co.  v.  Small,  40  Md.,  395  ;  Bommer 
V.  Manufacturing  Co.,  81  N.  Y.,  468  ;  Battelle  v.  Pavement  Co.,  37 
Minn.,  89 ;  McArthur  v.  Printing  Co.,  supra. 

Having  exercised  rights  and  enjoyed  benefits  secured  to  it  by  the 
terms  of  a  contract  made  by  its  promotei^s  in  its  behalf,  a  ciiipoxation 
should  be  held  estopped  to  denj-  its  validity. 

Again,  when  the  promoters  of  a  corporation  have  made  a  contract 
in  its  behalf,  to  be  performed  after  it  is  organized,  it  may  be  deemed 
a  continuing  offer  on  part  of  the  other  party  to  the  agreement,  unless 
withdrawn  by  him,  and  may  be  accepted  and  adopted  by  the  corpo- 
ration after  such  organization ;  and  the  exercise  of  any  right  incon- 
sistent with  the  nonexistence  of  such  contract  might  be  deemed  con- 
clusive evidence  of  such  adoption. 

But  there  are  some  cases  which  go  a  step  further.  Low  v.  Rail- 
ivay,  45  New  ILampshire,  370,  was  a  case  of  a  Vermont  corporation 
sued  in  New  Hampshire  upon  a  contract  made  in  the  former  State. 
After  a  charter  had  been  granted,  but  before  an  organization  had  been 
effected,  a  public  meeting  was  held  to  promote  the  enterprise,  at 
which,  it  is  to  be  presumed  from  the  opinion,  the  corporators  were 
;present  or  were  represented.     A  proposition  was  made  that  the  plain- 


WEATHEKFORD,   &c.   K.   CO.   V.    GRANGER.  259 

tiff  should  be  employed  and  paid  to  visit  various  towns  and  cities  to 
interest  capital  in  the  projected  scheme,  and  to  solicit  and  procure 
subscriptions.  The  plaintitf  accepted  the  offer  and  performed  the  ser- 
vices, and  it  was  held  that  the  corporation  was  liable.  The  court  de- 
termined that  the  question  of  liability  depended  upon  the  law  of  Ver- 
mont, as  announced  in  the  case  of  Hall  v.  Railway,  28  Vermont,  401. 
But  they  were  also  inclined  strongly  to  think,  that  upon  general  prin- 
ciples the  company,  by  accepting  subscriptions  which  were  procured 
by  the  plaintiff,  bound  itself  to  pay  for  his  services.  They  also  seem 
to  recognize  the  doctrine,  that  after  a  charter  has  been  granted  a 
majority  of  the  corporators  have  the  power  to  make  contracts  neces- 
sary to  perfect  the  organization,  which  may  be  binding  upon  the  com- 
pany when  formed.  But  they  also  lay  stress  upon  the  fact  that  the 
charter  of  the  defendant  corporation  provided,  that  "  the  expenses  of 
all  surveys  and  examinations,  as  also  of  the  preliminary  surveys 
already  made  and  making,  and  all  manner  of  incidental  expenses 
relating  thereto,  shall  be  paid  by  said  corporation." 

In  Hall  V.  Railway,  supra,  a  corporator  was  held  entitled  to  recover 
for  necessary  services  in  organizing  the  company,  although  there  was 
no  express  promise  by  any  one  that  he  should  be  paid.  Unless  the 
charter  of  the  company  provided  for  the  payment  of  such  expenses, 
this  decision  we  think  is  unsupported  by  authority. 

It^s^  generally  held,  that  in  the  absence  of  such  provision  in  the 
act  of  incorporation  in  case  of  a  special  charter,  or  in  the_gen£r^l-ia.w 
or  in  the  articles  of  incorporation  under  a  general  law,  no  implied^ 
promise  can  be  imputed  to  a  corporation  to  pay  for  the  services  of__a. 
corporator  or  promoter  before  the  corporation  comesinto  existence. 
A  contracFlmade  by  promoters  may  be  adopted  by  a  corporation,  ex- 
pressly  or  impliedly,  by  exercising  rights  under  itj  but  otherwise  it  js 
not  binding  upon  such  corporation.  Kelner  v.  Baxter,  supra ;  Melhado 
vT^ailivay,  sflpra;  Railway  v.  Ketchum,  27  Conn.,  170;  Kerridge  v. 
Hesse,  9  CarK  &  P.,  200  ;  Munson  v.  Railway,  103  N.  Y.,  58 ;  Morri- 
son V.  Mining  Co.,  52  Cal.,  306;  Gent  v.  Ins.  Co.,  107  111.,  652  ;  Rail- 
way V.  Sage,  65  111.,  328 ;  Western,  etc.,  Co.  v.  Cousley,  72  111.,  531 ; 
JBuffington  v.  Borden,  80  Wis.,  635  ;  see  also.  Railway  v.  Helensburg, 
2  McQueen  (H.  of  L.) ;  same  case,  2  Jur.,  K  S.,  695  ;  Teft  v.  Bank, 
141  Pa.,  550. 

Now,  when  it  is  said  that  when  a  corporation  accepts  the  benefit  of 
a  contract  made  by  its  promoters,  it  takes  it  cum  onere,  it  is  impor- 
tant to  understand  distinctly  what  is  meant.     There  is,  so  far  as  this 
matteris-concerned,  a  radical  difference  between  a  promise  made  onj 
behali_QL-tlie  future  corporation  in  the  contract  itself,  the  beneiit 
which_the  corporation  has  accepted,  and  the  promise  in  a  ju'eviqui 
contract  to_^y  for  services  in  procuring  the  latter  toJ)e  mad£,     Thi 
is  well  illustrated  by  the  facts  of  the  present  case.     Here  a  propos 
tion  was  made  on  behalf  of  the  company,  by  its  promoters,  that  if 
bonus  should  be  subscribed  and  paid  to  it,  ijt  would  build  ^^?  road  b 


260 


WEATHERFORD,   &c.    R.   CO.   V.    GRANGER. 


B 


tween  certain  points,  and  would  carry  coal  at  a  certain  stipulated  rate. 
By  accepting  the  bonus,  the  company  became  bound  to  fulfill  the  stip- 
ulations of  that  contract.  That  was  the  burden  which  it  took  with 
the  benefit  of  the  agreement.  Bu^italso  appears  that  one  of  the 
promoters  promised  the  plaintiff,  thaTif_he  would  assist  in  procuring 
subscribers  to  the  bonus,  the  company  wauld  pay  him  for  his  services. 
This  was  no  part  of  the  contract  the  benefits  of  which  were  taken  by 
the  defendant.  '**^ 

The  benefits  of  a  contract  are  the  advantages  which  result  to  either 
party  from  a  performance  by  the  other ;  and  in  like  manner  its  bur- 
dens are  such  as  its  terms  impose.  A  more  accurate  manner  of  stat- 
ing the  nature  of  the  plaintiff's  demand  is  to  say,  that  the  defendant 
has  accepted  the  benefit  of  the  plaintiff's  services  and  should  pay  for 
them.  It  is  true,  in  one  sense,  that  the  company  has  had  the  benefit 
of  plaintiff's  services,  and  it  is  equally  true  that  it  would  have  had 
that  benefit  if  the  services  had  been  rendered  under  an  employment  by 
the  subscribers  to  the  bonus ;  and  yet  in  the  latter  case  it  could  no% 
be  claimed  that  the  company  would  be  liable  for  such  services,  unless 
payment  for  them  by  the  company  were  made  one  of  the  terms  of  the 
contract  between  the  company  and  the  subscribers. 

In  Re  Rotherham,  etc..  Company,  50  Law  Times  Reports,  New 
Series,  219,  in  the  opinion  of  one  of  the  justices,  this  language  is  used  : 
"It  is  said  that  Mr.  Peace  has  an  equity  against  the  company,  be- 
cause the  company  had  the  benefit  of  his  labor.  What  does  that 
mean  ?  If  I  order  a  coat  and  receive  it,  I  get  the  benefit  of  tlie  labor 
of  the  cloth  manufacturer ;  but  does  any  one  dream  that  I  am  under 
any  liability  to  him  ?  It  is  a  mere  fallacy  to  say,  that  because  a  per- 
son gets  the  benefit  of  work  done  by  somebody  else,  he  is  liable  to  pay 
the  person  who  did  the  work." 

There  is  more  doubt  as  to  the  plaintiff's  right  to  recover  for  his 
legal  services  in  advising  as  to  the  articles  of  incorporation  and  in 
correcting  and  preparing  this  paper.  Such  services  are  usually  neces- 
sary, and  it  would  seem  that  the  corporation  should  pay  for  them. 
Such  payment  is  frequently  provided  for  in  the  act  of  incorporation, 
or  in  the  articles  when  the  incorporation  is  effected  under  a  general 
law.  When  such  is  the  case,  persons  who  take  stock  in  the  company 
are  chargeable  with  notice  that  a  liability  fortius  purpose  has  already 
been  created,  and  it  is  proper  for  the  corporation  to  discharge  it.  But 
in  the  absence  of  such  provision  in  the  statute  or  in  the  articles,  it 
may  be  unjust  to  shareholders  to  charge  the  corporation  with  liabil- 
ities of  which  they  had  no  actual  knowledge  at  the  time  they  accepted 
the  shares.  We  therefore  hold^  ^^^itli  some  hesitation,  that  claims  for 
tr.e  necessary  expenses  of  the  organization,  under  our  statute,  should 
iiot~be"^xcepted^from  the  general  jade  applicable  to  contracts  made 
before  the  corporation  has  come  into  legal  existence. 

Applying  the  rules  we  have  announced  to  the  case  before  us,  it  is 
apparent  that  the  plaintiff  has  recovered,  in  part  at  least,  for  services 


WEATHERFORD,   &c.   R.   CO.   V.    GRANGER.  261 

for  which  the  defendant  was  not  bound  to  pay.  He  made  his  con- 
tract before  the  company  had  a  legal  existence  as  a  corporation,  with 
a  single  promoter ;  and  it  is  a  matter  of  no  moment  that  the  promoter 
was  the  general  manager  of  the  project  and  became  the  owner  of  the 
majority  of  the  stock  upon  its  organization.  There  were  other  stock- 
holders. The  law  requires  that  there  should  be  ten  at  least.  Rev. 
Stats.,  art.  4099. 

The  evidence  does  not  disclose  that  his  contract  with  Anderson  was 
actually  known  to  any  other  person ;  nor  do  we  see  any  other  circum- 
stance from  which  knowledge  should  necessarily  be  inferred.  Since 
Anderson  had  no  power  to  b'ind  the  future  corporation,  but  could 
bind  himself,  the  inference  from  his  assisting  Anderson  would  be  that 
he  was  acting  gratuitously,  or  that  Anderson  had  agreed  to  pay  him. 

Anderson  was  interested  in  shifting  his  contract  upon  the  com- 
pany ;  and  it  may  be  doubted  whether,  although  he  became  a  director, 
notice  to  him  could  be  deemed  notice  to  the  company.  The  Court  of 
Civil  Appeals  find,  however,  that  the  company  had  notice. 

Waiving  the  question  of  the  right  of  the  court  to  supplement  the 
finding  of  the  trial  judge  under  such  evidence,  and  the  further  ques- 
tion whether  there  be  any  evidence  to  support  this  conclusion,  it  fol- 
lows from  what  we  have  already  said,  that  the  question  of  the  com- 
pany's knowledge  does  not  affect  the  case.  The  plaintiff's  contracr' 
with  Anderson^  though^niade  by  the  latter  on  behalf  of  the  company, ^  [j>*^ ^^ 
was_not  a  lien^_enciunbrauce.  or  burden  u])on.  the  contract  between  thep^.i ,  ^ 
subscribers  to  the  bonus  and  thu  defendant,  and  it  incurred  no  liabil-^^i  ^g/^'^ 
ity  on  the  former  contract  by  accepting  the  benefit  of  the  latter.  j/jj 

The  evidence  was  sufficient  to  sustain  a  recovery  by  the  plaintiff 
for  the  value  of  his  services  rendered  after  the  corporation  was  cre- 
ated ;  but  the  court  below  failed  to  find  separately  the  reasonable 
worth  of  such  services.  Therefore  the  entire  judgment  must  be  re- 
versed. 

We  deem  it  proper  to  say,  in  conclusion,  that  if  the  opinion  in  the 
case  of  McDonough  v.  Bank,  34  Texas,  309,  is  to  be  construed  as  hold- 
ing that  merely  by  accepting  the  benefit  of  the  plaintiff's  labor,  the 
defendant  ratified  and  became  bound  under  the  promoter's  contract,  it 
does  not  meet  our  approval.  Whether  the  contract  in  that  case  was 
one  which  the  bank  had  the  power  to  ratify,  is  to  say  the  least  a 
doubtful  question ;  but  it  is  one  that  does  not  concern  us  here,  and 
upon  which  we  express  no  opinion. 

The  judgments  of  the  District  Court  and  of  the  Court  of  Civil 
Appeals  are  reversed  and  the  cause  remanded. 

Reversed  and  remanded. 


262 


DOWNING   V.   MOUNT   WASHINGTON   KOAD  CO. 


4 


»/ 


4 


'/ 


CHAPTER  VII. 


INTERPRETATION   OF   CHARTERS. 


DOWNING 


MOUNT  WASHINGTON   ROAD   CO. 

I860.     40  New  Hampshire,  230. 


^'^J 


I 


%^' 


/fit 


^'^cP 


Assumpsit,  brought  b}'  Lewis  Downing  &  Sons,  to  recover  the  price 
of  eight  omnibuses,  and  a  model  for  the  same,  one  light  wagon,  and 
one  baggage  wagon,  made  for  the  defendants,  under  a  contract  entered 
into  by  D.  O.  Macomber,  president  of  the  defendant  corporation,  in 
their  behalf. 

The  light  wagon  was  made  and  sent  to  one  Cavis,  the  agent  for 
building  the  road,  and  was  used  by  him  in  making  it.  The  omnibuses 
and  baggage  wagon  were  intended  to  be  used  in  conveying  passengers 
up  and  down  the  mountain,  after  the  road  was  completed.  The  omni- 
buses were  constructed  in  a  peculiar  way,  and  are  not  fit  for  use  on 
ordinary  roads. 

By  their  act  of  incorporation,  passed  July  1,  1853,  the  corporation 
was  empowered  to  lay  out,  make  and  keep  in  repair,  a  road  from  such 
point  in  the  vicinity  of  Mt.  Washington  as  they  may  deem  most  favor- 
able, to  the  top  of  said  mountain,  &c.,  and  thence  to  some  point  on 
^the  northwesterly  side  of  said  mountain,  &c.,  to  take  tolls  of  passengers 
nd  for  carriages,  to  build  and  own  toll-houses,  and  to  take  land  for 
heir  road. 

The  corporation  was  duly  organized,  and  at  a  meeting  of  the  direc- 
tors on  the  31st  of  August,  18,53,  before  said  contract  was  made,  it 
was  "  voted  that  the  president  be  tlie  legal  agent  and  commissioner  of 
corapan}' ;  "  and  his  compensation  as  sucli  was  fixed. 
The  president"  was  "directed  to  proceed  with  the  letting  of  the 
work  for  the  construction  of  the  road,"  "  tlie  obtaining  the  right  of 
way,"  and  "  what  other  action  he  shall  deem  proper,  for  the  interests 
of  the  company,"  &c. 

A  committee  was  appointed  "  to  settle  in  relation  to  the  right  of 
way,  &c.,  and  in  relation  to  land  on  which  to  build  stables  and  other 
buildings,  for  the  use  of  the  road,  and  also  for  building  all  such  stables 
and  houses  as  may  be  necessary  for  the  operations  of  the  company." 


DOWNING   V.   MOUNT   WASHINGTON   ROAD   CO.  2G3 

It  appeared  that  by  an  additional  act,  passed  July  12,  185G,  the 
corporation  were  authorized  "  to  erect  and  maintain,  lease  and  dispose 
of  any  building  or  buildings,  which  may  be  found  convenient  for  the 
accommodation  of  their  business,  and  of  the  horses  and  carriages  and 
travelers  passing  over  said  road." 

The  defendants  denied  the  authority  of  Macomber  to  make  such  a 
contract  in  behalf  of  the  corporation,  and  the  power  of  the  corporation 
under  its  charter  either  to  authorize  or  enter  into  such  a  contract. 

Kittredge  d;  Hellov^s,  for  the  plaintiffs. 

George  <b  F'oster^  for  the  defendants. 

Bell,  C.  J.^     Corporations  are  creatures  of  the  legislature,  having  "ttM"^ 

no  other  powers  tlian  such  as   are   given  to  tluMiTTn-  their  charters,  or     /    'fi^      ^^^ 
such   as^are   incidental,  or  necessary  to  carry  into  effect   tlie_  purposes  t/^>^''^'*^ 

for_wliich  they  werfi  t^st^ihlislied.  Trustees  v.  Peaslee^  15  N.  H.  330;  ^^""^^'T'/ 
Perrine  v.  Chesapeake  Canal  Co.,  9  How.  172.  In  giving  a  construe-  ^  -^^'^"^^^^ 
tion  to  the  powers  of  a  corporation,  the  language  of  the  charter  should 
in  general  neither  be  construed  strictl}'  nor  liberally,  but  according  to 
the  fair  and  natural  import  of  it,  with  reference  to  the  purposes  and 
objects  of  the  corporation.  Enfidd  Bridge  v.  Hartford  R.  R.,  17 
Conn.  454. ;  Strauss  v.  Eagle  Co.,  5  Ohio  (N.  S.)  39. 

If  the  powers  conferred  are  against  common  right,  and  trench  in  any 
way  upon  the  privileges  of  other  citizens,  they  are,  in  cases  of  doubt, 
to  be  construed  strictly,  but  not  so  as  to  impair  or  defeat  the  objects 
of  the  incorporation. 

In  the  present  case  the  power  to  take  the  lands  of  others,  and  to 
take  tolls  of  travelers,  must  be  strictly  construed,  if  doubts  should 
arise  on  those  points  ;  but  it  is  not  seen  that  the  other  grants  to  the 
defendant  corporation  should  not  receive  a  fair  and  natural  construction. 

The  charter  of  the  Mount  Washington  Road  empowers  them  to  lay 
out,  make  and  keep  in  repair,  a  road  from  Feabody  River  Valley  to  the 
top  of  Mount  "Washington,  and  thence  to  some  point  on  the  north- 
west side  of  the  mountain.  It  grants  tolls  on  passengers  and  carriages, 
and  authorizes  them  to  take  lands  of  others  for  their  road,  and  to  build 
and  own  toll-houses,  and  erect  gates,  and  appoint  toll-gatherers  to  col- 
lect their  tolls.  The  remaining  provisions  contain  the  ordinary  powers 
of  corporations,  relating  to  directors,  stock,  dividends,  meetings,  &c. 
Laws  of  1853,  chapter  1486. 

This  charter  confers  the  usual  powers  heretofore  granted  to  turnpike 
corporations,  and  no  others.  The  most  natural  and  satisfactory  mode 
of  ascertaining  what  are  the  powers  incidentally  granted  to  such  com- 
panies, is  to  inquire  what  powers  have  been  usually  exercised  under 
them,  without  question  by  the  public  or  by  the  corporators.  It  may 
be  safel}'  assumed  that  the  powers  which  have  not  heretofore  been 
found  necessary,  and  have  not  been  claimed  or  exercised  under  such 
charters,  are  not  to  be  considered  generally  as  incidentally  granted. 

1  Bellows,  J.,  did  uot  sit. 


264  DOWNING   V.   MOUNT   WASHINGTON   EOAD   CO. 

Such  charters  have  in  former  years  been  very  common  in  this  an(^ 
other  States,  and  they  have  not,  so  far  as  we  are  aware,  been  under- 
stood as  authorizing  the  corporations  to  erect  hotels,  or  to  establish 
stao-e  or  transportation  lines,  to  purchase  horses  or  carriages,  or  to 
employ  drivers  in  transporting  passengers  or  freight  over  their  roads  ; 
and  no  such  powers  have  anywhere  been  claimed  or  exercised  under 
them.  We  are,  therefore,  of  opinion  that  the  power  to  establish  stage 
and  transportation  lines  to  and  from  the  mountain,  to  purchase  car- 
riageinand  horses  foiLthe^_pui-iX)se  of  carrying  on  such_a  business,  was 
notjncidentally  granted  to  the  cfefendant  corporation  by  their  charter. 
State\.  Commissioners ,  3  Zab.  510. 

But  it  is  contended  that  the  power  to  make  this  contract  is  con- 
ferred by  the  act  in  amendment  of  the  charter,  passed  Jul}'  12,  1856. 
By  this  act  the  corporation  may  "erect  and  maintain,  lease  and  dis- 
pose of  any  building  or  buildings  wliicli  may  be  found  convenient  for 
tiie  accommodation  of  their  business,  and  of  the  horses  and  carriages 
and  travelers  passing  over  their  said  road."  By  their  business,  which 
the  buildings  to  be  erected  were  designed  to  accommodate,  it  is  said 
tlie  legislature  must  have  intended  some  permanent  and  continning 
business  beyond  that  of  merely  building  and  maintaining  a  road  ;  and 
that  it  could  be  no  other  than  that  of  erecting  a  hotel  on  the  mountain, 
and  establishing  lines  of  carriages,  for  the  purpose  of  carrying  visitors 
up  and  down  the  mountain. 

But  the  foundation  of  this  implication  is  very  slight.  The  express 
grant  is  of  an  authority  to  erect,  &c.,  buildings,  not  of  all  kinds,  but 
such  as  may  be  found  convenient  for  the  accommodation  of  their  busi- 
ness, and  of  travelers,  &c.  Tlie  business  here  referred  to  must  be 
understood  to  be  such  as  they  are  by  their  charter  authorized  to  engage 
in.  If  nothing  had  been  said  of  horses  and  travelers,  there  could 
hardly  be  any  foundation  for  the  idea  that  a  hotel  could  have  been 
contemplated  by  the  legislature.  Buildings  suitable  for  the  accommo- 
dation of  their  toll-gatherers  and  workmen  employed  on  their  road, 
would  probably  be  thought  every  thing  the  legislature  intended  to 
authorize  by  this  additional  act.  Connected  as  this  authority  now  is 
with  travelers,  horses  and  carriages,  there  is  scarce  a  pretence  for 
argument,  that  this  additional  act  goes  any  further  than  the  original 
act,  to  authorize  a  stage  and  transportation  company.  It  is  not 
unlikely  that  some  of  the  projectors  of  this  enterprise  intended  to 
secure  much  more  extensive  rights  than  those  of  a  turnpike  and  hotel 
company,  but  it  seems  certain  they  have  not  exhibited  this  feature 
of  their  case  to  the  legislature  so  distinctly  as  to  secure  their  sanc- 
tion, and  the  charter  and  its  amendment  as  yet  justifies  them  in  no  such 
claim. 

The  power  of  buying  and  selling  real  and  personal  property  for  the 
legitimate  purposes  of  the  corporation,  and  the  power  of  cf)ntfacting 
generally  for  the  same  purposes,  within  the  limits  prescrilied  by  the 
charter,  being  granted,  we  understand  the  princi[)le  to  be,  that  their 


DOWNING   V.   MOUNT   WASHINGTON    ROAD    CO  265 

pirchases,  sales,  and  contracts  generally,  will  be  presumed  to  be  madej 
uithin  the  legitimate  scope  and  purpose  of  the  corporation,  until  tbt 
contrar}'  appears,  and  that  the  burden  of  showing  that  any  contract  o| 
a  corporation  is  beyond  its  legitimate  powers,  rests  on  the  party  wh<] 
objects  to  it.  Indiana  v.  IVoram,  6  Hill  37 ;  U.c  parte  Peru  Jrar, 
Company^  7  Cow.  540;  Farmer's  Loan  v.  Cloices,  3  Comst.  470; 
Same  v.  Curtis,  3  Seld.  4G6  ;  Biers  v.  Phenix  Compani/,  14  Barb. 
358. 

If  a  corporation  attempt  to_  enforce  a  contract  made  with  them  in  a 
case  beyond  the  legitimate  limits  of  their  corporate  power,  that  fact 
being  shown,  will  ordinarily  constitute  a  perfect  defence.  Green  v. 
Seymour,  3  Sandf.  Ch.  285;  Bangor  Boom  v.  Whiting,  29  Me.  123; 
Life  <&c.  Company  v.  Manufacturers  <&c.  Company,  7  "Wend.  31 ; 
^"tic-York  cC'c.  Insurance  Company  v.  F^y,  5  Conn.  560. 

And  if  a  suit  is  brought  uiJOU_a^ontract  alleged  to  be  made  by  the 
corporation ,,i2ut_  which  is  shown  to  be_beyond  its  corporate  power  to 
enter  into,  the  contract  will  be  regarded  as  void,  and  the  corporation 
may  avairthemselyes_of  that  defence.  Beach  v.  Fulton  Bank,  3 
Wend.  573  ;  Albert  v.  Savings  Bank,  1  Md.  Ch.  Dec.  407 ;  Abbot  v. 
Baltimore  &c.  Company,  1  Bid.  Ch.  Dec.  542;  Strauss  v.  Eagle 
Insurance  Comptany,  5  Ohio  (N.  S.)  59  ;  Baron  v.  Mississippi  Insur- 
ance Company,  31  Miss.  116  ;  Bank  of  Genesee  v.  Fatchin  Bank,  3 
Kern.  315  ;    Gage  v.  Newmarket,  18  Q.  B.  457. 

Tiie  contract  set  up  in  this  case  was  made  not  by  the  corporation 
itself,  by  a  vote,  nor  b}'  an  agent  express!}'  authorized  to  sign  a  contract 
already  drawn,  but  it  was  made  bj-  the  president  of  the  corporation, 
acting  under  an  appointment  as  their  general  agent ;  and  it  is  argued 
that  he  was  fully  authorized  by  votes  of  the  corporation  to  bind  them 
by  such  a  contract  as  the  present ;  but  it  is  not  necessary  to  consider 
this  question,  as  we  think  it  settled  that  the  powers  of  the  agents  of 
corporations  to  enter  into  contracts  in  their  behalf  are  limited,  b}-  the 
nature  of  things,  to  such  contracts  as  the  corporations  are  b}'  their 
charters  authorized  to  make.  This  principle  is  distinctly  recognized  in 
McCullough  V.  Moss,  5  Den.  567;  overruling  the  case  of  Moss  v. 
Bossie  lead  Co.,  5  Hill  137,  and  in  Central  Bank  v.  Empire  Co.,  26 
Barb.  23  ;  Bank  of  Geriesee  v.  Patchin  Bank,  3  Kern.  315. 

The  same  want  of  power  to  give  authority'  to  an  agent  to  contract, 
and  thereby  bind  the  corporation  in  matters  bej'ond  the  scope  of  their 
corporate  objects,  must  be  cqualh'  conclusive  against  any  attempt  to 
ratify  such  contract.  What  they  cannot  do  directlv  they  cannot  do 
indirect!}".  The}'  cannot  bind  tlieniselves  by  tlie  ratification  of  a  con- 
tract which  they  had  no  authority  to  make.  5  Den.  567,  above  cited. 
The^wer_QLjtlie  agent  must  be  restricted  to  the  business  which  the 
company  was^jauthorized  to  do.  Within  the  scope  of  the  business 
which  they  had  power  to  transact,  he,  as  its  agent,  may  be  authorized 
io  act  for  it,  but  beyond  that  he  could  not  be  authorized,  for  its  powers 
extend  no  further. 


d 


e. 


7^ 


266 


STOURBEIDGE    CANAL    V.   WHEELEY. 


This  view  seems  to  us  entirely  conclusive  against  the  claim  made  for 
the  omnibuses  and  model,  and  probably  for  the  baggage  wagon. 

As  to  the  light  wagon,  that  may  stand  on  a  different  ground.  Such 
a  wagon  might  be  useful  and  necessary  for  the  use  of  the  agent  of  the 
company,  in  conducting  the  undoubted  business  of  the  corporation  — 
tlie  building  and  maintaining  the  road. 

We  are  unable  to  assent  to  the  position  taken  in  the  argument,  that 
a  ratification  of  part  is  a  ratification  of  the  whole  contract.  While  the 
corporation  ma}-  be  restricted  from  ratifying  a  contract  beyond  the 
scope  of  the  objects  of  the  corporation,  there  could  be  no  such  objec- 
tion as  to  any  matter  clearlj-  within  their  power.  The  other  contract- 
ing party  might  have  a  riglit  to  reject  such  ratification,  claiming  that-, 
the  contract  is  entire,  and  if  not  ratified  as  such,  it  should  not  be  made 


good  for  a  part  only.     But  if  they  claim  the  benefit  of  the  pa: 
tication,  tiie  corporation  can  hardly  object 


^ 


"•^ ,'   PROPRIETORS  OF  THE  STOURBRIDGE  CA^if AL  v.  WHEELEY. 


/jy^^  <lV^  y    vn  M^  This  case  was  argued  in  the  last  term  ^  by  Sir  James  Scarlett  for  the 


1831.     2  Barnewall  Sj-  Adolphus,  792. 


K^d 

^^'^'X 


•0 


plaintiff,  and    Campbell  for  the  defendants.     The  facts  of  the  case, 

(/^  tlm.several  clauses  of  the  act  of  parliament  upon  which  the  question 

li/'^ose,  and  the  arguments  urged,  are  so  fully  stated  and  commented  on 

in  the  judgment  delivered  b}-  the  Court,  that  it  is  deemed  unnecessary 

to  notice  them  here.  Cur.  adv.  vult. 

Lord  Tentekden,   C.  J.,  in  the  course  of  this  term,  delivered  the 
judgment  of  the  Court. 

This  case  was  argued  before  us  in  the  last  term.    It  was  an  action  of 

to  recover  the  sum  of  492^.  9s.  as  a 

or  passage  for  boats  loaded  with 

coals  and  other  merchandise,  along  a  part  of  the  plaintiffs'  canal,  made 

16  G.  3,  c.  28,  an  act  of  parliament  for  malc- 

the  Stourbridge  Canal  with  two  collateral  cuts. 

J^ This  canal  was  formed  upon  two  levels;    tiie   upper  or  summit  level, 

wliich  comninnicatcs  with  tiie  Dudley  Canal,  then  intended  to  be  made 

and  since  comi)leted ;  upon  tlie  whole  of  which  level  thoie  is  no  kjclc ; 

and  the  lower  or  Stourbridge  level,   extending  from   Stourbridge  to 

Stourton  ;  and  the  two  levels  are  connected  b}-  a  chain  of  sixteen  lockSo 

The  defendants  have  carried  large  quantities  of  coals  and  other  goods, 

part  from  the  Dudley  Canal,  part  not,  along  the  upper  level,  witUout 

1  Before  Lord  Tenterden,  C.  J.,  Littledale,  Parke,  and  Taunton.  Js. 


f.gy*^     Xy*  '^      assumpsit  brought  by  the  plaintiffs  t 

-^       1^^^^^,!^^  compensation  for  the   use  of  a  way 
^<'^     'T  coals  and  other  merchan 

'  g^/9^      t  Vv^'  '    '  Jinder  the  powers  of  the 
''^'"s   iA--^  b-f^ins  and  maintaining  th 


^^' 


STOUKBFJDGE    CAXAL   V.    WHEELEY.  JT  2G7 

jKissing  tlirough  any  lock.  Until  recently  they  have  paid  to  the  plain- 
tiffs a  compensation  in  the  nature  of  tonnage  for  the  coals  and  goods 
so  carried,  as  other  persons  have  also  done  ;  but  the  defendants  having 
latterly  refused  to  do  so,  this  action  has  been  brought;  and  the  ques-) 
tion  is,  whether  the  plaintiffs  are  entitled  to  demand  anything  for  the 
nse  of  the  part  of  the  canal  on  which  the  defendants  have  so  navigated  ; 
if  the}'  are,  the  sum  chiimed  is  admitted  to  be  reasonable,  and  the  plain- 
tiffs are  entitled  to  recover  it :  if  they  are  not,  the  previous  payments 
b}-  the  defendants  cannot  render  them  liable,  and  the  plaintiffs  cannot 
recover  anything. 

The  canal  liaving  been  made  under  the  provisions  of  an  act  of  par- 
liament, the  rights  of  the  plaintiffs  are  derived  entirely  from  the  act. 
This,  like  many  otlier  cases,  is  a  bargain  between  a  company  of  adven- 
turers and  the  public,  the  terms  of  which  are  expressed  in  the  statute  ; 
and  the  rule  of  construction  in  all  such  cases  is  now  fully  established 
to  be  this,  —  thatanv  ambiguity  in  the  terms  of  the  contract  must 
o])erate_against  the  adventurers,  and  in  favour  of  the  pubUc  ;  and  the 
plaintiffs^can  cIaTm~nothing  which  is  not  clearly  given  to  them  b}'  the 
a'cl!  This  rule  is  laid  down  in  distinct  terms  by  the  Court  in  the  case 
of  The  Hull  Dock  Compan}-  c.  La  Marche,  8  B.  &  C.  51,  where  some 
previous  authorities  are  cited  ;  and  it  was  also  acted  upon  in  the  case 
of  The  Leeds  and  Liverpool  Canal  Company  v.  Hustler,  1  B.  &  C.  424. 

Adopting  tliij_rule,  we  are  to  decide  whether  a  j;ight  to  demj,nd. 
some  compensation  for  the  use  of  this  part  of  the  canal,  is  clearly  and 
xinambUjuoxialy  given  to  the  plaintiffs  b^:  this  act  of  parliament^;  and 
we  think  itjs  not. 

The  act  of  parliament  recites  that  the  proposed  canal  will  be  of 
public  utility  (p.  732)  ;  the  company  are  empowered  to  purchase  land 
for  the  use  of  the  navigation  (p.  748)  ;  the  lands  acquired  by  voluntary 
or  compulsor}^  sale  are  vested  in  the  proprietors  for  the  use  of  the 
navigation,  and  for  no  other  use  or  purpose  whatsoever  (p.  759)  ;  and. 
all  persons  whatsoever  are  to  have  free  libert}'  "  to  navigate  upon  the' 
canal  and  collateral  cuts  with  an}'  boats  or  other  vessels  "  of  certain 
dimensions,  "  and  to  use  the  wharfs  and  quays  for  loading  and  unload- 
ing any  goods,  wares,  merchandise,  and  commodities  ;  and  also  to  use 
the  towing  paths  with  horses  for  hauling  and  drawing  such  boats  and 
vessels  upon  payment  of  such  rates  and  dues  as  shall  be  dema tided  by 
the  said  company  of  proprietors  7iot  exceeding  the  rates  before  men- 
tioned in  the  statute"  (p.  788).  This  refers  to  a  previous  clause, 
p.  777,  which  provides  that,  in  consideration  of  the  great  charge  and 
expense  of  the  proprietors  in  making,  maintaining,  and  supplying  with 
water  the  canal  and  collateral  cuts,  &e.,  it  shall  be  lawful  for  the  com- 
pany from  time  to  time  to  ask.  demand,  take,  and  recover  for  their 
own  use  and  benefit  for  the  tonnage  and  wharfage  of  iron,  «&;c.,  and 
other  commodities  navigated,  carried,  and  conveyed  thereon,  such  rates 
and  duties  as  they  shall  think  fit,  not  exceediug  the  sum  of  sixpence 
for  every  ton  of  iron,  &c.,  navigated  on  any  part  of  the  canal,  and 


A 


^ 


(^ 


268  STOUKBEIDGE   CANAL   V.   WHEELEY. 

/which  shall  pass  through  any  one  or  more  of  the  locks  which  shall  be 

I  erected  on  the  said  canal.     A  similar  provision  is  made  for  the  tonnage 

and  wharfage  of  goods  in  vessels  navigated  on  the  collateral  cuts  ;  and 

a  power  of  bringing  an  action  for  arrears  or  distraining  is  given  to  the 

companj'. 

Kow,  it  is  quite  certain  that  the  compan}^  have  no  right  eocpresshj 
given  to  receive  an}"  compensation  except  the  tonnage  paid  for  goods 
carried  through  some  of  the  locks  on  the  canal  or  the  collateral  cuts  ; 
and  it  is  therefore  incumbent  upon  them  to  show  that  the}-  have  a  right 
clearly  given  by  inference  from  some  of  the  other  clauses. 

One  of  the  clauses  relied  upon  b}'  the  plaintiffs  is  that  which  gives> 
the  public  the  use  of  the  canal,  p.  788,  and  it  is  contended  that  no  per- 
sons have  a  right  to  use  an\-  part  of  the  canal  under  that  clause,  except 
those  who  actually  do  pay  some  of  the  I'ates  or  dues,  and  consequently 
pass  some  of  the  locks  ;  and  that  if  individuals  have  no  right  to  navi- 
gate a  particular  part,  the  company  may  make  their  own  bargain  as  to 
the  terms  upon  whicli  they  ma}'  be  permitted  to  do  so. 

But  the  clause  in  question  is  capable  of  two  constructions  ;  one,  that 
those  persons  who  pass  the  locks,  and  therefore  pay  the  rates,  and 
tliose  only,  ai'e  entitled  to  navigate  any  part  of  the  canal  or  cuts ;  the 
other,  that  all  persons  are  entitled  to  use  it,  paying  rates  when  rates 
are  due.  The  former  of  these  constructions  is  against  the  public  and  in 
favour  of  the  company,  the  latter  is  in  favour  of  the  public  and  against 
the  company,  and  is  therefore,  according  to  the  rule  above  laid  down, 
the  one  which  ought  to  be  adopted. 

And  indeed  the  more  obvious  meaning  of  this  clause  is,  to  declare 
that  the  canal  is  dedicated  to  the  public,  but,  at  the  same  time,  to  pre- 
serve the  right  of  the  company  to  the  rates  already  given :  and  it  is 
reasonable  to  suppose  that,  by  the  section  p.  777,  which  gives  the  rates 
as  a  compensation  for  the  expenses  of  the  proprietors,  the  legislature 
meant  to  include  (ill  the  benefit  they  were  to  derive  from  the  canal,  and 
not  to  leave  the  company  to  make  what  agreement  they  pleased  with 
the  public  in  cases  not  provided  for,  and  to  gain  an  unlimited  profit 
from  a  particular  part  of  it.  They  i)robably  did  not  contemplate  the 
case  of  persons  using  the  canal  who  did  not  pass  any  lock  ;  but  whether 
the  omission  was  intentional,  or  arose  from  inadvertence,  it  is  still  an 
omission  in  that  clause  which  provides  for  the  emolument  of  the 
company. 

Another  section  upon  which  some  reliance  was  placed,  was  that  in 
page  789,  which  gives  to  the  owners  of  adjoining  lands  the  power  to 
use  any  pleasure  boats  on  the  canal,  &c.  (so  as  the  same  do  not  pass 
•through  any  lock),  without  paying  any  rates  or  dues  for  the  same,  and  so 
as  such  boat  be  noi  used  for  carrying  any  goods  ;  and  it  is  argued  that 
the  inference  arising  from  the  latter  part  of  this  clause  is,  that  pleasure 
boats  carrying  goods  would  be  liable  to  pay  rates,  though  they  should 
pass  no  locks ;  and  if  pleasure  boats,  then  all  other  boats  should  be 
equally  liaVjle.     And  there  is   no  doubt  but  that  this  provision  does 


CENTRAL  TEAKSPORTATION  CO.  V.   PULLMAN  CAR  CO. 


269 


afford  some  colour  for  this  argument.  The  object  of  the  clause  appears 
to  have  been,  partly  to  secure  the  right  of  the  proprietors  to  use  the 
canal  with  pleasure  boats  ;  (and  in  that  respect  it  was  introduced  pro 
majore  cautela;)  and  partly  to  prevent  the  company  being  injured  by 
their  passing  through  locks ;  and  the  framer  of  the  clause  seems  to  have 
added  the  last  provision  in  the  section  merely  to  put  pleasure  boats 
with  goods  on  board,  on  the  footing  of  loaded  vessels,  without  consid- 
ering whether  loaded  vessels  were  liable  to  duties  or  not.  At  any  rate 
this  clause  is  not  sufficient,  in  our  judgment,  to  enable  us  to  say  that  it 
is  dear  the  legislature  intended  to  give  the  plaintiffs  the  right  to  the 
compensation  claimed  for  the  use  of  a  part  of  the  canal  where  there  is 
no  lock. 

Upon  the  principle  of  construction,  therefore,  above  laid  down,  viz., 
that  the  company  are  entitled  to  impose  no  burthen  on  the  public  for 
their  own  benefit  except  that  which  is  clearl}'  given  by  the  act,  we  are 
of  opinion  that,  as  their  right  to  claim  this  compensation  is  not  clearl}' 
given  by  the  act,  the  plaintiffs  are  not  entitled  to  recover. 

Judgment  for  defendants. 


Gray,   J.,   in    CENTEAL    TRANSPORTATION   CO.   v.  PULL- 
MAN  CAR  CO. 

1891.     139  U.  S.  24,  p.  49. 

By  a  familiar  rule,  every  public  grant  of  property,  or  of  privileges,, 
or  franchises,  if  ambiguous,  is  to  be  construed  against  the  gran- 
tee and  in  favor  of  the  public ;  because  an  intention,  on  the  part  of 
the  government,  to  grant  to  private  persons,  or  to  a  particular  corpo- 
ration, property  or  rights  in  which  the  whole  public  is  interested, 
cannot  be  presumed,  unless  unequivocally  expressed  or  necessarily  to 
be  implied  in  the  terms  of  the  grant ;  and  because  the  grant  is  sup- 
posed  to  be  majle_^at  the  solicitation  of  the  grantee,  and  to  be  drawn 
up"  by  him^r  by  his  agents,  and  therefore  the  words  used  are  to_be 
treated  as  those  oi  the^  grantee ;  and  this  rule  of  construction  is  a 
wholesome  safeguard  of  the  interests  of  the  public  against  any  attempt 
of  the  grantee,  by  the  insertion  of  ambiguous  language,  to  take  what 
could  not  be  obtained  in  clear  and  express  terms.  Charles  River 
Bridge  v.  Warren  Bridge,  11  Pet.  420,  544-548 ;  Dubuque  &  Pacific 
Railroad  v.  Litchfield,  23  How.  66,  88,  89 ;  Slidell  v.  Grandjean,  111 
U.  S.  412,  437,  438.  This  rule_applies  with  peculiarjforce^  to  articles 
of^association^hich  are  framed  under  general  laws^and  which^aie 
a  substi.tute  for  a  legislative  charter,  and  assume  and  define_the 
powers  of  the  corporation  by  the  mere  act  of  the  associates,  without 
any  supervision  of  the  legislature  or  of  any  public  authority.  Oregon 
Railway  v.  Oregonian  Railioay,  130  U.  S.  26,  27. 


^«Y 


^ 


CO.   V.   OEEGONIAN   KY.    CO. 


OKEGOK  EAILWAY  &  NAVIGATION  CO. 
OREGONIAN  KAILWAY  CO. 

1889.     130  [T.  S.  1,  pp.  26,  27. 


V. 


y>^  iji  is  to  be  remembered  that  where  a  statute  making  a  grant  of 

\^v      ^  property,  or  of  powers,  or  of  franchises,  to  a  private  individual,  or  a 

^/f"  J^   /private  corporation,  becomes  the  subject  of  construction  as  regards 

the  extent  of  the  grant,  the  universal  rule  is  that  in  doubtful  points 

/I  the  construction  shall  be  against  the  grantee  and  in  favor  of  the  gov- 
'  ernment  or  the  general  public.  As  was  said  in  the  case  of  Charles 
River  Bridge  v.  Warren  Bridge,  11  Pet.  420,  "  in  this  court  the  prin- 
ciple is  recognized  that  in  grants  by  the  public  nothing  passes  by  im- 
plication." See  also  Dubuque  a7id  Pacific  Railroad  Co.  v.  Litchfield, 
23  How.  66 ;  Turnpike  Co.  v.  Illinois,  96  U.  S.  63. 

Therefore  if  the  articles  of  association  of  these  two  corporations, 
instead  of  being  the  mere  adoption  by  the  corporators  themselves  of 
the  declaration  of  their  own  purposes'and  powers,  had  been  an  act  of 
the  legislature  of  Oregon  conferring  such  powers  on  the  corporations, 
they  would  be  subject  to  the  rule  above  stated  and  to  rigid  construc- 
tion in  regard  to  the  powers  granted.  How  much  more,  then,  should 
this  rule  be  applied,  and  with  how  much  more  reason  should  a  court, 
called  upon  to  determine  the  powers  granted  by  these  articles  of  asso- 
ciation, construe  them  rigidly,  with  the  stronger  leaning  in  doubtful 
cases  in  favor  of  the  public  and  against  the  private  corporation, 

We  have  to  consider,  when  such  articles  become  the  subject  of  con- 
struction, that  they  are  in  a  sense  ex  parte ;  their  formation  and  exe- 
cution —  what  shall  be  put  into  them  as  well  as  what  shall  be  left  out 
, —  do  not  take  place  under  the  supervision  of  any  official  authority 
whatever.  They  are  the  production  of  private  citizens,  gotten  up  in 
I  the  interest  of  the  parties  who  propose  to  become  corporators,  and 
[Stimulated  by  their  zeal  for  the  personal  advantage  of  the  parties  con- 
cerned rather  than  the  general  good. 

These  articles,  when  signed  by  the  corporators,  acknowledged  before 
any  justice  of  the  peace  or  notary  public,  and  filed  in  the  office  of  the 
Secretary  of  State  and  the  clerk  of  the  proper  county,  become  com- 
plete and  operative.  They  are,  so  far  as  framed  in  accordance  with 
law,  a  substitute  for  legislation,  put  in  the  place  of  the  will  of  the 
people  of  the  State,  formerly  expressed  by  acts  of  the  legislature. 
Neither  the  officer  who  takes  such  acknowledgment,  nor  those  who 
file  the  articles,  have  any  power  of  criticism  or  rejection.  The  duty 
of  the  first  is  to  certify  to  the  fact,  and  of  the  second  to  simply  mark 
them  filed  as  public  documents,  in  their  respective  offices. 

Tliese  articles,  which  necessarily  assume  by  the  sole  action  of  the 
corporators  enormous  powers,  many  of  which  have  been  heretofore 
considered  of  a  public  character,  sometimes  affecting  the  interests  of 


\^ 


WHITAKEK  V.   DELAWARE   AND   HUDSON  CANAL  CO.  271 

the  public  very  largely  and  very  seriously,  do  not  commend  them- 
selves to  the  judicial  mind  as  a  p,1as8  of  instruments  requiring  or 
justifying  j;ny_veix_nberal  construction.  Where  the  question  is 
whether  they  conform  to  the  authority  given  by  statute  in  regard 
to  corporate  organizations,  it  is  always  to  be  determined  upon  just  i^ 

construction  of  the  powers  granted  therein,  with  a  due  regard  for  ir  j. 
all  the  other  laws  of  the  State  upon  that  subject,  and  the  rule  state^  J^ 
above.  .     -i^ 


WHITAKEK  V.   DELAWARE   &  HUDSOI 

1878.     87  Pa.  State,  34.1      a/* 

Case  to  recover  for  damages  to  plaintiff's  lumber  rafra  while  passing  7^  ^n^ 

through  the  schute  of  defendants'  dam,  alleged  to  have  resulted  from  (?^  ^ 

the  improper  construction    and    maintenance  of  such  dam.     At  the  ^^f^    tM^ 

trial,  in  the  Court  of  Common  Pleas,  after  evidence  had  been  intro-  *)\s       ly   <^^'f^ 
duced  by  both  sides.  Waller,  P.  J.,  directed  a  verdict  for  defendants.  ^     ^^^"^ f^y^ £ jr^ 
Plaintiff  took  a  writ  of  error.  i  ^v^     ."t^         ,.  ^ 

G.  G.  Waller,  for  plaintiff  in  error.  0^        ''  k     \j       Ly~^ 

II.  M.  /See/y,  for  defendant  in  error.  (^y)      -     c/^  A^vj^' 

Trunkey,  J.     The  defendants  were  incorporated  under  the  laws  oi/^|^^  *^^(k* 
New  York,  and  by  divers  statutes  of  this  state,  are  vested  with  certain/^/''    /^i| 
public  franchises.     For  the  purposes  of  the  grant  the  dam  across  the  t^        .    L^  'a** 
Delaware  river  was  built  about  fifty  years  ago,  and  the  right  to  main-     ^^(&^  »,      "^ 
tain  it  is  conceded.     In  the  Act  of  1825,  Pamph.  L.  142,  is  a  pro-.       /y^V^  " 
vision  "That  the  said  company  shall  not  erect  any  works,  or  make  any] 
improvement,  connected  with  the  Delaware  river,  unless  the  same  shall/''^- 
be  so  constructed  as  to  leave  the  channel  of  said  river  as  safe  and  as 
convenient  for  the  descent  of  rafts  as  it  now  is."     The  plaintiff  com- 
plains that  the  river  is  not  as  safe   and  convenient  for  navigation  as 
before  the  erection  of  the  dam.     Unquestionably  this  is  so.     A  dam  in 
a  stream  is  an  impediment  and  in  some  degree  renders  its  navigation 
less  safe  and  convenient.      A  literal  construction  of  this  provision 
makes  it  impossible  to  build  and  maintain  the  dam,  and  the  conceded 
right  vanishes.     The  statutes  of  this  state,  recognizing  those  of  New 
York,  and  in  connection  therewith,  conferring  the  power  to  construct 
a  great  public  highway,  are  nugatory  under  a  strict  construction  of  the 
section  providing  for  safe    and    convenient    navigation  of  the  river. 
This  was  not  the  legislative  intent.     It  could  not  have  been  intended 
to  grant  a  franchise  to  build  a  public  highway,  in  connection  with  one 
in  a  sister  state,  and  so  clog  it  that  the  work  could  never  be  executed. 

Various  statutes,  from  time  to  time,  have  been  enacted  authorizing 
public  improvements,   some  of    which  would  obstruct  or  impede  the 

1  Statement  abridged.     Argumeuts,  and  pa^rt  of  opinion,  omitted.  —  Ed. 


4 


272  WHITAKER  V.   DELAWARE   AND   HUDSON   CANAL   CO. 

navigation  of  rivers,  and  others  the  use  of  streets  and  roads,  which 
contained  provisions  forbidding  such  obstructions  and  impediments. 
Tlie  courts  have  uniformly  held  that  these  provisions  should  be  liberally 
construed,  so  as  not  to  destroy  the  grant.  For  instance,  the  act  of  in 
corporation  of  the  IMonongahela  Bridge  Company  contained  a  declara- 
tion that  nothing  therein  contained  should  authorize  the  erection  of  a 
bridge  over  the  Monongahela  river  "in  such  manner  as  to  injure,  stop, 
or  interrupt  the  navigation  of  the  said  river,  by  boats,  rafts  or  other 
vessels."  It  was  held  that  the  proviso  was  not  intended  to  prevent  the 
erection  of  piers  in  the  bed  of  the  river,  yet  piers  in  the  bed  of  a  navi- 
gable stream  inevitably  endanger  navigation  and  render  it  more  difficult. 
They  do  not  necessarily  "  injure,  stop  or  interrupt  the  navigation  "  in 
the  sense  in  which  these  words  were  used  by  the  legislature.  A  strict 
literal  meaning  was  not  intended,  and  in  the  ver}-  nature  of  things,  it 
never  could  have  been.  When  the  purpose  of  the  franchise  is  the 
performance  of  a  public  act^the  grant  is  to  be  so  interpreted  as  to 
enable  the  act  to  be  done.  The  extension  of  one  highway  over  an- 
other is  a  public  act,  and  not  less  so  because  of  the  power  to  exact 
tolls:  Monongahela  Bridge  Co.  v.  Kirk,  10  Wright,  112.  The  charter 
of  the  Erie  and  North  East  Railroad  Company  bad  a  provision  that 
"  The  said  railroad  shall  be  so  constructed  as  not  to  impede  or  obstruct 
the  free  use  of  an}-  public  road,  street,  lane  or  bridge  now  laid  out, 
opened  or  built."  ''  These  words  taken  literally  and  in  their  strongest 
sense  would  prevent  tTie  railroad  from  being  made  on  the  streets  at  all. 
But  we  follow  authority  in  saying  the}'  are  not  to_be  so  interpreted.  The 
defendants  have  a  right  to  use  a  street  if  thej-  take  caxe  to  obstruct  it 
a"s  little  as  the  nature  and  character  of  their  improvement  will__permit, 
if  they  create  no  material  or  unnecessarj-  impediment — no  obstruction 
which  could  be  avoided  by  any  reasonable  expenditure  of  money  or 
labor.  They  cannot  occupy  the  whole  of  a  street  and  drive  the  public 
away  from  it  altogether.  But  any  street  which  is  wide  enough  for  the 
railroad  and  public  both  may  be  used  on  the  terms  mentioned."  Per 
Black,  C.  J.,  Commonwealth  v.  E.  &  N.  E.  Railroad  Co.,  3  Casey  365. 

It  is  no  departure  from  the  current  of  decisions,  but  in  its  direct 
lineTto  hold  that  the  defendants  can  enjoy  their  franchise,  can  lawfully 
construct  and  maintain  their  dam,  taking  care  to  obstruct  the  channel 
asjittle  as  the  nature  and  character  of  the  imj)rovement  jvi]]^j)ermit, 
and  leaving  it  as  safe  and  convenient  for  the  navisfation  of  rafts  as 
could  be  by  any  reasonable  expenditure  of  jjiDney  and-lahoj'.  Tlieir 
franchise  is  for  the  construction  of  one  highway  over  another.  The 
wiiole  community  are  interested  in  both.  Private  charters  are  strictly 
interpreted.  In  them  what  is  not  expressed  or  necessarily  implied,  is 
not  granted,  and  what  is  doubtful  is  resolved  in  favor  of  the  sovereign. 
But  wlien  the  sovei'eign  grants  a  public  franchise  over  a  liighway,  a 
clause  relative  to  the  use  of  said  highway  will  not  be  so  construed  as  to 
defeat  tlie  grant. 

'J'hij  phiintiff  does  not  claim  merely  for  consequential  damages,  re- 


CHARLES   RIVEK   BRIDGE   V.   WARREN   BRIDGE. 


273 


suiting  solel}'  from  the  construction  of  the  dam.  If  he  did,  the 
defendants'  answer  would  be  found  in  Clark  v.  Birmingham  and 
Pitts.  Bridge  Co.,  5  Wright  147,  and  Monongahela  Bridge  Co.  v. 
Kirk,  saprtt. 

He  claims  further  for  an  immediate  injury,  consequent  upon  tlie  de- 
fendants' negligence,  in  that  they  "  built  and  left  the  said  dam  in  and 
'across  said  highway,  in  a  dangerous,  insecure  and  impassable  state  and 
condition."  His  averment  implies  much  more  than_such  obstruction 
as  was  necessar} 
and  there  was  no 
If  he  adduced  suffi( 
submitted  to  the  jury. 

[After  considering  the  evidence,  the  Co^iri  held,.,  that  it^was^^in! 
cient  to  warrant  a  ^fijidin^  that  the  defeudantj/ were  ^uil^  ^1" '' 


^m 


iJnT^   RITOE  BRIDGE  v.  PfipipBI^' 
©^•"WAEEEN    BRIDGE^   h  ^  Cy'^  ^ 
,m7^   II  Peters  U.S.  420.'        ^    j  .  ' 


^.^Mv 


»     .       ■-     ^^..     II  Peters  U.  S.  420.^         ^'     j,  .  ,,  ■    „. 

fry  or  -^  ^t^  5^^ 

Error  to  Supreme  Court  of  Massachusetts.     Bill  in  ^quit}^  to  e 
the  building  of  Warren  Bridge,  and  for  general  relief. 

In  1650,  the  Massachusetts  Legislature  granted  to  Harvard  Colli^^ 
the  power  to  dispose,  by  lease  or  otherwise,  of  the  ferry  from  Charles 
town  to  Boston.     In  1785,  the  legislature  incorporated  "•  The  Proprier  j^ ^    /.•V 
tors  of  Charles  River  Bridge,"  for  the  purpose  of  erecting  a  bridge  in*  j'^  xkt     < 
the  place  where  the  ferry  was  then  kept.     The  charter  was  limited  to  '^    ^  '^^ 
forty  years  from  the  opening;  the  company  were  to  pay  200/  annually  ^  V^^ i*    ^     y\ 
to  Harvard  College  ;  and  at  the  end  of  the  forty  years  the  bridge  was^j;/^  f^^J^    ^ 
to  be  the  propert}-  of  the  commonwealth,  saving  to  the  college  a  reason-  jji^  gl-^flA*-  „a^' 
able  annual  compensation  for  the  annual  income  of  the  ferr3\ 
bridge  was  opened  in  1786.     In  1792,  the  legislature  chartered  The 
Proprietors  of  West  Boston  Bridge  to  bridge  the  same  river  at  a  point' 


*f>' 


about  a  mile  and  a  half  from  the  first  bridge.     The  7th  section  of  the  C 
act  of  1792  extends  the  charter  of  Charles  River  Bridge  to  seventypX' 
years  from   its  opening;   inasmuch  as  the  erection  of  West  Bosto^f" 
Bridge  "  ma}'  diminish  the  emoluments  of  Charles  River  Bridge."     Inf 
1828,  the  legislature  incorporated  Proprietors  of  Warren  Bridge  toerecj;, 
another  bridge  across  Charles  River,  distant  only  sixteen  rods  on  the^^^ 
Cliarlestown  side  and  about  fifty  rods  on  the  Boston  side  from  the  bridge      .  L 
of  the  plaintiffs.     Warren  Bridge,  by  the  terms  of  its  charter,  was  to  be^  •  "  "^ 

1  Statement  abriJ>?ed.     Arguments  omitted.  —  Ed.  hJt)^  Ib*"'*^^         'iu'^ 


1  V 


«- 


4^£ 


SJ-* 


M 


t^  ^  .   (f' 


'/.V     i^  ^.ti^ 


t^^ 


OJ 


'-^ 


fV 


4^ 


>1 


f{^,^ 


CHARLES 


ff///- 


ARREN  -B 


,  fis  soon  as  the  expense  oi  buil 


& 


f///' 


building:  and 


^ 


surrendered  to  the  State,  fis  soon  as  tne'  expense  oi  Duurting  anrt  sup- 
porting it  should  be  reimbursed  ;  and  this  period  was  in  no  event  to 
exceed  six  years  from  the  time  of  beginning  to  receive  toll.  A  supple- 
mental bill  was  filed,  alleging  that  the  Warren  Bridge  had  been  so  far 
completed  as  to  be  open  for  travel.  In  the  argument  in  the  U.  S. 
Supreme  Court,  it  was  admitted  that  sufficient  toll  had  been  received 
by  llie  owners  of  the  Yv^arren  Bridge  to  reimburse  their  expenses,  that 
the  bridge  has  now  become  the  property-  of  the  state  and  has  been 
made  a  free  bridge ;  and  that  the  value  of  the  franchise  granted  to  the 
owners  of  the  Charles  River  Bridge  has,  by  this  means,  been  entirely 
estroyed. 

the    Supreme  Court  of  Massachusetts  the  judges  were  equally 
divided  in  opinion  ;  and  the  bill  was  there  dismissed  by  a  decree  pro 


"^  "  fjjformd..     7  Pick.  344 


/ 


6) 


^■l 
^M^ 


Dutton  and  Webster^  for  plaintiffs. 
|-^  Greenleqf  and  Davis,  contra. 
Taney,  C.J. 

The  plaintiffs  in  error  insist  mainly  upon  two  grounds :  1.  That  by 
virtue  of  the  grant  of  1650,  Harvard  College  was  entitled,  in  perpe- 
tuity, to  the  right  of  keeping  a  ferry  between  Charlestown  and  Bos- 
ton ;  that  this  right  was  exclusive ;  and  that  tlie  legislature  had  not. 
the  power  to  establish  another  ferry  on  the  same  line  of  travel,  because 
it  would  infringe  the  rights  of  the  college  ;  and  that  these  rights,  upon 
the  erection  of  the  bridge  in  the  place  of  the  ferry,  under  the  charter  of  • 
1785,  were  transferred  to,  and  became  vested  in  "the  proprietors  of 
the  Charles  River  Bridge  ;  "  and  that  under  and  by  virtue  of  this  trans- 
of  the  ferr}'  right,  the  rights  of  the  bridge  company  were  as  exclu- 

e   in   that   line   of  travel   as   the   rights   of  the   ferr3\      2.    That 
independenth'  of  the  ferry  right  the  acts  of  the  legislature  of  Massachu- 
setts of  1785,  and  1792,  by  their  true  construction^  necessarily  implied 
tliat  tlie  legislature  would  not  authorize  another  bridge,  and  especially 
a  free  one^  by  the  side  of  this,  and  placed  in  the  same  line  of  trave  1 , 
whereby  the  franchise  granted  to  the  "  Proprietors  of  the  Charles  River 
Bridge"  should  be  rendered  of  no  value  ;  and  the  plaintiffs  in  error  con-, 
tend  that  the  grant  of  the  ferry  to  the  college,  and  of  the  charter  to- 
tEe  proprietors  of  liic  bridge,  are  both  contracts  on  the  pai;t_of  the. 
State  ;  and  that  the  law  authorizing  the  erection  of  the  Warren  Bridge, 
iliJ828,  impairs  the  obligation  of  one  or  botli  of  these  contracts. 

It  is  very  clear  that  in  the  form  in  which  tliis  case  comes  before  us, 
being  a  writ  of  error  to  a  state  court,  the  plaintiffs  in  claiming  under 
either  of  these  rights  mustplace  themselves  on  the  ground  of  contract. 


and  cannot  sjapport  tlieniselves^upqujlie  principle  that  the  law~deycsts 
festedjr^jhtsTjrris  well  settled  by^e  decisions  of  this  court  that  a 
81*510  law  may  be  retrospective  in  its  character,  and  may  devest  vested 
rights,  and  yet  not  violate  the  constitution  of  the  United  States,  unless 
it  also  impairs  the  obligation  of  a  contract. 


CHARLES   RIVER   BRIDGE   V.   WARREN   BRIDGE.  " 


275 


[The  learned  judge  then  held,  that  the  ferry  rights,  and  all  franchises 
connected  therewith,  were  extinguished,  and  not  transferred  to  the 
Charles  River  Bridge  corporation.] 

This  brings  us  to  the  act  of  the  legislature  of  Massachusetts,  of  1785, 
by  which  the  plaintiffs  were  incorporated  by  the  name  of  "The  Pro- 
prietors of  the  Charles  River  Bridge,"  and  it  is  here,  and  in  the  law  of 
1792,  prolonging  their  charter,  that  we  must  look  for  the  extent  and 
nature  of  the  franchise  conferred  upon  the  plaintiffs. 

Much  has  been  said  in  the  argument,  of  the  principles  of  construc- 
tion by  which  this  law  is  to  be  expounded,  and  what  undertakings,  on 
the  part  of  the  State,  may  be  implied.  The  court  think  there  can  be 
no  serious  difficulty  on  that  head.  It  is  the  grant  of  certain  franchises 
b}'  the  public  to  a  private  corporation,  and  in  a  matter  where  the  pul)lic 
interest  is  concerned.  The  rule  of  construction  in  such  cases  is  well 
settled,  both  in  England,  and  b}'  the  decisions  of  our  own  tribunals. 

[The   learned  judge   here  cited  and  commented  upon  8tourhrid(j6^    \  ^\ 
Canal  v.  Wheeley,  2  B.  &  Ad.  793,  ante.']  |/V^-^     \K  n 

Borrowing,  as  we  have  done,  our  S3"stem  of  jurisprudence  from  the      /  f^/^  ju:^ 

English  law  ;  and  having  adopted,  in  every  other  case,  civil  and  crim-  f>5*^  bA 
inal,  its  rules  for  the  construction  of  statutes  ;  is  there  anything  in  our  ,  yj^'^"^  f, 
local  situation,  or  in  the  nature  of  our  political  institutions,  wliicli  should 
lead  us  to  depart  from  the  principle  where  corporations  are  concerned? 
Are  we  to  appl}'  to  acts  of  incorporation,  a  rule  of  construction  differing 
from  that  of  the  P^nglish  law,  and,  by  implication,  make  the  terms  of  a 
charter  in  one  of  the  States,  more  unfavorable  to  the  public,  than  upon 
an  act  of  parliament,  framed  in  the  same  words,  would  be  sanctioned  in 
an  English  court?  Can  an}-  good  reason  be  assigned  for  excepting  this 
particular  class  of  cases  from  the  operation  of  the  general  principle  ; 
and  for  introducing  a  new  and  adverse  rule  of  construction  in  favor  of 
corporations,  wliile  we  adopt  and  adhere  to  the  rules  of  construction 
known  to  the  English  common  law,  in  ever}-  other  case,  without  excep- 
tion? "We  think  not;  and  it  would  present  a  singular  spectacle,  if, 
while  the  courts  in  England  are  lestraining,  within  the  strictest  limits, 
the  spirit  of  monopol}',  and  exclusive  privileges  in  nature  of  monopO' 
lies,  and  confining  corporations  to  the  privileges  plainly  given  to  them 
in  their  charter ;  the  courts  of  this  countrv  should  be  found  enlarging 
these  privileges  hy  implication  ;  and  construing  a  statute  more  unfavor- 
ably to  the  public,  and  to  the  rights  of  the  community,  than  would  be 
done  in  a  like  case  in  an  English  court  of  justice. 

But  we  are  not  now  left  to  determine,  for  the  first  time,  the  rules  b}' 
which  public  grants  are  to  be  construed  in  this  country.  The  subject 
has  already  been  considered  in  this  court ;  and  the  rule  of  construction, 
above  stated,  fully  established. 

[After  referring  to  U.  S.  v.  Arredondo,  6  Peters,  738  ;  Jackson  v. 
Lamjyhire,  3  Peters,  289  ;  and  JBeaty  v.  Lessee  of  Ktioicles,  4  Peters, 
168;  the  opinion  proceeds.]  .    _ 


276 


'CHARLES   EIVER   BRIDGE   V.    WARREN   BRIDGE. 


But  the  case  most  analogous  to  this,  and  in  which  the  question  came 
more  directly  before  the  court,  is  the  case  of  the  Providence  Bank  v. 
Billings  and  Pittman,  4  Pet.  514,  and  which  was  decided  in  1830.  In 
that  case,  it  appeared  that  the  legislature  of  Rhode  Island  had  char- 
tered the  bank,  in  the  usual  form  of  such  acts  of  incorporation.  The 
charter  contained  no  stipulation  on  the  part  of  the  State,  that  it  would 
not  impose  a  tax  on  the  bank,  nor  any  reservation  of  the  right  to  do  so. 
It  was  silent  on  this  point.  Afterwards,  a  law  was  passed,  imposing  a 
tax  on  all  banks  in  the  State ;  and  the  right  to  impose  this  tax  was 
resisted  by  the  Providence  Bank,  upon  the  ground  that,  if  the  State 
could  impose  a  tax,  it  might  tax  so  heavily  as  to  render  the  franchise 
of  no  value,  and  destroy'  the  institution ;  that  the  charter^was  a  con- 
tract, and  that  a  power  which  may  in  effect  destro}'  the  charter  is  in- 
consistent with  it,  and  is  impliedly  renounced  b}'  granting  it.  But  the 
court  said  that  the  taxing  power  was  of  vital  importance,  and  essential 
to  the  existence  of  government ;  and  that  the  relinquishment  of  such 
a  power  is  never  to  be  assumed.  And  in  delivering  the  opinion  of 
the  court,  the  late  chief  justice  states  the  principle,  in  the  following 
clear  and  emphatic  language.  Speaking  of  the  taxing  power,  he  says, 
>'as  the  whole  communit}' is  interested  in  retaining  it  undiminished, 
that  community  has  a  right  to  insist  that  its  abandonment  ought  not  to 
be  presumed,  in  a  case  in  which  the  deliberate  purpose  of  the  State  to 
abandon  it  does  not  appear."  The  case  now  before  the  court,  is,  in 
principle,  precisely  the  same.  It  is  a  charter  from  a  State.  The  act  of 
incorporation  is  silent  in  relation  to  the  contested  power.  The  argu- 
ment in  favor  of  the  proprietors  of  the  Charles  River  Bridge,  is  the 
same,  almost  in  words,  with  that  used  by  the  Providence  Bank  ;  that  is, 
that  the  power  claimed  by  the  State,  if  it  exists,  may  be  so  used  as  to 
destro}^  the  value  of  the  franchise  the}'  liave  granted  to  the  corporation. 
The  argument  must  receive  the  same  answer;  and  the  fact  that  the 
power  has  been  already  exercised  so  as  to  destroy  the  value  of  the 
franchise,  cannot  in  an}'  degree  affect  the  principle.  The  existence  of 
the  power'  does  not,  and  cannot  depend  upon  the  circumstance  of  its 
aving  been  exercised  or  not. 

It  may,  perhaps,  be  said,  that  in  the  case  of  the  Providence  Bank, 
this  court  were  speaking  of  the  taxing  power  ;  which  is  of  vital  impor- 
tance to  the  very  existence  of  every  government.  But  the  object  and 
end  of  all  government  is  to  promote  the  happiness  and  prosperity  of 
the  community  by  which  it  is  established  ;  and  it  can  never  be  assumed, 
that  the  government  intended  to  diminish  its  power  of  accomplishing 
the  end  for  which  it  was  created.  And  in  a  country  like  ours,  free, 
active,  and  enterprising,  continually  advancing  in  numbers  and  wealth, 
new  channels  of  communication  are  daily  found  necessary,  both  for 
travel  and  trade ;  and  are  essential  to  the  comfort,  convenience,  and 
prosperity  of  the  people.  A  State  ought  never  to  be  presumed  to  sur- 
render this  power,  because,  like  the  taxing  power,  the  whole  community 
have  an  interest  in  preserving  it  undiminished.     And  when  a  corpora- 


CHAELES   RIVER   BRIDGE   V.   WARREN   BRIDGE.  277 

tion  alleges,  that  a  State  has  surrendered  for  seventy  j-ears,  its  power 
of  improvement  and  public  accommodation,  in  a  great  and  important 
line  of  travel,  along  which  a  vast  number  of  its  citizens  must  dailj' 
pass ;  the  community  have  a  right  to  insist,  in  the  language  of  this 
court  above  quoted,  "  that  its  abandonment  ought  not  to  be  presum^l, 
in  a  case,  in  \vhich  the  deliberate  purpose  of  the  State  to  abandon  it. 
does  not  appear."  The  continued  existence  of  a  government  would  be 
of  no  great  value,  if  by  implications  and  presumptions,  it  was  disarmed 
of  the  powers  necessary  to  accomplish  the  ends  of  its  creation  ;  and  the 
functions  it  was  designed  to  perform,  transferred  to  the  hands  of  priv- 
ileged corporations.  The  rule  of  construction  announced  b}'  the  court, 
was  not  confined  to  the  taxing  power ;  nor  is  it  so  limited  in  the 
opinion  delivered.  On  the  contrary,  it  was  distinctl}'  placed  on  the 
ground  that  the  interests  of  the  communit}'  were  concerned  in  preserv- 
ing, undiminished,  the  power  then  in  question  ;  and  whenever  any 
power  of  the  State  is  said  to  be  surrendered  or  diminished,  whether  it 
be  the  taxing  power  or  any  other  affecting  the  public  interest,  the  same 
principle  applies,  and  the  rule  of  construction  must  be  the  same.  No 
one  will  question  that  the  interests  of  the  great  bod}'  of  the  people  of 
the  State,  would,  in  this  instance,  be  affected  b}'  the  surrender  of  this 
great  line  of  travel  to  a  single  corporation,  with  the  right  to  exact  toll, 
and  exclude  competition  for  seventy  j'eare.  While  the  rights  of  private 
property  are  sacredly  guarded,  we  must  not  forget  that  the  community 
also  have  rights,  and  that  the  happiness  and  well-being  of  everj'  citizen 
depends  on  their  faithful  preservation. 

Adopting  the  rule  of  construction  above  stated  as  the  settled  one,  we. 
proceed  to  appl}'  it  to  the  charter  of  1785,  to  the  proprietors  of  the 
Charles  River  Bridge.  This  act  of  incorporation  is  in  the  usual  formT] 
and  the  privileges  such  as  are  commonly  given  to  corporations  of 
kind.  It  confers  on  them  the  ordinary  faculties  of  a  corporation 
the  purpose  of  building  the  bridge  ;  and  establishes  certain  rates  of  toll^ 
which  the  company  are  authorized  to  take.  This  is  the  whole  grant.  \ 
There  is  no  exclusive  privilege  given  to  them  over  the  waters  of  Charles  ) 
River,  above  or  below  their  bridge.  No  right  to  erect  another  bridge 
themselves,  nor  to  prevent  other  persons  from  erecting  one.  No 
engagement  from  the  State  that  another  shall  not  be  erected ;  and  no 
undertaking  not  to  sanction  competition,  nor  to  make  improvements 
that  may  diminish  the  amount  of  its  income.  Upon  all  these  sub- 
jects the  charter  is  silent ;  and  nothing  is  said  in  it  about  a  line  of 
travel,  so  much  insisted  on  in  the  argument,  in  which  they  are  to  have 
exclusive  privileges.  No  words  are  used,  from  which  an  intention  to 
grant  any  of  these  rights  can  be  inferred.  If  the  plaintiff  is  entitled  to 
them,  it  must  be  implied,  simpl}',  from 'the  nature  of  the  grant;  and 
cannot  be  inferred  from  the  words  by  which  the  grant  is  made. 

The  relative  position  of  the  Warren  Bridge  has  already  been  de- 
scribed. It  does  not  interrupt  the  passage  over  the  Charles  River 
Bridge,  nor  make  the  way  to  it  or  from  it  less  convenient.     None  of 


that     /fS 
,  for     ^ 


278  CHARLES   RIVER   BRIDGE   V.    WARREN  BRIDGE. 

tlie  faculties  or  franchises  granted  to  that  corporation  have  been  re- 
volved b\-  the  legislature,  and  its  right  to  take  the  tolls  granted  by  the 
charter  remains  unaltered.  In  short,  all  the  franchises  and  rights  of 
property  enumerated  in  the  charter,  and  there  mentioned  to  have  been 
granted  to  it,  remain  unimpaired.  But  its  income  is  destroyed  b}'  the 
"Warren  Bridge  ;  which,  being  free,  draws  off  the  passengers  and  prop- 
ert}'  which  would  have  gone  over  it,  and  renders  their  franchise  of  no 
value.  This  is  the  gist  of  the  complaint.  For  it  is  not  pretended  that 
the  erection  of  the  Warren  Bridge  would  have  done  them  any  injury,  or 
in  an}'  degree  affected  their  right  of  propert}',  if  it  had  not  diminished 
the  amount  of  their  tolls.  In  order  then  to  entitle  themselves  to  relief, 
it  is  necessar}-  to  show  that  the  legislature  contracted  not  to  do  the  act 
of  which  they  complain,  and  that  they  impaired,  or,  in  other  words, 
violated  that  contract  by  the  erection  of  the  Warren  Bridge. 

The  inquiry  then  is.  Does  the  charter  contain  such  a  contract  on  the 

ji/"  part  of  the  State?     Is  there  any  such  stipulation  to  be  found  in  that 

instrument?     It  must  be  admitted  on  all  hands  that  there  is  none, — 

no  words  that  even  relate  to  another  bridge,  or  to  the  diminution  of 

their  tolls,  or  to  the  line  of  travel.     If  a  contract  on  that  subject  can 

'  JJ"      ^e  gathered  from  the  charter,  it  must  be  by  implication,  and  cannot  be 

'>'  found  in  the  words  used.     Can  such  an  agreement  be  implied?     The 

Dy  U^  y  '       i^        ^"^^  ^^  construction  before  stated  is  an  answer  to  the  question.     In 

nT*   f     «y    (W^        charters  of  this  description,  no  rights  are  taken  from  the  public,  or 

-Vk  K^  ^  A       given  to  the  corporation,  beyond  those  which  the  words  of  the  charter, 

/iW^    h       J^  \J   ^y  ^^^^'^'  "''^t^i^'^l  ^^^^  proper  construction,  purport  to  convey.     There 

W      rX    f/       I  ^^  ^^®  ^^  words  which  import  such  a  contract  as  the  plaintiffs  in  error 

y^  «/\J     1^   ^y^■^  ^  i    contend  for,  and  none  can  be  implied  ;  and  the  same  answer  must  be 

L^     v}  .  , .       5j>A       given  to  them  that  was  given  by  this  court  to  the  Providence  Bank. 

i^A^      A^     l/J  4  Pet.  514.     The  whole  communit}-  are  interested  in  this  inquiry,  and 

C^      ^  A\f^  ^^^y  have  a  right  to  require  that  the  power  of  promoting  their  comfort 

'  i)^     /  )  ^"^^  convenience,  and  of  advancing  the  public  prosperity,  by  providing 

l"     A       ^  safe,  convenient,  and  cheap  ways  for  the  transportation  of  produce  and 

\    K,**^^""  V  ihe  purposes  of  travel,  shall  not  be  construed  to  have  been  surrendered 

\  ^  or  diminished  by  the  State,  unless  it  shall  appear  by  plain  words  that 

it  was  intended  to  be  done. 

But  the  case  before  the  court  is  even  still  stronger  against  any  such 
implied  contract  as  the  plaintiffs  in  error  contend  for.  The  Charles 
River  Bridge  was  completed  in  1786.  The  time  limited  for  the  dura- 
tion of  tlie  corporation,  by  their  original  charter,  expired  in  1826. 
When,  therefore,  the  law  passed  authorizing  the  erection  of  the  Warren 
Bridge,  the  proprietors  of  Charles  River  Bridge  held  their  corporate 
existence  under  the  law  of  1792,  which  extended  their  charter  for 
thirty  years  ;  and  the  rights,  privileges,  and  franchises  of  the  company, 
must  depend  upon  the  construction  of  the  last-mentioned  law,  taken  in 
connection  with  the  act  of  1785. 

The  act  of  1792,  which  extends  the  charter  of  this  bridge,  incorpo- 
rates another  company  to  build  a  bridge  over  Charles  River ;  furnish- 


CHARLES   RIVER   BRIDGE  V.   WARREN   BRIDGE.  279 

ing  another  communication  with  Boston,  and  distant  only  between  one 
and  two  miles  from  tlie  old  bridge. 

The  first  six  sections  of  tliis  act  incorporate  tb&  proprietors  of  the 
West  Boston  Bridge,  an(]  define  the  privileges,  and  describe  the  duties 
of  that  corporation.  In  the  7th  section  there  is  the  following  recital : 
"•  And  whereas  the  erection  of  Charles  River  Bridge  was  a  work  of 
hazard  and  public  utilit}-,  and  another  bridge  in  the  place  of  West 
Boston  Bridge  may  diminish  the  emoluments  of  Charles  River  Bridge  ; 
therefore,  for  the  encouragement  of  enterprise,"  they  proceed  to  extend 
the  charter  of  the  Charles  River  Bridge,  and  to  continue  it  for  the  terra 
of  seventy  Acars  from  the  day  the  bridge  was  completed,  subject  to  the 
conditions  prescribed  in  the  original  act,  and  to  be  entitled  to  the  same 
tolls.  It  appears,  then, that  b}'  the  same  act  that  extended  this  charter, 
the  legislature  established  another  bridge,  which  they  knew  would  lessen 
its  profits  ;  and  this,  too,  before  the  expiration  of  the  first  charter,  and 
onlv  seA'en  ^-ears  after  it  was  granted  ;  there b}'  showing,  that  the  State 
did  not  suppose  that,  b}'  the  terms  it  had  used  in  the  first  law,  it  had 
deprived  itself  of  the  power  of  making  such  public  improvements  as 
might  impair  the  profits  of  the  Charles  River  Bridge  ;  and  from  the 
language  used  in  the  clauses  of  the  law  b}'  which  the  charter  is  extended,  .< 

it  would  seem  that  the  legislature  were  especially  careful  to  exclude  xn 

any  inference  that  the  extension  was  made  upon  the  ground  of  com-        .•  (^ 
promise  with  the  bridge  companj-,  or  as  a  compensation  for  rights  ^  ^      J , 

impaired.  j^ 

On  the  contrary,  words  are  cautiousl}'  employed  to  exclude  that  con-'C^l/       /w/nT  ^ 
elusion  ;  and  the  extension  is  declared  to  be  granted  as  a  reward  for'  «,/^      Iv^ 
the  hazard  thej*  had  run,  and  "  for  the  encouragement  of  enterprise."  A/j»l^  ^n  -J^M  ^ 
The  extension  was  given  because  the  company  had  undertaken  and^r-ji^^^     '        i/y 
executed  a  work  of  doubtful  success;  and  the  improvements  which  thef,  k^-*^'  tWi       ^ 
legislature  then  contemplated,  might  diminish  the  emoluments  they  hadl/f       ^ro^      -ji 


expected  to  receive  from  it.     It  results  from  this  statement,  that  the    jvn      ^ 
legislature,  in  the  ver}'  law  extending  the  charter,  asserts  its  rights  to     |  _  (JA'      y^  i    \ 
authorize  improvements  over  Charles  River  which  would  take  oflf  a  por-    f^^^t/JK  »    ■^*^' 
tion  of  the  travel  from  this  bridge  and  diminish  its  profits;  and  the     ^JJ^     \     /' 
bridge  company  accept  the  renewal  thus  given,  and  thus  carefully  con-5  ^    yv^^lj^        ^ 
nected  with  this  assertion  of  the  right  on  the  part  of  the  State.     Can  i  v       ii?  j^    '^      \  ^ 
they,  when  holding  their  corporate  existence  under  this  law,  and  deriv-  ^^^^^r  ""    L^r  * 
ing  their  franchises  altogether  from  it,  add  to  the  privileges  expressed    kj^-^  K  • 
in  their  charter  an  implied  agreement  which  is  in  direct  conflict  with  a      il- 
portion  of  the  law  from  which  they  derive  their  corporate  existence?  ■'»^ 
Can  the  legislature  be  presumed  to  have  taken  upon  themselves  an  im- 
plied obligation,  contrary  to  its  own  acts  and  declarations  contained  in 
the  same  law  ?     It  would  be  difficult  to  find  a  case  justifying  such  an 
implication,  even  between  individuals ;  still  less  will  it  be  found  where 
sovereign  rights  are  concerned,  and  where  the  interests  of  a  whole  com- 
munity would  be  deeply  affected  b\'  such  an  implication.     It  would, 
indeed,  be  a  strong  exertion  of  judicial  power,  acting  upon  its  own 


280 


CHARLES   RIVER   BRIDGE  V.    WARREN  BRIDGE. 


^J-AjV  "'■ 

fv^iv  ■■■'■ 


views  of  what  justice  required,  and  the  parties  ought  to  have  done,  to 
raise,  bj-  a  sort  of  judicial  coercion,  an  implied  contract,  and  infer  from 
it  the  nature  of  the  very  instrument  in  which  the  legislature  appear  to 
have  taken  pains  to  use  words  which  disavow  and  repudiate  any  inten- 
tion, on  the  part  of  the  State,  to  make  such  a  contract. 

Indeed,  the  practice  and  usage  of  almost  every  State  in  the  Union, 
old  enough  to  have  commenced  the  work  of  internal  improvement,  is 
opposed  to  the  doctrine  contended  for  on  the  part  of  the  plaintiffs  in 
erroi'.  Turnpike  roads  have  been  made  in  succession  on  the  same  line 
of  travel ;  the  later  ones  interfering  materially  with  the  profits  of  the 
first.  These  corporations  have,  in  some  instances,  been  utterly  ruined 
by  the  introduction  of  newer  and  better  modes  of  transportation  and 
travelling.  In  some  cases,  railroads  have  rendered  the  turnpike  roads 
on  the  same  line  of  travel  so  entirel}*  useless,  that  the  franchise  of  the 
turnpike  corporation  is  not  worth  preserving.  Yet  in  none  of  these 
cases  have  the  corporation  supposed  that  their  privileges  were  invaded, 
or  an}'  contract  violated  on  the  part  of  the  State.  Amid  the  multitude 
of  cases  which  have  occurred,  and  have  been  dailj^  occurring  for  the 
last  forty  or  fifty  3-ears,  this  is  the  first  instance  in  which  such  an  im- 
plied contract  has  been  contended  for,  and  this  court  called  upon  to 
infer  it  from  an  ordinary  act  of  incorporation,  containing  nothing  more 
than  the  usual  stipulations  and  provisions  to  be  found  in  everj-  such 
(^aw.  The  absence  of  any  such  controversy,  when  there  must  have 
Vbeen  so  many  occasions  to  give  rise  to  it,  proves  that  neither  States, 
j  nor  individuals,  nor  corporations,  ever  imagined  that  such  a  contract 
could  be  implied  from  such  charters.  It  shows  that  the  men  who  voted 
for  these  laws,  never  imagined  that  they  were  forming  such  a  contract ; 
and  if  we  maintain  that  they  have  made  it,  we  must  create  it  by  a  legal 
fiction,  in  opposition  to  the  truth  of  the  fixct,  and  the  obvious  intention 
'of  the  party.  We  cannot  deal  thus  with  the  rights  reserved  to  the 
States,  and  b}'  legal  intendments  and  mere  technical  reasoning,  take 
away  from  them  an}'  portion  of  that  power  over  their  own  internal 
police  and  improvement,  which  is  so  necessary  to  their  well  being  and 
prosperity. 

And  what  would  be  the  fruits  of  this  doctrine  of  implied  contracts  on 
the  part  of  the  States,  and  of  property  in  a  line  of  travel  by  a  corpora- 
tion, if  it  should  now  be  sanctioned  by  this  court?  To  what  results 
would  it  lead  us?  If  it  is  to  be  found  in  the  charter  to  this  bridge,  the 
■same  process  of  reasoning  must  discover  it  in  the  various  acts  which 
have  been  passed,  within  the  last  forty  j'cars,  for  turnpike  companies, 
what  is  to  be  the  extent  of  the  privileges  of  exclusion  on  the  dif- 
ent  sides  of  the  road  ?  The  counsel  who  have  so  abl}'  argued  this 
have  not  attempted  to  define  it  by  any  certain  boundaries.  How 
far  must  the  new  improvement  be  distant  from  the  old  one  ?  How  near 
may  you  approach  without  invading  its  rights  in  the  privileged  line? 
If  this  court  should  establish  the  principles  now  contended  for,  what  is 
to  become  of  the  numerous  railroads  established  on  the  same  line  of 


CHARLES   RIVER   BRIDGE   V.    WARREN   BRIDGE.  281 

travel  with  turnpike  companies ;  and  which  have  rendered  the  fran- 
chises of  tlie  turnpike  corporations  of  no  vahie?  Let  it  once  be  under- 
stood that  such  charters  carr}-  with  them  these  implied  contracts,  and 
give  this  unknown  and  undefined  property  in  a  line  of  travelling,  and 
you  will  soon  find  the  old  turnpike  corporations  awakening  from  their 
sleep,  and  calling  upon  this  court  to  put  down  the  improvements  which 
have  taken  their  place.  The  millions  of  property  which  have  been 
invested  in  railroads  and  canals,  upon  lines  of  travel  which  had  been 
before  occupied  by  turnpike  corporations,  will  be  put  in  jeopard}'.  "We 
shall  be  thrown  l)ack  to  the  improvements  of  the  last  centur}',  and 
obliged  to  stand  still,  until  the  claims  of  the  old  turnpike  corporations 
shall  be  satisfied,  and  they  shall  consent  to  permit  these  States  to  avail 
themselves  of  the  lights  of  modern  science,  and  to  partake  of  the  bene- 
fit of  those  improvements  which  are  now  adding  to  the  wealth  and 
prosperity,  and  the  convenience  and  comfort  of  ever}'  other  part  of  the 
civilized  world.  Nor  is  this  all.  This  court  will  find  itself  compelled 
to  fix,  by  some  arbitrary  rule,  the  width  of  this  new  kind  of  property 
in  a  line  of  travel ;  for  if  such  a  right  of  property  exists,  we  have  no 
lights  to  guide  us  in  marking  out  its  extent,  unless,  indeed,  we  resort 
to  the  old  feudal  grants,  and  to  the  exclusive  rights  of  ferries,  by  pre- 
scription, between  towns  ;  and  are  prepared  to  decide  that  when  a, 
turnpike  road  from  one  town  to  another  had  been  made,  no  railroad  o 
canal,  between  these  two  points,  could  afterwards  be  estabHshed.  Thi 
court  are  not  prepared  to  sanction  principles  which  must  lead  to  sue 
lesults. 

Many  other  questions  of  the  deepest  importance  have  been  raised 
and  elaborately  discussed  in  the  argument.  It  is  not  necessary  for  the 
decision  of  this  case,  to  express  our  opinion  upon  them ;  and  the  court 
deem  it  proper  to  avoid  volunteering  an  opinion  on  any  question,  in- 
volving the  construction  of  the  constitution,  where  the  case  itself  does 
not  bring  the  question  directly  before  them,  and  make  it  their  duty  to 
decide  upon  it. 

Some  questions,  also,  of  a  purely  technical  character,  have  been 
made  and  argued,  as  to  the  form  of  proceeding  and  the  right  to  relief. 
But  enough  a))pcars  on  the  record,  to  bring  out  the  great  question  in 
contest;  and  it  is  the  interest  of  all  parties  concerned,  that  the  real 
controversy  should  be  settled  without  further  delay ;  and  as  the  opinion 
of  the  court  is  pronounced  on  the  main  question  in  dispute  here,  and 
disposes  of  the  whole  case,  it  is  altogether  unnecessary  to  enter  upon 
the  examination  of  the  forms  of  proceeding,  in  which  the  parties  have 
brought  it  before  the  court. 

The  judgment  of  the  supreme  judicial  court  of  the  commonwealth  of 
Massachusetts,  dismissing  the  plaintiffs'  bill,  must,  therefore,  be  aflBrmed, 
with  costs. 

[McLean,  J.  delivered  an  opinion  in  favor  of  dismissing  the  bill  for 
want  of  jurisdiction.     Story,  J.  delivered  an  opinion  dissenting  from 


7: 


282  CHARLES   RIVER   BRIDGE  V.   WARREN   BRIDGE.  , 

the  couclusions  of  Taney,  C.  J.  Thompson,  J.  concurred  in  the 
views  of  Story,  J.  The  following  extracts  are  from  the  opinion  of 
Story,  J.] 

Story%  J.  .  .  .  It  is  a  well-known  rule  in  the  construction  of  private 
grants,  if  the  meaning  of  the  words  be  doubtful,  to  construe  them  most 
strongly  against  the  grantor.  But  it  is  said  that  an  opposite  rule  pre- 
vails in  cases  of  grants  by  the  king ;  for  where  there  is  any  doubt,  the 
construction  is  made  most  favorably  for  the  king,  and  against  the 
grantee.  The  rule  is  not  disputed.  But  it  is  a  rule  of  very  limited 
application.  To  what  cases  does  it  apply?  To  such  cases  only  where 
there  is  a  real  doubt;  where  the  grant  admits  of  two  interpretations, 
one  of  which  is  more  extensive,  and  the  other  more  restricted ;  so  that 
a  choice  is  fairly-  open,  and  either  may  be  adopted  without  an3'  violation 
of  the  apparent  objects  of  the  grant.  If  the  king's  grant  admits  of  two 
interpretations,  one  of  which  will  make  it  utterly  void  and  worthless, 
and  the  other  will  give  it  a  reasonable  effect,  then  the  latter  is  to  pre- 
vail, for  the  reason,  (says  the  common  law,)  "  that  it  will  be  more  for 
the  benefit  of  the  subject,  and  the  honor  of  the  king,  which  is  to  be 
more  regarded  than  his  profit."  Cora.  Dig.  Grant,  G.  12;  9  Co.  R. 
131,  a;  10  Co.  R.  67,  b;  6  Co.  R.  6.  And  in  every  case  the  rule  is 
made  to  bend  to  the  real  justice  and  integrity'  of  the  case.  No  strained 
or  extravagant  construction  is  to  be  made  in  favor  of  the  king.  And 
if  the  intention  of  the  grant  is  obvious,  a  fair  and  liberal  interpretation 
of  its  terms  is  enforced. 

But  what,  I  repeat,  is  most  material  to  be  stated,  is,  that  all  this 
doctrine  in  relation  to  the  king's  prerogative  of  having  a  construction 
in  his  own  favor,  is  exclusively  confined  to  cases  of  mere  donation, 
llowing  from  the  bounty  of  the  crown.  Whenever  the  grant  is  upon  a 
valuable  consideration,  the  rule  of  construction  ceases  ;  and  the  grant 
is  expounded  exacti}'  as  it  would  be  in  the  case  of  a  private  grant, 
favorably  to  the  grantee.  Why  is  this  rule  adopted  ?  Plainly,  because 
the  grant  is  a  contract,  and  is  to  be  interpreted  according  to  its  fair 
meaning.  It  would  be  to  the  dishonour  of  the  government,  that  it 
should  pocket  a  lair  consideration,  and  then  quibble  as  to  the  obscuri- 
ties and  implications  of  its  own  contract. 

If,  then,  the  present  were  the  case^  a  royal  grant,  I  should  most 
strenuously  contend,  both  upon  principlejand  authority,  that  it  was  to 
receive  a  liberal,  and  not  a  strict,  construction.  I  should  so  coiitend 
upon  the  plain  intent  of  the  charter,  from  its  nature  and  objects,  and 
from  its  burdens  and  duties.  It  is  confcssedl}'  a  case_o£  contract^and. 
not^of  bounty  ;  a  case  of  conti  act  for  a  vuluabFe  consideration;  forob- 
jects  of  puljlic  utility  ;  to  encourage  enterprise  ;  to  advance  the  public 
conveniencej  and  to  ^.cure_  a  ji'St__reiiiuuiiratiQn_fqr  large  outlaysj^ 
pHvale  cajHtal.-    What  is  there  in  such  a  grant  of  the  crown,  which 


CHARLES   RIVER   BRIDGE   V.    WARREN   BRIDGE.  283 

should  demand  from  any  court  of  justice  a  narrow  and  strict  interpreta- 
tion of  its  terms  ? 

The  present,  however,  is  not  the  case  of  a  royal  grant,  but  of  a 
legislative  grant,  by  a  public  statute.  The  rules  of  the  common  law 
in  relation  to  roj'al  grants,  have,  therefore,  in  reality,  nothing  to  do 
with  the  case.  We  are  to  give  this  act  of  incorporation  a  rational  and 
fair  construction,  according  to  the  general  rules  which  govern  in  all 
cases  of  the  exposition  of  public  statutes.  We  are  to  ascertain  the 
legislative  intent ;  and  that  once  ascertained,  it  is  our  duty  to  give  it  a 
full  and  liberal  operation. 

What  solid  ground  is  there  to  sa}',  that  the  words  of  a  grant  in  the 
mouth  of  a  citizen,  shall  mean  one  thing,  and  in  the  mouth  of  the  legis- 
lature shall  mean  another  thing?  That,  in  regard  to  the  grant  of  a 
citizen,  ever^-  word  shall,  in  case  of  any  question  of  interpretation  or 
implication,  be  construed  against  liim,  and  in  regard  to  the  grant  of  the 
government,  every  word  shall  be  construed  in  its  favor?  That  language 
shall  be  construed,  not  according  to  its  natural  import  and  implications 
from  its  own  proper  sense,  and  the  objects  of  the  instrument ;  but  shall 
change  its  meaning,  as  it  is  spoken  by  the  whole  people,  or  by  one  of 
them  ?  There  may  be  very  solid  grounds  to  sa}',  that  neither  grants  nor 
charters  ought  to  be  extended  beyond  the  fair  reach  of  their  words ; 
and  that  no  implications  ought  to  be  made  which  are  not  clearly  de^ 
ducible  from  the  language  and  the  nature  and  objects  of  the  grant. 

There  is  great  virtue  in  particular  phrases  ;  and  when  it  is  once  sug- 
gested, that  a  grant  is  of  the  nature  or  tendency  of  a  monopol}',  the 
mind  almost  instantaneousl}-  prepares  itself  to  reject  every  construction 
which  does  not  pare  it  down  to  the  narrowest  limits.  It  is  an  honest, 
prejudice,  which  grew  up  in  former  times  from  the  gross  abuses  of  the 
royal  prerogatives ;  to  which  in  America,  there  are  no  analogous  au-. 
thorities.  But  what  is  a  monopoly,  as  understood  in  law?  It  is  an. 
exclusive  riglit  granted  to  a  few,  of  something  which  was  before  of 
common  right. 

No  sound  lawyer  will,  I  presume,  assert  that  the  grant  of  a  right  to/ 
erect  a  bridge  over  a  navigable  stream,  is  a  grant  of  a  common  right./ 
Before  such  grant,  had  all  the  citizens  of  the  State  a  right  to  erect 
bridges  over  navigable  streams?  Certainl}-  they  had  not;  and,  there- 
fore, the  grant  was  no  restriction  of  any  common  right.  It  was  neither 
a  monopol}- ;  nor  in  a  legal  sense,  had  it  any  tendency'  to  a  monopoly. 
It  took  from  no  citizen  what  he  possessed  before  ;  and  had  no  tendency 
to  take  it  from  him.  It  took,  indeed,  from  the  legislature  the  power  of 
granting  the  same  identical  privilege  or  franchise  to  any  other  persons 
But  this  made  it  no  more  a  monopoly,  tlian  the  grant  of  the  public  stock 
or  funds  of  a  State  for  a  valuable   consideration.     Even  in  cases  of 


I 


1^ 


284  CHARLES   RIVER   BRIDGE  V.   WARREN   BRIDGE. 

monopolies,  strictly  so  called,  if  the  nature  of  the  grant  be  such  that  it 
is  for  the  public  good,  as  in  cases  of  patents  for  inventions,  the  rule 
has  always  been  to  give  them  a  favorable  construction  in  support  of  the 
patent,  as  Lord  Chief  Justice  Eyre  said,  ut  res  magis  valeat  quani 
pereat;  Boulton  v.  Bull,  2  H.  Bl.  463,  500. 

Taking  this  to  be  a  grant  of  a  right  to  build  a  bridge  over  Charles 
River,  in  the  place  where  the  old  ferry  between  Charlestown  and  Boston 
was  then  kept,  (as  is  contended  for  by  the  defendants,)  still  it  has,  as 
all  such  grants  must  have,  a  fixed  localit}' ;  and  the  same  question 
meets  us,  is  the  grant  confined  to  the  mere  right  to  erect  a  bridge  on 
thej2roper  spot,  and  to  take  toll  of  the  passengers  who  may  pass  over 
it,  without  any  exclusive  franchise  on  either  side  of  the  local  limits  of 
the  bridge?  Or  does  it,  by'implication,  include  an  exclusive  franchise 
oneach  side,  to  an  extent  which  shall  shut  out  any  jnjurjous  compe- 
tition? In  other  words,  does  the  grant  still  leave  the  legislature  at 
,  yi       1    liberty  to  erect  other  bridges  on  either  side,  free  or  with  tolls,  even  in 

1^,  \       \   juxtaposition  with  the  timbers  and  planks  of  this  bridge?     Or  is  there 

an  implied  obligation,  on  the  part  of  the  legislature,  to  abstain  from  all 
acts  of  this  sort  which  shall  impair  or  destroy-  the  value  of  the  grant? 
The  defendants  contend  that  the  exclusive  right  of  the  plaintiflTs  extends 
no  further  than  the  planks  and  timbers  of  the  bridge,  and  that  the 
legislature  is  at  full  liberty  to  grant  any  new  bridge,  however  near ; 
and  although  it  may  take  away  a  large  portion,  or  even  the  whole  of 
the  travel  which  would  otherwise  pass  over  the  bridge  of  the  plaintiffs. 
And  to  this  extent  the  defendants  must  contend  ;  for  their  bridge  is,  to 
all  intents  and  purposes,  in  a  legal  and  practical  sense,  contiguous  to 
that  of  the  plaintiffs. 

The  argument  of  the  defendants  is,  that  the  plaintiffs  are  to  take 
nothing  by  implication.  Either  (say  they)  the  exclusive  grant  extends 
only  to  the  local  limits  of  the  bridge,  or  it  extends  the  whole  length  of 
the  river,  or  at  least  up  to  Old  Cambridge  bridge.  The  latter  con- 
struction would  be  absurd  and  monstrous,  and  therefore  the  former 
must  be  the  true  one.  Now,  I  utterly-  deny  the  alternatives  involved 
in  the  dilemma.  The  right  to  build  a  bridge  over  a  river,  and  to  take 
toll,  may  well  include  an  exclusive  franchise  beyond  the  local  limits  of 
the  bridge,  and  3'et  not  extend  through  the  whole  course  of  the  river, 
or  even  to  any  considerable  distance  on  the  river.  There  is  no  diffi- 
culty in  common  sense  or  in  law  in  maintaining  such  a  doctrine.  But 
then,  it  is  asked,  what  limits  can  be  assigned  to  such  a  franchise?  The 
answer  is  obvious  ;  the  grant  carries  with  it  an  exclusive  franchise  to 
a_reasonable_distanceon  the  river,  so  that  the  ordinarj'  travel  to  tlje 
K  bridge  shall  not  be  diverted  by  any  new  brklgc  to  the  injury  or  ruin  of 

\3    jf<       the  Jninchise.     A  new  _b  ridge  wliiijh  would  be  a  nuisance  to  the  old 

/f  ^ilii^SS'  vvould  be  withm  the jeach  oXJts  exclusiyej'ight.     Xijc  question 

/1^*^K  jJj*^"*  would  not  be  so  muclwis  to  the  fact  joLdista ace,  as  it  would  be  as  to. 

r  f        ^  tlie~ract  of  nuisance.      There  is  nothing  new  in  such  expositions  of 

ry^        -  -       


CHARLES   EIVEK   BRIDGE  V.    WARREN   BRIDGE.  285 

incorporeal  rights,  and  nothing  new  in  thus  administering,  upon  this 
foundation,  remedies  in  regard  thereto.  The  doctrine  is  coeval  with 
the  common  law  itself.  Suppose  an  action  is  brought  for  shuttinglip' 
the  ancient  liglits  belonging  to  a  messuage,  or  for  diverting  a  water- 
course, or  for  flowing  back  a  stream,  or  for  erecting  a  nuisance  near 
a  dwelling-house ;  the  question  In  such  cases  is  not  a  question  of 
mere  distance,  of  mere  feet  and  inches,  but  of  injury ;  permanent,  real, 
and  substantial  injury,  to  be  decided  upon  all  the  circumstances  of 
the  case. 

But  it  is  said  that  there  is  no  prohibitory  covenant  in  the  charter, 
and  no  implications  are  to  be  made  of  an}'  such  prohibition.     The  pro- 
prietors are  to  stand  upon  the  letter  of  their  contract,  and  the  maxim 
kpplies,  de  non  apjmrentibus  et  non  existentibus,  eadem  est  lex.     And 
yet  it  is  conceded,  that  the  legislature  cannot  revoke  or  resume  this 
grant.     Wh}'  not,  I  pra}-  to  know?     There  is  no  negative  covenant  in 
the  charter ;  there  is  no  express  prohibition  to  be  found  there.     The 
reason  is  plain.     The  proliibition  arises  by  a  natural,  if  not  b}-  neces- 
sary implication.     It  would  be  against  the  first  principles  of  justice  tol 
presume  that  the  legislature  reserved  a  right  to  destroy-  its  own  grant./ 
That  was  the  doctrine  of  Fletcher  v.  Peck,  6  Cranch,  87,  in  this  court, 
and  in  other  cases  turning  upon  the  same  great  principle  of  political 
and  constitutional  duty  and  right.     Can  the  legislature  have  power  to 
do.  that  indirectly  which  it  cannot  do^directly,?     If  it  cannot  take  away_ 
or  resume  the  franehjse  itself,  can  it  take  awa}'  its  whole  sjil^stajicfi  and-'' 
value ?__  If  the  law  will  create  an  implication  that  the  kirislature  shall 
not  resume  its  own  grant,  is  it  not  equally  as  natural  and  as  necessary 
an  implication,  that  the  legislature  shall  not  do  an}'  act  directly  to  pre- 
iudice  its  own  grant  or  to  desti'oy  its  value? 

But  then  again,  it  is  said,  that  all  this  rests  upon  implication,  and 
not  upon  the  words  of  the  charter.  I  admit  that  it  does  ;  but  I  again 
isa}',  that  the  implication  is  natural  and  necessar}'.  It  is  indispensable 
to  the  proper  elTect  of  the  grant.  The  franchise  cannot  subsist  without 
it,  at  least  for  any  valuable  or  practical  purpose.  What  objection  can 
there  be  to  implications,  if  the}'  arise  from  the  very  nature  and  objects 
of  the  grant?  If  it  be  indispensable  to  the  full  enjoyment  of  the  right 
to  take  toll,  that  it  should  be  exclusive  within  certain  limits,  is  it  not 
just  and  reasonable,  that  it  should  be  so  construed?  If  the  legislative 
power  to  erect  a  new  bridge  would  annihilate  a  franchise  already  granted, 
is  it  not,  unless  expressly  reserved,  necessarily  excluded  by  intendment 
of  law?  Can  any  reservations  be  raised  by  mere  implication  to  defeat 
the  operation  of  a  grant,  especially  when  such  a  reservation  would  be 
coextensive  with  the  whole  riglit  granted,  and  amount  to  the  reserva- 
tion of  a  right  to  recall  the  whole  grant? 

The  truth  is,  that  the  whole  argument  of  the  defendants  turns  upon 


286         i  ^  THE   BINGHAMTON  BRIDGE.  // ^    /v    * ._-        ff     ^ 

an  iuii)lied  reservatiou  of  power  in  the  legislature  to  oefeai^^^dxdestroj^ 

y .;  ^,^^  f  ^    —  V  /yy///, 

y^  ^^  VxC<^H£^ANGO  BRIDGE  CO.  v.  BINGHAMTON  BRIDGE  CO.] 

1^.    ^J     Vi^        ^    ir  1865.     3  W^aWace  17.  aS.  51.1  j  ^ 

'     ^y^       i/^  Error  to  the  New  York  Court  of  Appeals.  x^  -      - 

^f^f^  J,         .  ,       Bill  in  equity  by  Chenango  Bridge  Co.  to  enjoin  Binghamton  Bridge 

*p^    jP  ,jj  "  Co.     The  plaintiff  company  was  chartered  by  Section  4  of  the  Act  of 

^      y^  ' <f      1,  1808,  "  for  the  purpose  of  erecting  and  maintaining  a  toll-bridge  across 

I    /S^      j/^   ^^/^    the  Chenango  River,  at  or  near  Chenango  Point."     The  corporation 

t'        /^   ^      ^^^  "  ^°  ^^^^  perpetual  succession,  under  all  the  provisions,  regula- 

/(^    *P^     >  tions,  restrictions,  clauses  and  provisions  of  the  before-mentioned  Sus- 

g/f^^.     ..        ^_^quehanna  Bridge  Company,"  (referred  to  in  Section  3  of  the  same'Act 

fj^  j(h^,'^        ^y*  of  1808.)     The  latter  company  was  incorporated  by  Section  38  of  the 


iff    J^'      f^         -^^^  ^^  1805,  which  gave  the  Susquehanna  Bridge  Co.  all  the  "  powers, 
A%ik      y^  rights,  privileges,  immunities,  and  advantages,"  contained  in  the  incor- 


/    .  V^  J"—    poration  of  the  Delaware  Bridge  Co.  by  Section  31  of  the  same  Act  of 
^'       '^        1805.     Said  Section  31  enacted;  "  It  shall  not  be  lawful  for  any  per- 


'    u}-   y  son  or  persons  to  erect  any  bridge,  or  establish  an}-  ferry  across  the  said 

^ItJ  ^P^         '        ^®^*  ^"^^  ®^^^  branches  of  Delaware  River,  within  two  miles  either 

ti  r/^i         above  or  below  the  bridges  to  be  erected  and  maintained  in  pursuance 

f^l  J^    .  of  this  act."     Soon  after  the  passage  of  the  Act  of  1808,  the  plaintiff 

/?tS     /*''^Jf^  /)    company  built  a  toll-bridge  across  the  Chenango  River,  at  Chenango 

\     ^>        ^Tft^  'JKPoint.     In  1855,  the  legislature  granted  a  charter  to  the  Binghamton 

^A  ■  ,^    })r       '    Bridge  Co.,  purporting  to  authorize  the  building  of  a  bridge  in  close 

^'''^lyfh'nw  proximity  to  that  of  the  plaintiffs.     The  latter  company  built  a  bridge 

Ul   /r   J/ir  a  few  rods  above  the  old  one.     The  old  company  filed  a  bill  in  the 

^,.\        I  Supreme  Court  of  New  York  to  enjoin  the  new  company.     The  plain- 

7  •^■.'  tiffs  contended  that  the  exclusive  rights  given  by  Section  31  of  the 

^,  C  Act  of  1805  to  the  Delaware  Bridge  Co.  were  imported  by  Section  38 

of  that  Act  into  the  charter  of  the  Susquehanna  Co.  ;  that  these  again, 

thus  imported,  were  translated  into  Section  3  of  the  Act  of  1808  ;  and 

that  these  last  were  carried  finally  into  Section  4  of  the  latter  Act ;  thus 

making  a  contract  by  the  State  with  the  Chenango  Bridge  Co.,  that  no 

bridge  should  ever  be  built  over  the  Chenango  River  within  two  miles 

of  their  bridge,  either  above  or  below  it. 

'J'lie  answer  denied  the  contract  thus  set  up. 

The  Supreme  Court  of  New  York  dismissed  the  bill ;  and  this  decree 
was  afllrmcd  by  the  Court  of  Appeals. 

Mr.  I).  >V.  iJkkenson^  for  Binghamton  Bridge  Co. 

'  StatC'iiH'iit  abridged.     Arguinents,  and  parl.s  of  ypiuious,  omitted.  —  Elt 


THE   BINGHAMTON  BRIDGE. 


287 


Mr.  Mygatt,  contra. 

Mr.  Justice  Davis  delivered  the  opinion  of  the  Court.* 

The  Constitution  of  the  United  States  declares  that  no  State  shall 
pass  an}'  law  impairing  the  obligation  of  contracts  ;  and  the  25th  sec- 
tion of  the  Judiciary  Act  provides,  that  the  final  judgment  or  decree  of 
the  highest  court  of  a  State,  iu  which  a  decision  in  a  suit  can  be  had, 
ma}'  be  examined  and  reviewed  in  this  court,  if  there  was  drawn  in 
question  in  the  suit  the  validity  of  a  statute  of  the  State,  on  the  ground 
of  its  being  repugnant  to  the  Constitution  of  the  United  States,  and 
the  decision  was  in  favor  of  its  validity. 

The  plaintiffs  in  error  brought  a  suit  in  equity  in  the  Supreme  Court 
in  New  York,  alleging  that  they  were  created  a  corporation  by  the 
legislature  of  that  State,  on  the  first  of  April,  1808,  to  erect  and  main- 
tain a  bridge  across  the  Chenango  River,  at  Binghamton,  with  perpetual 
succession,  the  right  to  take  tolls,  and  a  covenant  that  no  other  bridge 
should  be  built  within  a  distance  of  two  miles  either  way  from  their 
bridge ;  whicli  was  a  grant  in  the  nature  of  a  contract  that  can- 
not be  impaired.  The  complaint  of  the  bill  is,  that  notwithstanding 
the  Chenango  Bridge  Company  have  faithfully  kept  their  contract  with 
the  State,  and  maintained  for  a  period  of  nearly  fifty  years  a  safe  and 
suitable  bridge  for  the  accommodation  of  the  public,  the  legislature  of 
New  York,  on  the  fifth  of  April,  1855,  in  plain  violation  of  the  con- 
tract of  the  State  with  them,  authorized  the  defendants  to  build  a  bridge 
across  the  Chenango  River  within  the  prescribed  limits,  and  that  the 
bridge  is  built  and  open  for  travel. 

The  bill  seeks  to  obtain  a  perpetual  injunction  against  the  Bingham-' 
ton  Bridge  Company,  from  using  or  allowing  to  be  used  the  bridge  thus 
built,  on  the  sole  ground  that  the  statute  of  the  State,  which  authorizes 
it,  is  repugnant  to  that  provision  of  the  Constitution  of  the  United 
States  which  says  that  no  State  shall  pass  any  law  impairing  the  obli- 
gation of  contracts.  Such  proceedings  were  had  in  the  inferior  courts 
of  New  York,  that  the  case  finally  reached  and  was  heard  in  the  Court 
of  Appeals,  which  is  the  highest  court  of  law  or  equity  of  the  State  in 
which  a  decision  of  the  suit  could  be  had.  And  that  court  held  that 
the  act,  by  virtue  of  which  the  Binghamton  bridge  was  built,  was  a 
valid  act,  and  rendered  a  final  decree  dismissing  the  bill.  Everything, 
therefore,  concurs  to  bring  into  exercise  the  appellate  power  of  this 
court  over  cases  decided  in  a  State  court,  and  to  support  the  writ  of 
error,  which  seeks  to  re-examine  and  correct  the  final  judgment  of  the 
Court  of  Appeals  in  New  York. 

The  questions  presented  by  this  record  are  of  importance,  and  have 
received  deliberate  consideration. 

It  is  said  that  the  revising  power  of  this  court  over  State  adjudica- 
tions is  viewed  with  jealousy.  If  so,  we  say,  in  the  words  of  Chief 
Justice  Marshall,  "  that  the  course  of  the  judicial  department  is  marked 


^  Nelson,  J.,  not  sitting,  being  indisposed. 


288  THE   BINGHAMTON   BRIDGE. 

out  by  law.  As  this  court  has  never  grasped  at  ungranted  jurisdiction, 
so  it  never  will,  we  trust,  shrink  from  that  which  is  conferred  upon  it." 
The  constitutional  right  of  one  legislature  to  grant  corporate  jjrivileges 
and  franchises,  so  as  to  bind  and  conclude  a  succeeding  one,  has  been 
denied.  We  have  supposed,  if  anything  was  settled  by  an  unbroken 
course  of  decisions  in  the  Federal  and  State  courts,  it  was,  that  an  act 
of  incorporation  was  a  contract  between  the  State  and  the  stockholders. 
All  courts  at  this  day  are  estopped  from  questioning  the  doctrine.  The 
security  of  property  rests  upon  it,  and  every  successful  enterprise  is 
undertaken,  in  the  unshaken  belief  that  it  will  never  be  forsaken. 

A  departure  from  it  note  would  involve  dangers  to  societ}'  that  can- 
not be  foreseen,  would  shock  the  sense  of  justice  of  the  countr}-,  un- 
hinge its  business  interests,  and  weaken,  if  not  destroy,  that  respect 
which  has  always  been  felt  for  the  judicial  department  of  the  Govern- 
ment. An  attempt  even  to  reaffirm  it,  could  only  tend  to  lessen  its 
force  and  obligation.  It  received  its  ablest  exposition  in  the  case  ot 
Dartmouth  College  v.  'Woodward,^  which  case  has  ever  since  been 
considered  a  landmark  by  the  profession,  and  no  court  has  since  dis- 
reo-arded  the  doctrine,  that  the  charters  of  private  corporations  are 
contracts,  protected  from  invasion  by  the  Constitution  of  the  United 
States.  And  it  has  since  so  often  received  the  solemn  sanction  of  this 
court,  tliat  it  would  unnecessarily  lengthen  this  opinion  to  refer  to  the 
cases,  or  even  enumerate  them. 

The  principle  is  supported  by  reason  as  well  as  authority.  It  was 
well  remarked  by  the  Chief  Justice,  in  the  Dartmouth  College  case, 
"  that  the  objects  for  which  a  corporation  is  created  are  universally 
such  as  the  Government  wishes  to  promote.  They  are  deemed  bene- 
ficial to  the  country,  and  this  benefit  constitutes  the  consideration,  and 
in  most  cases  the  sole  consideration  for  the  grant."  The  purposes  to 
be  attained  are  generally  beyond  the  ability  of  individual  enterprise, 
and  can  only  be  accomplished  through  the  aid  of  associated  wealth. 
This  will  not  be  risked  unless  privileges  are  given  and  securities  fur- 
nished in  an  act  of  incorporation.  The  wants  of  the  public  are  often 
so  imperative,  that  a  duty  is  imposed  on  Government  to  provide  for 
them  ;  and  as  experience  has  proved  that  a  State  should  not  directly 
attempt  to  do  this,  it  is  necessary  to  confer  on  others  the  faculty  of 
doing  what  the  sovereign  power  is  unwilling  to  undertake.  The  legis- 
y  jlature,  therefore,  says  to  public-spirited  citizens  :  *'  If  you  will  embark, 

yL    ^  ff^AM^   I  with  your  time,  money,  and  skill,  in  an  enterprise  which  will  accommo- 
#    ,  >\j^     /  (lute  the  public  necessities,  we  will  grant  to  you,  for  a  limited  period, 

^^^^^^^^^  I  or  in  perpetuity,  privileges  that  will  justify  the  expenditure  of  your 

^^U^Xj  ^  Inioney,  and  the  employment  of  your  time  and  skill."     Such  a  grant  is 

d^-'iSY^^    „       Vv,  contract,  with  mutual  considerations,  and  justice  and  good  poUcy  alike 
IV        \J.^^"''-c  that  the  protection  of  the  law  should  be  assured  to  it. 
*'  ^  It  is  argued,  as  a  reason  why  courts  should  not  be  rigid  in  enforC' 

1  4  Wheaton,  418. 


THE   BINGHAMTON   BRIDGE.  289 

ing  the  contracts  made  b}'  States,  that  legislative  bodies  are  often 
overreached  by  designing  men,  and  dispose  of  franchises  with  great 
recklessness. 

If  the  knowledge  that  a  contract  made  by  a  State  with  individuals  is 
equally  protected  from  invasion  as  a  contract  made  between  natural 
persons,  does  not  awaken  watchfulness  and  care  on  the  part  of  law- 
makers, it  is  difficult  to  perceive  what  would.  The  corrective  to  im- 
provident legislation  is  not  in  the  courts,  but  is  to  be  found  elsewhere. 

A  great  deal  of  the  argument  at  the  bar  was  devoted  to  the  consider- 
ation of  the  proper  rule  of  construction  to  be  adopted  in  the  interpreta- 
tion of  legislative  contracts.    In  this  there  is  no  difficulty.    All  contracts 
are  to  be  construed  to  accomplish  tlie  intention  of  the  parties  ;  and  in 
determining  their  different  provisions,  a  liberal  and  fair  construction 
will  be  given  to  the  words,   either  singl}'  or  in  connection  with  the 
subject-matter.     It  is  not  the  duty  of  a  court,    bj-  legal  subtlety,  to 
overthrow  a  contract,  bat  rather  to  uphold  it  and  give  it  effect ;  and  no 
strained  or  artificial  rule  of  construction  is  to  be  applied  to  any  part  of 
it.     If  there  is  no  ambiguit}',  and  the  meaning  of  the  parties  can  be 
clearly  ascertained,  effect  is  to  be  given  to  the  instrument  used,  whether 
it  is  a  legislative  grant  or  not.      In   the   case  of  the  Charles   River 
bridge,^  the  rules  of  construction  known  to  the  English  common  law 
were  adopted  and  applied  in  the  interpretation  of  legislative  grants,  and 
the  principle  was  recognized,  that  charters  are  to  be  construed  most 
favorably  to  the  State,  and  that  in  grants  by  the  public  nothing  passes 
by  implication.     This  court  has  repeatedly  since  reasserted  the  same 
doctrine  ;    and  the  decisions  in  the  several  States  are  nearly  all  the 
same  way.     The  principle  is  this  :  that  all  rights  which  are  asserted  , 
against_tbe  State  must  be  clearly  defined,  and  not  raised  by  inference. 
or  presumption  ;  and  if  the  charter  is  silent  about  a  power,  it  does  not 
exist^  If,  on  a  fair  reading  of  the  instrument,  reasonable  doubts  arisg. 
as  to  the  proper  interpretation  to  be  given  to  it,  those  doubts  are  to  be 
solved  in  favor  of  the  State ;  and  w^here  it  is  susceptible  of  two  mean-^.  /?} 
ings,  the^QuS-  restricting  and  the  other  extending  the  powers  of  the   ^ 
corporation,  that  construction  is  to  be  adopted  which  works  the  least 
harm__to_the__State.     But  if  there^is  jio  ambiguity  in  the  charteri^and  f 
the  powers  conferred  are  plainly  marked,  and  their  limits  can  be  readily  I 
ascertaiuedj_then  it  is  the  duty  of  the  court  to  sustain  and  uphold  ir, 
Snd  to__carry  out  the  true  meaning  and  intention  of  the  parties  to^t.   1 
An}-  other  rule  of  construction  would  defeat  all  legislative  grants,  and  ■' 
overthrow  all  other  contracts.    What,  then,  are  the  rights  of  the  parties 
to  this  controversy? 

[After  considering  the  various  N.  Y.  Acts  in  reference  to  Bridge 
Companies,  and  adopting  substantially  the  construction  contended  for 
by  plaintiffs,  the  opinion  proceeds  as  follows  :] 

The  legislature,  therefore,  contracted  with  this  company,   if  they 

»  11  Peters,  544. 


290  THE  BINGHAMTON   BRIDGE. 

would  build  and  maintain  a  safe  and  suitable  bridge  across  the  Chen- 
ango River  at  Chenango  Point,  for  the  accommodation  of  the  public, 
they  should  have,  in  consideration  for  it,  a  perpetual  charter,  the  right 
to  take  certain  specified  tolls,  and  that  it  should  not  be  lawful  for  an}' 
person  or  persons  to  erect  any  bridge,  or  establish  any  ferry,  within  a 
distance  of  two  miles,  on  the  Chenango  River,  either  above  or  below 
their  bridge. 

Has  the  legislature  of  1855  broken  the  contract,  which  the  legislatures 
of  1805  and  1808  made  with  the  plaintiffs?     M^. 

The  foregoing  discussion  affords  an  easy  answer  to  this  question. 
The  legislature  has  the  power  to  license  ferries  and  bridges,  and  so  to 
regulate  them,  that  no  rival  ferries  or  bridges  can  be  established  within 
certain  fixed  distances.  No  individual  without  a  license  can  build  a 
bridge  or  establish  a  ferry  for  general  travel,  for  "it  is  a  well-settled 
principle  of  common  law  that  no  man  ma}'  set  up  a  ferry  for  all  passen- 
gers, without  prescription  time  out  of  mind,  or  a  charter  from  the  king. 
lie  may  make  a  ferry  for  his  own  use,  or  the  use  of  his  family,  but  not 
for  the  common  use  of  all  the  king's  subjects  passing  that  way,  because 
it  doth  in  consequence  tend  to  a  common  charge,  and  is  become  a  thing 
of  public  interest  and  use ;  and  every  ferry  ought  to  be  under  a  public 
regulation."  ^  As  there  was  no  necessity  of  laying  a  restraint  on  un- 
authorized persons,  it  is  clear  that  such  a  restraint  was  not  witliin  the 
meaning  of  the  legislature.  The  restraint  was  on  the  legislature  itself. 
The  plain  reading  of  the  provision,  "  thatjt  shall  not  bejawfiil  for  any 
person  or  persons  to  erect  a  bridge  within  a  distance  of  two  miles,"  in, 
that  the  legislature  icill  not  make  it  lawful  by  licensing  any  person,  or 
association  of^ person s,_to^jlo_it.  And  the  obligation  includes  a  free 
bridge  as  well  as  a  toll  bridge,  for  the  security  would  be  worthless  to 
the  corporation  if  the  right  by  implication  was  reserved,  to  authorize 
the  erection  of  a  bridge  which  should  be  free  to  the  public.  The  Bing- 
hamton  Bridge  Company  was  chartered  to  construct  a  bridge  for  gen- 
eral road  travel,  like  the  Chenango  bridge,  and  near  to  it,  and  within 
the  prohibited  distance.  This  was  a  plain  violation  of  the  contract 
which  the  legislature  made  with  the  Chenango  Bridge  Company,  and  as 
such  a  contract  is  within  the  protection  of  the  Constitution  of  the 
United  States,  it  follows  that  the  charter  of  the  Binghamton  Bridge 
Com[)any  is  null  and  void. 

Decree  of  the  Court  of  Appeals  of  New  York  reversed,  and  a  man- 
date ordered  to  issue,  with  directions  to  enter  a  judgment  for  the  plain- 
tiff in  error,  the  Chenango  Bridge  Company,  in  conformity  with  this 
opinion. 

[Chase,  C.  J.,  delivered  a  dissenting  opinion.] 
Chase,  C.  J.,  Field,  J.,  and  Guiek,  J.,  dissented- 

1  IIar{,'rave'8  Law  Tracts,  ch.  ii.  16;  The  Enfield  Toll  Bridge  Co.  v.  The  Hartford 
and  New  Haven  TJailroad  Co.,  17  Connecticut,  63  ;  Hooker  v,  Cummings,  20  Johnson. 
100 ;  Bowman  v.  Wathan,  2  McLean,  383. 


V'/ 


myfr 


\ 


BOTT  V.    CITY   OF  LAWRENCEyJ^  y^ 


ROTT  V.   CITY 


.V 


1872.     2  Z>t7/on  [/.  /S.  Circuit  Court  Repiirts^ 


lo^iON  to  dissolve  temporaiy  injunction  restraining  the  defendants^   if^ 
\    ijftie  Messrs.  Wilson,  from  operating  the   ferr}-  hereinafter  described. 
^    »r  Plaintiff  is  a  citizen  of  Ohio,  and  a  stockholder  in  the  Lawrence  Bridge, 
'v     Co.     In  his  bill  in  equity,  he  alleges  that  the  maintenance  of  the  ferry! 
infringes  upon  the  rights  of  the  Bridge  Co. ;  and,  to  show  his  right  toj 
maintain  the   bill,  alleges  that  the  Bridge   Co.  and  its  officers  have 
refused  to  proceed  in  the  State  courts  to  obtain  redress. 

Feb.  15,  1857,  the  Legislative  Assembly  of  the  Territor}-  of  Kansas^ 
incorporated  the  Lawrence  Bridge  Co.;  granting;  the  exclusive  right .'-j^    . 
and  privilege  of  building  and  maintaining  a  bridge  across  the  Kansas  j^^  .j 
River,  at  the  city  of  Lawrence  for  a  period  of  twenty-one  years ;  withp      \H\^ 
power  to  establish  and  collect  tolls. 

Prior  to  said  incorporation  of  the  Bridge  Co.  the  Legislative  Assem- « 
bly  had,  in  1855,  granted  to  one  Baldwin  the  exclusive  right  to  estab-p^'l^      (^  C i>- 
lish  a  public  ferrj*  within  two  miles  of  Lawrence,  for  a  term  of  fifteen/5r  j   ' IV  a,^     l*- 
years.     The  answer  of  some  of  the  defendants  alleges  that  Baldwin*^ (L      ti*      aV''^ 
kept  a  ferr}'  in  the  immediate  vicinity  of  the  bridge  for  some  time  after      T^yi  w     h^^^ 
the  erection  of  the  bridge  ;  when,  for  reasons  unknown,  he  ceased  tdC)      ^         *"    j^ 
operate  the  ferry.  J[^    J/^  iV^  '  Jl 

By  the  laws  of  Kansas,  the  county  commissioners  have  the  power  to  yj\  .  ,1 
grant  ferr}'  licenses.     In  Januarj',  1871,  the  commissioners  licensed,,  j 
one  Darling  to  keep  a  ferrv,  at  Lawrence,  for  one  year.     The  ferry'    i^t/"^. 
was  o[)erated  at  first  by  Darling,  and  afterwards  by  the  Wilsons,  under^^  '      j  A 
an  arrangement  with  the  city  of  Lawrence,  the  cit}'  having  purchased    |f/^;   i-<r^' 
the  ferry-boat  of  Darling.     January  6,  1872,  the  commissioners  granted/  iy^Ty^-^ 
to  the  defendant,  Wilson,  the  right  to  keep  and  run  a  ferry  on  the  Kan-/  .    ;^       l//^'  y 
sas  River,  at  the  city  of  Lawrence,  for  one  year.  '•^'^  •  ^^^^   ,v^ 

According  to  the  bill,   answer,   and  affidavits,  it  appears  that  ihe^^i^  y        *^ 


ferry-boat,  or,  as  the  bill  styles  it,  the  floating  bridge,  is  operated  in 
this  way :  Two  ropes,  or  cables,  are  thrown  across  the  river,  fastened 


3d1 

to  I 


the  upper  side  of  the  boat,  or  "  floating  bridge,"  and  this  rope  glides 
upon  the  upper  cable  bj'  means  of  a  pulley  attached  to  the  other  end  ♦ 
of  the  rope,  said  pulley  passing  from  side  to  side  of  the  river  with  the 
boat,  the  motive  power  moving  the  boat  back  and  forth  across  the 
stream  being  a  stationar}'  steam  engine  located  on  the  north  bank  ofj 
the  river.     The  boat  itself  is  an  ordinary  flat-bottomed  boat. 

T/iacher  &  Hanks,  and  N'.  T.  Stephens,  for  the  complainant. 

Wilso?i  Shannon,  for  the  Messrs.  Wilson  and  the  city  of  Lawrence. 

Dillon,  Circuit  Judge.     The  grant  to  the  bridge  company-  by  its 

1  Statement  abridged.  —  Ed. 


A 

y^  ^ 

y 


re/ 


^ 


292 


PAEROTT   V.    CITY   OF  LAWRENCE, 


-  (^ 


charter  is  "  the  exchisive  right  and  privilege  of  building  and  maintain- 
ing fir  bridge  across  the  Kansas  river  at  the  city  of  Lawrence,"  and  "to 
I  establish  and  collect  tolls  for  crossing  said  bridged  If  this  right  has 
not  been  invaded,  the  complainant  is  not  entitled  to  an  injunction 
against  the  running  of  the  ferr}'.  I  say  t\xQ  ferry ^  for,  in  m}'  judgment, 
it  is  clear  that  the  means  used  to  cross  the  river  by  the  defendant,  Wil- 
son, —  viz.  a  flat-bottomed  boat,  connected  with  cables  spanning  the 
stream,  and  moved  or  propelled  back  and  forth  across  it  by  power  sup- 
plied b}'  a  stationary'  engine  on  the  bank  —  is  a  ferr}',  as  distinguished 
from  a  bridge,  both  under  the  legislation  of  the  State  and  according  to 
the  usual  meaning  of  the  word. 

The  passage  over  streams  is  generally  effected  in  one  of  two  ways, 
viz.  :  b}-  bridges,  which,  as  commonl}'  constructed  for  the  use  of  trav- 
ellers and  teams,  are  immovable  structures  or  extensions  of  the  high- 
wavs  over  and  accross  the  water ;  and  by  boats,  which  are  movable 


and  jjropelled^b}^  steam-power,  horse-pojjer,  the  action  of  the  current, 
"similaf'asencies.     When 


/and  1 
or""?! 


the  passage  is  by  the  latter  mode  it  is 

c^^^ferrging^  which  imjjlies"a1EioaF|hat  moves  back  and  forth  across 
the  stream,  from  bank  to  bank.  The  legislation  of  Kansas  everywhere 
\  recognizes  this  distinction  between  bridges  and  ferries.  In  the"  Stat- 
utes of  1855  there  are  provisions  for  building  bridges  (chap.  18),  and 
also  for  regulating  ferries  (chap.  71).  At  the  first  session  of  the 
legislature,  in  1855,  there  were  a  great  man}'  special  acts,  some  author- 
izing certain  persons  to  build  toll-bridges,  and  others  to  establish  and 
maintain  ferries.  Among  these  numerous  acts  was  one  giving  to  John 
Baldwin  the  exclusive  right  to  keep  a  public  ferr}'  across  the  Kansas 
river  at  the  town  of  Lawrence  for  the  period  of  fifteen  3'ears.  Two 
years  afterwards  the  legislature  incorporated  the  Lawrence  Bridge 
Company,  giving  it  the  exclusive  right  to  build  and  maintain  a  bridge 
across  the  river  at  the  same  place.  Did  this  invade  the  franchise  which 
had  been  granted  to  Baldwin?  Clearh'  not,  for  the  two  grants  are 
different ;  the  one  was  to  keep  a  ferr}'  and  collect  tolls  or  ferriage  for 
crossing  the  stream  by  this  mode  —  the  other  was  to  erect  and  maintain 
a  bridge,  &c.,  "  to  collect  tolls  for  crossing  the  same."  So  that  during 
the  period  for  which  Baldwin's  ferry  charter  was  to  run,  there  were  two 
modes  of  crossing  the  river  at  Lawrence  expressly  authorized,  —  the 
one  b}'  means  of  Baldwin's  ferry,  the  other  b}-  means  of  the  bridge  of 
the  Lawrence  Bridge  Company. 

The  contract  of  the  legislature  with  the  bridge  company  must  be 
protected  from  subsequent  invasion.  But  what  was  that  contract?  It 
was  simply  an  exclusive  riglit  to  build  a  bridge  and  to  "'collect  tolls 
for  crossing  the  same."  It  is  argued  that  the  contract  with  the  bridge 
company  was  that  the  travel  of  a  certain  district,  to-wit:  -those  passing 
the  river  at  Lawrence,  should  pass  over  this  bridge  and  pa}'  tolls  there- 
for. But  it  is  clear  that  such  was  not  the  contract:  1st,  because  it  is 
not  so  expressed,  or  fairly  to  be  implied  from  the  language  used ;  and, 
2d,  because  the  existence  of  the  Baldwin  ferry  cliarter,  which  must  be 


PAEROTT   V.   CITY   OP'  LAWRENCE. 


293 


presumed  to  have  been  in  the  minrl  of  the  legislature  when  it  passed 
tlie  bridge  charter,  and  which,  bj'  its  terms,  would  continue  in  force 
manv  years  after  the  period  fixed  for  the  completion  of  the  bridge, 
shows  that  the  legislature  did  not  intend  to  make  a  contract  with  the 
bridge  compan}'  to  the  effect  that  all  persons  and  propert}'  crossing  at 
Lawrence  should  pass  over  tlie  bridge. 

When  we  consider  that  legislative  grants  creating  monopolies,  while 
they  are  not  to  be  cut  down  by  hostile  or  strained  constructions,  are 
nevertheless  not  to  be  enlarged  beyond  the  fair  meaning  of  the  lan- 
guage used  {Binghconton  Bridge  Case,  3  Wall.  74),  this  conclusion 
seems,  to  m\-  mind,  so  clear  as  not  to  admit  of  fair  doubt. 

Ithas  been  settled  by  adjudication  that  the  exclusive  right  to  a  toll 


bridge  is  not  infringed  by  the  erection  of  an  ordinary  railroad  bridge 
within  the  limits  over  which  the  exclusiA^e  right  extendecL  {Mohawk 
Bridge  Company  v.  Railroad  Company,  6  Paige,  564;  Bridge  Pro 
prietors  v.  Hohoken  Co.  1  Wall.  116,  150,  and  cases  cited)  ;  and  the 


although  this  wouldhave 


mjure  the  value  of  theJ'rangMse  of  the  bridge  company- 
the  opinion  of  the  presiding  justice  of  this  court  is  plain  from  an 
expression  to  that  effect,  b}'  wav  of  argument,  in  his  opinion  in  the 
Hobohen  Bridge  Case  (1  Wall.  116, 149).  In  that  case  the  legislature 
of  New  Jersey,  in  1790,  authorized  the  making  of  a  contract  with  cer- 
tain persons  for  the  building  of  a  bridge  over  the  Hackensack  river, 
and  by  the  same  statute  enacted  that  it  should  not  be  lawful  for  an}' 
person  to  erect  "  any  other  bridge  over  or  across  the  said  river  for 
ninet3"-nine  3'ears ;  "  and  it  was  held  that  the  railroad  bridge  subse- 
quently authorized,  which  was  so  constructed  as  that  persons  or  prop- 
ert}' could  not  pass  over  it  except  in  railway  cars,  did  not  impair  the 
legal  rights  of  the  bridge  proprietors.  Mr.  Justice  Miller,  in  dis- 
cussing the  question  as  to  what  was  the  meaning  of  the  Act  of  1790 
and  the  contract  with  the  persons  who  built  the  bridge,  says  :  "  There 
is  no  doubt  that  it  was  the  intention  of  those  who  framed  those  two 
documents  to  confer  on  the  persons  now  represented  by  the  plaintiffs 
some  exclusive  privileges  for  ninety-nine  years.  If  we  can  arrive  at 
a  clear  and  precise  idea  what  that  privilege  is,  we  shall  perhaps  be 
enabled  to  decide  whether  the  erection  proposed  by  the  defendants  will 
infringe  it.  In  the  first  place,  it  is  not  an  exclusive  right  to  transport 
passengers  and  property  over  the  Hackensack  and  Passaic  rivers, /or 
there  is  no  prohibition  of  ferries,  nor  is  it  pretended  that  they  would 
violate  the  contract."     (1  Wall.  149.) 

In  conclusion  I  may  remark,  that  I  have  considered  the  very  ingen- 
ious argument  made  by  the  complainant's  counsel  to  show  that  the  mode 
adopted  by  the  defendants  for  transporting  persons  and  property  across 
the  river  is  not  a  ferry,  but  a  flying  bridge,  or  a  floating  bridge,  and 


(2, 


reasoning  upon  which  this  conclusion  rests  shows  that  where  the  charter 
ofthe  bridge  company  is  siTent  upon  the  subject,  its  exclusive  righj; 
would  not  be  invaded  by  the  establishment,  under  legislative  authorit}i 

incidental  effect  to 
That  this  is-\ 
Ln    1 


er 


\r 


294  PARROTT  V.   CITY   OF  LAWRENCE. 

hence  it  is  a  violation  of  the  franchise  of  the  bridge  compan}'.  But 
the  single  boat  which  is  made  to  cross  the  river  b}'  steam-power,  is  not, 
in  ni}'  judgment,  a  bridge  of  an}'  kind,  and  certainh'  not  a  bridge 
within  the  meaning  of  legislation  of  the  State  of  Kansas  on  the  sub- 
ject of  bridges  and  ferries.  It  is  argued,  and  perhaps  with  correct- 
ness, that  the  cit}'  of  Lawrence  transcended  her  powers  in  purchasing 
boats  and  in  assisting  Wilson  to  maintain  his  ferrj^  under  his  license 
from  the  count}-  authorities.  But  if  this  be  granted,  it  falls  far  short 
of  showing  that  the  complainant  is  entitled,  in  consequence,  to  an 
injunction  to  prevent  Wilson  from  running  his  ferry  under  his  license. 
Delahay,  J.,  concurs.  Injunction  dissolved. 


STOCKTON  SAVINGS   BANK  V.   STAPLES.  295 


CHAPTER  VIII. 
POWERS  USUALLY  IMPLIED.* 


SECTION  I. 


Power  to  Acquire  Property  hy 
STOCKTON   SAVINGS   BANK  v.  ^SI^PJjES  et  ux. 

1 893.     98  California,  1 89\2    ^^^  ^ 

Vancltef,  C.     Action  to  quiet  title  to  an  undivided  half  of  a  quarter 
section  of  land  situate  in  the  county  of  San  Joaquin.     The  judgment  \fy-     tr      t 
was  in  favor  of  the  plaintiff,  and  defendants  have  appealed  therefrom,  aL)^    f^fit 
and  from  an  order  denjing  their  motion  for  a  new  trial.    Robert  Coffee,  «    .      ^       ' 
who  is  admitted  to  have  been  the  source  of  title, 'conve3ed  an  undivided*  A'      k/^     ^ 
half  of  the  quarter  section  to  the  defendant  Mary  P.  Staples  in  March,   a^  ;  \ 
1870;    and  it  is  not  disputed  that  she  remained  a  tenant  in  common       lA 
with  him  until  the  2d  day  of  June,  1875,  at  which  time  it  is  claimed  b}'         .  ., 
plaintiff  that  he  ousted  her,  and  thence  maintained  a  continuous  adverse  ^y\ 
possession  of  her  interest  until  September  11,  1888,  when  he  conveyed 
the  whole  quarter  section  to  Ahce  L.  Hudson,  who  continued  the  ad- 
verse possession  until  September  20,   1890,  when  she  conveyed  the 
entire  quarter  section  to  the  plaintiff.     This  action  was  commenced 
October  15,  1890.     The  court  found  all  the  essential  elements  of  a  con- 
tinuous adverse  possession  by  Robert  Coffee,  Alice  L.  Hudson,  and 

1  "  .  .  .  There  is  probably  not  a  single  act  of  incorporation  among  the  thousands  that 
are  to  be  found  in  our  statute  book,  which  does  not  contain  some  grant  of  power,  or  some 
restriction,  which  the  corporation  thereby  created  would  have  taken  or  been  subjected  to, 
if  the  charter  had  been  silent  on  the  subject.  In  the  charter  before  me,  (and  in  every  other 
granted  before  the  Revised  Statutes,  that  I  recollect  to  have  examined,  there  are  similar 
provisions,)  it  is  enacted  that  this  body  corporate  may  have  continual  succession,  and  be 
capaUle  in  law  of  suing  and  being  sued,  and  may  have  a  common  seal;  all  of  which  rights 
were  conferred  by  the  simple  expression,  that  it  was  created  a  body  corporate. 

"...  The  inference  from  the  express  grant  of  this  power  or  right  in  one  charter  or  act, 
that  the  power  is  not  incident  to  another  corporation  of  a  different  class,  is  therefore  very 
feeble." 

Sandford,  Vice-Chancellor,  in  Barry  v.  Merchants'  Exchange  Co.,  (A.  D.  18-44,)  1 
Sandf.  N.  Y.  Chancery,  280,  p.  295.  —  Ed. 

2  Only  part  of  the  opinion  is  given.  —  Ed. 


A 


296 


STOCKTOX   SAVINGS   BANK   V.    STAPLES. 


plaintiff,  except  notice  to  Mary  P.  Staples  of  its  hostile  character,  from 
June  2,  1875,  until  the  commencement  of  this  action;  and  further 
found,  substantial'ly,  that  Mary  P.  Staples  had  actual  notice  of  the  ad- 
verse and  hostile  character  of  such  possession  from  1884  until  the  com- 
mencement of  this  action.  Thus  it  appears  that  the  title  upon  which 
plaintiff  recovered  was  found  to  have  been  acquired  by  prescription. 


f 


■i 


Appellants  contend  that  the  court  erred  in  overruling  their  objections 
to  the  introduction  in  evidence  of  the  deed  from  Mrs.  Hudson  to  plain- 
'  tiff.  The^iwaudjof-thaiibiection  was  that  the  plaintiif^^^jwasjnot  shown 
to  have  the  power  to  pui'chase,  hold,  orj^eceive  said  land,  nor  that  said 
Tand_was  conveyed  to  it  for  any  of  the^  purposes  of  the  corporation." 
There  was  no  evidence  to  show  for  what  purpose  the  corporation  had 
been  organized,  or  what  business  it  was  conducting.  The  court  found 
according  to  the  allegation  of  the  complaint,  not  denied  in  the  answer, 
that  at  all  the  times  stated  the  plaintiff  "was  a  corporation  duly  organ- 
ized and  incorporated  under  and  by  virtue  of  the  laws  of  the  state  of 
California,  and  having  its  office  and  principal  place  of  business  in  the 
cit\'  of  Stockton,  county  of  San  Joaquin,  state  of  California."  Under 
these  circumstances  I  think  it  must  be  presumed  (as  against  the  defend- 
ants, at  least)  that  the  corporation  had  power  to  purchase  and  hold  the 
land.  Mining  Co.  v.  Clarkin,  14  Cal.  545  ;  Evans  v.  Baile}',  66  Cal. 
112  ;  Hagar  v.  Board,  47  Cal.  222  ;  People  v.  La  Rue,  67  Cal.  526  ; 
Spel.  Priv.  Corp.  §§  203,  206.  It  does  not  appear  under  what  statute, 
or  for  what  purpose,  the  plaintiff  was  incorporated,  nor  what  business  it 
was  engaged  in,  nor  for  what  purpose  the  property  was  purchased  or 
used.     In  answer  to  a  similar  objection  in  People  v.  La  Rue,  supra,  it 

Eas  said:  "If  there  was  anything, in  its  charter,  or  the  business  in 
hich  it  was  engaged,  or  in  the  law  under  which  it  was  organized,  in 
ny  manner  abridging  its  right  to  hold  land,  it  does  not  appear  of 
3cord  ;  hence  we  deem  the  objection  untenable."  ^ 

Belcher  C.  and  Temple  C.  concurred. 

For  the  reasons  given  in  the  foregoing  opinion  the  judgment  and 
order  appealed  from  are  affirmed. 

Garoutte  J.,  Paterson  J.,  Harrison  J. 
Hearing  in  Bank  denied. 

1  In  People  v.  Ln  Rue,  the  passage  above  quoted  is  preceded  by  these  sentences. 

It  is  said  by  AngoU  &  Ames  on  Corporations,  at  section  110,  that  "both  by  the 
laws  of  England  and  the  United  States,  there  are  several  powers  and  capacities  which 
tacitly  and  without  any  express  provision  are  considered  inseparable  from  every  cor- 
poration." Kyd  enumerates  five  of  tlicse  as  necessarily  and  inscjtarahly  belonging  to 
every  corporation. 

In  enumerating  them,  the  third  in  number  is  the  right  or  power  "  to  purcliase  lauds 
and  h(dd  XAm-aw  for  the  benefit  of  themselves  and  their  .successors." 

'J'he  pre.suniptiori  is  tliat  the  corporation  in  question  iiad  the  rigiit  to  purchase  and 
bold  the  lauds  by  it  represented. 


YOKK  AND   EEIE   RAILED 


QLI^-  is^EW  YORK   &  ER 


1854.     12  New  York,  12i.i  J" '  r/f  w^ ,lj    ta.  / 

Ejectment  commenced  in  the  supreme  court  in  February,  1847^  ^y 
and  tried  at  the  Orange  county  circuit,  held  by  Mr.  Justice  Edwards  p-  a 
in  October,  1848.  The  jury  found  a  special  verdict,  from  which  it  ^  I 
appeared  that  on  the  first  day  of  July,  1836,  Nicholas  A.  Dederer,  ^  \^. 
being  the  owner  in  fee  simple  of  a  farm  situate  in  Blooming  Grove,  [V* 
Orange  Count}-,  executed  to  the  Hudson  and  Delaware  Railroad  Com- 
pany a  deed,  dated  that  day,  whereby,  in  consideration  of  the  benefits 
and  advantages  to  him  of  the  railroad  proposed  to  be  made  b}'  the 
compan}-,  and  of  one  dollar  to  him  paid  by  the  company,  he  granted  to 
such  compan}'  the  privilege  of  surveying  and  laying  out,  by  its  agents 
and  engineers,  through  his  farm  or  tract  of  land,  the  route  and  site  of 
its  road ;  and  also  granted,  bargained,  sold,  and  conveyed  unto  the 
company  and  its  successors,  so  much  of  the  farm  as  might  be  selected 
and  laid  out  hy  the  company  for  the  site  of  its  railroad,  six  rods  in 
width  across  the  farm  ;  provided  always,  and  such  grant  was  made 
upon  the  express  condition,  that  the  company  should  construct  its 
railroad  within  the  time  prescribed  b}-  the  act  incorporating  the  same. 
That  subsequent!}-,  and  before  the  27th  of  October,  1836,  the  company 
selected  and  laid  out,  for  the  site  of  its  railroad  through  the  farm,  a 
strip  of  land  six  rods  wide  extending  through  the  farm.  That  on  the 
first  of  April,  1844,  the  farm  formerly  owned  b}'  Dederer,  by  virtue  of 
sundry  mesne  conve3'ances,  became  the  property  of  the  plaintiff  in  fee 
simple,  subject  only  to  such  right  as  the  Hudson  and  Delaware  Railroad 
Company-  then  had  to  an_y  portion  thereof  suflTicient  for  the  track  of  its 
road.  That  this  corapan}',  on  the  27th  of  October,  1836,  commenced 
the  construction  of  its  railroad,  but  never  completed  or  put  in  operation 
a  double  or  single  track,  or  an}-  part  thereof.  That  in  pursuance  of 
an  act  of  the  legislature,  entitled  an  act  authorizing  the  New  York  and 
Erie  Railroad  Company  to  construct  a  branch  road,  terminating  at  the 
village  of  Newburgh,  passed  April  8,  1845,  the  Hudson  and  Delaware 
Railroad  Company  were  authorized  to,  and  on  the  14th  of  September. 
1846,  did  execute  to  the  defendant,  the  New  York  and  Erie  Railroad 
Company,  a  deed,  and  thereby  for  a  valuable  consideration  granted, 
bargained,  sold,  and  conveyed  to  the  defendant  and  its  successors, 
the  maps,  charts,  drafts,  surveys,  and  other  personal  property  of  the 
Hudson  and  Delaware  Compan}-,  and  all  its  rights,  privileges,  immuni- 
ties and  improvements,  acquired  under  and  b}-  virtue  of  the  original  act 
of  incorporation,  or  of  an}-  act  amending  it,  or  in  any  other  manner ; 
and  also  all  the  grants,  lands,  and  real  estate  acquired  by  or  ceded  or 
conveyed  to  the  Hudson  and  Delaware  Company,  and  all  its  right,  title, 
and  interest  to  the  same,  and  particularly  the  right  of  way,  granted  by 


K^^ 


6 


1  Arguments  omitted.  —  Ed. 


298  NICOLL   V.   NEW   YORK   AND   EKIE   RAILROAD   CO. 

Dederer  to  the  company-  and  its  successors,  b}'  the  deed  from  him  above 
mentioned.  That  when  this  suit  was  commenced,  on  the  25th  of  Feb- 
ruary, 1847,  the  defendant  had  not  completed  or  put  in  operation  its 
branch  road  terminating  at  Newburgh,  or  an}'  part  of  it,  nor  had  it 
done  so  when  the  cause  was  tried.  That  on  the  2d  of  December,  1846, 
the  defendant  entered  upon  the  strip  of  land  six  rods  wide,  mentioned 
in  the  deed  from  Dederer  and  laid  out  by  the  Hudson  and  Delaware 
Compan}'  through  his  farm  as  the  site  of  its  road,  and  ejected  the 
plaintiff  therefrom,  and  that  the  defendant  was  still  in  the  possession 
thereof.  The  suit  was  brought  to  recover  possession  of  this  strip  of 
land  from  the  defendant. 

The  justice  before  whom  this  cause  was  tried  ordered  judgment  upon 
the  special  verdict  in  favor  of  the  plaintiff.  The  defendant  appealed, 
and  tl)e  supreme  court,  sitting  in  general  term  in  the  3d  district,  reversed 
the  judgment  and  gave  judgment  in  favor  of  the  defendant.  {See  12 
Barb.,  460.)     The  plaintiff  appealed  to  this  court. 

E.  L.  Fanche)\  for  appellant. 

T.  M.  Kissocl;  for  respondent. 

Parker,  J.  The  grant  from  Dederer  to  the  Hudson  and  Delaware 
Railroad  Compan}-,  bearing  date  the  first  day  of  Jul}',  1836,  was  made 
to  that  company  "  and  their  successors."  Under  that  grant,  there  cau 
be  no  doubt  the  Hudson  and  Delaware  Railroad  Compan}'  took  a  fee. 
The  words  of  perpetuity  used  would  have  been  sufficient  to  describe  a 
fee,  even  under  the  most  strict  requirements  of  the  common  law. 

The  cpni^jany  had  ample  power  to  purchase  lands.  It  was  a  power 
incident  at  common  law  to  all  corporations,  unless  they  were  specially 
restrained  by  their  charters  or  by  statute.  (2  Kent,  281  ;  Co.  Litt., 
4Tir,"300  h;  1  Kyd  on  Corp.,  76,  78,  108, 115  ;  3  Pick.  239.)  And  in 
this  case  the  power  was  expressl}'  conferred  by  the  9th  section  of  the 
charter  (/iSess.  ia'MJS  0/1835,  ^J.  113);  and  by  the  16th  section  there 
were  given  to  it  the  general  powers  conferred  upon  corporations 
'J  R.  S.  731),  one  of  which  is  that  of  holding,  purchasing  and  con- 
veying such  real  estate  as  the  purposes  of  the  corporation  may  require. 
But  if  no  words  of  perpetuity  had  been  used,  the  grantor  owning  a  fee, 
the  company  would  have  taken  a  fee  ;  for  the  statute  is  now  impera- 
tive, that  every  grant  shall  pass  all  the  estate  or  interest  of  the  grantor, 
unless  the  intent  to  pass  a  less  estate  or  interest  shall  appear  by 
express  terms  or  be  necessarily  implied  in  the  terms  of  the  grant. 
(1  B.  S.,  748,  §  1.) 

But  it  is  objected  that  because,  by  the  act  of  incorporation,  there 
was  given  to  it  only  a  term  of  existence  of  fifty  years  (Lmvs  0/1835, 
/>.  110,  §  1),  therefore  the  grant  sluill  be  deemed  to  have  conveyed  an 
estate  for  years,  and  not  in  fee.  The  unsoundness  of  that  position  is 
easily  shown.  It  was  never  yet  held,  that  a  grant  of  a  fee  in  express 
terras  could  bo  restricted  by  the  fact  that  the  grantee  had  but  a  limited 
term  of  existence.  If  it  were  so,  a  grant  could  never  be  made  to  an 
indivifhi.'il  ill  foe,  because,  in  his  eurthl}'  existence,  he  is  not  immortal. 


NICOLL   V.   NEW   YORK   AND   ERIE   RAILROAD   CO.  299 

Cnder  such  a  rule,  a  man  could  never  bu}'  a  greater  interest  in  a  farm 
than  a  life  estate.  It  would  follow  that  all  estates  would  be  life  estates, 
except  those  held  by  perpetual  corporations.  The  intent  of  parties, 
fully  expressed  in  a  deed,  would  avail  nothing,  but  all  grants  would  be 
measured  by  the  mortality  of  the  grantee.  It  is  needless  to  follow  out 
the  proposition  further  to  show  its  absurdity. 

It  is  not  to  the  parties  to  a  grant,  but  to  its  terms,  that  we  look  to 
ascertain  the  character  and  extent  of  the  estate  conveyed.     Such  was 
the  rule  at  common  law,  and  is  still  b}-  statute.     (1  H.  jS.,  748,  §  1.) 
The  change  made  by  the  statute  favors  the  grantee,  where  there  are  no/ 
express  terms  in  the  graut,  by  the  presuming  the^rantgr  intended  to| 
convey  all  his  estate. 

At  common  law,  it  was  only  where  there  were  no  express  terms, 
defining  the  estate  in  the  conveyance,  that  the  terra  of  legal  existence 
of  the  grantee  was  deemed  to  be  the  measure  of  the  interest  intended 
to  be  conveyed.  Thus,  words  of  perpetuit\-,  such  as  "  heirs  or  suc- 
cessors," were  necessary  to  convey  a  fee.  A  grant  to  an  individual, 
without  such  words,  conve3-ed  onl\-  a  life  estate.  For  the  same  reason 
a  grant,  without  such  words,  to  a  corporation  aggregate  (  Vifiers  Ab., 
Estate^  L.  3),  or  to  a  mayor  or  commonalty  {ih,,  3),  conveyed  a  fee, 
because  the  grantees  were  perpetual.  The  grantee  named  in  such  case 
having  a  perpetual  existence,  the  estate  could  not  have  been  enlarged 
by  words  of  succession. 

But  this  is  now  changed  by  our  Revised  Statutes.  Words  of  inheri- 
tance or  succession  are  no  longer  necessarj',  and,  in  their  absence,  we 
look,  not  to  the  term  of  existence  of  the  grantee  to  ascertain  the  estate, 
))ut  to  the  amount  of  interest  owned  by  the  grantor  at  the  time  he 
conve^'ed.  All  his  estate  is  deemed  to  have  passed  by  the  grant. 
(1  R.  S..  748,  §  1.) 

All  this  is  applicable  onl^'  to  cases  where  the  grant  is  silent  as  to 
the  extent  of  interest  conve^'ed.  Where  that  interest  is  expressly 
described,  as  in  this  case,  the  law  never,  either  before  or  since  our 
/evision,  did  violence  to  the  intent  of  the  parties,  by  cutting  down  the 
estate  agreed  to  be  conveyed  to  the  measure  of  the  grantee's  term  of 
existence.  It  has  long  been  one  of  the  maxims  of  the  law,  that  "  no 
implication  shall  be  allowed  against  an  express  estate  limited  by  express 
words."     {Vinefs  Ah.,  Implication^  A.,  5  ;  1  Sulk.^  236.) 

1^  It  is  erroneous  to  say  that  an  estate  in  fee  cannot  be  fully  enjoyed 
by  a  natural  person,  or  1)\'  a  corporation  of  limited  duration.  It  is  an 
enjoyment  of  the  fee  to  possess  it,  and  to  have  the  full  control  of  it, 
including  the  power  of  alienation,  by  which  its  full  value  may  at  once 
be  realized. 
It  is  well  settled  that  corporations,  though  limited  in  their  duration, 


may  purchase  aiKniold  a  fee,  and  the}*  ma\'  sell  such  real  estate  wheQ- 
ever  they  shall  find  it  no  longer  necessary  or  convenient.  (5  Denio, 
38y  ;  2  l' rest 071  on  Estates,  50.)  Kent  saj's:  "Corporations  have  a 
fee  simple  for  the  purpose  of  alienation,  but  they  have  only  a  deter- 


300  NICOLL   V.   NEW   YOEK   AND   ERIE   RAILROAD   CO. 

minable  fee,  for  the  purpose  of  enjoyment.  On  the  dissolution  of  the 
corporation,  the  reverter  is  to  the  original  grantor  or  his  heirs  ;  ^  but  the 
grantor  will  be  excluded  by  the  alienation  in  fee,  and  in  that  wa}' 
the  corporation  may  defeat  the  possibility  of  a  reverter.  (2  Kent,  282  ; 
\5  Denio,  389  ;  1  Comst.  M.  509.)  Large  sums  of  money  are  accord- 
ingly expended  bj^  railroad  companies  in  erecting  extensive  station 
houses  and  depots,  and  by  banking  corporations  in  erecting  banking 
houses,  because,  holding  the  land  in  fee,  the}'  may  be  able  to  reimburse 
themselves  for  the  outlay  by  selling  the  fee  before  the  termination  of 
their  corporate  existence. 

The  Hudson  and  Delaware  Eailroad  Company  then,  b}'  their  grant 
from  Dederer,  took  a  title  in  fee,  but  it  was  a  fee  upon  condition,  there 
being  in  the  grant  an  express  condition  that  the  road  should  be  con- 
structed by  the  company  within  the  time  prescribed  b}'  the  act  of  incor- 
poration. This  was  not  a  condition  precedent,  as  was  argued  b}'  the 
plaintiff's  counsel,  but  a  condition  subsequent. 

Kent  says  (4  Kent,  129;  :  ''Conditions  subsequent  are  not  favored 
in  the  law  and  are  construed  strictly,  because  the}'  tend  to  destroy 
estates."  They  can  only  be  reserved  for  the  benefit  of  the  grantor 
and  his  heirs,  and  no  others  can  take  advantage  of  a  breach  of  them. 
(4  Kent  Com.  122,  127;  2  Black.  Com.,  154.)  The  plaintiff  took  his 
deed  of  the  farm  on  the  first  of  April,  1844.  This  was  one  year  before 
the  expiration  of  the  time  for  constructing  the  road,  and  two  years 
before  the  Hudson  and  Delaware  Railroad  Company  conveyed  to  the 
defendants.  At  that  time,  therefore,  there  had  been  no  breach  of  the 
condition  ;  on  the  contrary,  the  right  of  the  company  was  expressly 
recognized  and  reserved  in  the  deed.  Certainly,  then,  Dederer,  when 
he  conveyed,  had  no  assignable  interest. 

..  ••>••• 

[The  concurring  opinion  of  Gardiner,  C.  J.,  is  omitted.] 

Judgment  affirmed. 

^  Thip  view  is  now  rejected.  See  Bacon  v.  Eohertson,  post ;  also  Gray  on  the  Rule 
against  Perpetuities,  §§  44-51 ;  and  2  Kent's  Cora.  307,  note  l>.  —  Ed. 


■\. 


\ 


h 


HOWARD. 


Power  to  Acquire  Pro'perty  hy  Devise, 


am  Bostwick,  P  \^  ^  iP"   /V 
!  will.     The  residue,  both^/^V  j^    /■  y^ 
be  applied  for  the  benefit    vf^  ^  [^ 
daughter  should  die  leav-  ^    ^,  1/  o-p    ^''  ' 


WHITE   V.   HOWARD/^  ^  ^1\^       i.J^*.J.V . 

r    jjy        1871.     38  Conn.  342.1         "jL  V^  /    1/ 

5iLL  IN  EQUITY  b}'  thc  exccutors  of  the  will  of  "William 
praying  for  advice  in  the  construction  of  the  will.     The  residue,  both^^»/^ 
real  and  personal,  was  devised  to  trustees,  to  '  "    ^  "     "     '        "'        '^ 

of  testator's  daughter  during  her  life.     If  the  vict^.^u..^^  o^v^un-i  «.iic  icav-  , 
ing  no  husband  or  issue,  a  certain  part  of  the  trust  fund  was  to  be  B^  ^      . 
divided  between  six  societies,  of  which  the  American  Tract  Societ\-,  a  \i   t/T     < 
New  York  corporation,  was  one.     The  daughter  died,  leaving  neither  ^  n 
husband  nor  children.     Counsel  for  the   heirs-at-law  of  the  testator 
contend  that  the  American  Tract  Societ}'  is  incapable  of  taking  real 
estate  in  Connecticut  b}'  devise,   and  that  the  residuary  clause  must 
fail  so  far  as  it  attempts  to  devise  real  estate  iu  Connecticut  to  that 
corporation. 

H.  White  and  d.  S.  Beach,  for  petitioners. 

Doolittle  and  L.  N.  Bristol,  for  heirs  of  testator. 

D.  B.  Beach,  for  heirs  of  daughter. 

J.  W.  Edmunds,  Cook,  Campbell,  G.  N.  Titus,  T.  Westervelt, 
A.  L.  Edwards,  S.  E.  Baldwin,  for  various  Societies. 

Foster  J. 

It  is  asserted  that  the  American  Tract  Society  can  take  neither  real 
or  personal  property  under  this  will.  That  it  cannot  take  real,  because 
its  charter  of  incorporation,  granted  by  the  state  of  New  York,  does 
not  confer  the  power  of  taking  by  devise  ;  that  it  cannot  take  personal, 
because  the  charter  provides  that  the  net  income  of  said  society  arising 
from  real  and  personal  estate  shall  not  exceed  the  sum  of  610,000  annu- 
ally. This  limit  it  is  claimed  has  been  reached  and  exceeded,  and  so 
the  capacity  of  the  society  to  take  property  is  exhausted.  This  society 
was  incorporated  by  a  special  act  of  the  legislature  of  the  state  of  New 
York,  passed  May  26,  1841.  The  third  section  of  its  charter  provides 
that  the  corporation  shall  possess  the  general  powers,  and  be  subject 
to  the  provisions,  contained  in  title  3d  of  chapter  18  of  the  first  part  of 
the  revised  statutes,  so  far  as  the  same  are  applicable  and  have  not 
been  repealed.  The  title  and  chapter  referred  to  enumerate  the  powers 
of  corporations,  and  the  clause  which  bears  directly  upon  this  subject 
reads  thus:    "to  hold,  purchase,  and  convey  such  real  and  personal 

^  Statement  abridged.  Onl\'  so  much  of  the  opinion  is  given  as  relates  to  one 
point.     Arguments  omitted. —  Ed. 


^/302 


J 


WHITE   V.   HOWAED. 


\y  \   I  estate  as  the  purposes  of  the  corporation  shall  require,  not  exceeding 
^0^  Ithe  amount  limited  in  its  charter."     This  charter  was  amended  by  the 

legislature  of  New  York  on  the  31st  of  March,  1866,  but  as  this  was 
after  the  death  both  of  the  testator  and  of  his  daughter,  that  amend- 
ment need  not  be  particularly  considered,  as  it  cannot  materially  affect 
the  question  involved.  Now  it  is  manifest  that  this  corporation  has 
express  power  by  its  charter  to  hold,  purchase  and  convey  real  and  per- 
sonal estate,  for  specified  purposes  and  to  a  limited  amount.  There  is 
no  express  power  to  take  b}'  devise,  nor  is  the  power  so  to  take 
expressl}'  prohibited.  "We  suppose  there  could  be  no  doubt  that  this 
corporation  could  take  b}'  devise  in  New  York,  if  the  Statute  of  Wills 
of  that  state  empowered  corporations  generally  to  take  in  that  manner. 
The  English  Statute  of  Wills,  passed  in  the  time  of  Henry  VIII, 
authorized  ever}'  person  having  a  sole  estate  in  fee  simple  of  any 
manors  «&c.,  "to  give,  dispose,  will,  or  devise,  to  any  person  or  per- 
sons, except  to  bodies  jyolitic  and  corporate,  by  his  l<ist  will  and  testa- 
ment in  writing,  or  otherwise  by  an}'  acts  lawfully  executed  in  his 
lifetime,  all  his  manors  &c.,  at  his  own  will  and  pleasure,  any  law,  stat- 
ute, custom,  or  other  thing  theretofore  had,  made,  or  used  to  the  con- 
trary notwithstanding."  Thus  corporations,  bj'  express  exception  in 
these  statutes,  were  not  enabled  to  take  lands  directl}-  by  devise  in 
England,  and  the  Statute  of  Wills  of  the  state  of  New  York  makes  the 
same  exception.  By  that  statute  it  is  enacted,  that  all  persons,  except 
idiots,  persons  of  unsound  mind,  married  women,  and  infants,  may 
devise  their  real  estate  by  a  last  will  and  testament  duly  executed  c&c. 
Y'-  Such  devise  may  be  made  to  ever}'  person  capable  by  law  of  holding 
/real  estate ;  but  no  devise  to  a  corporation  shall  be  vahd,  unless  such 
/corporation  be  expressly  authorized  by  its  charter,  or  by  statute,  to 
I  take  by  devise."  3  N.  Y.  Rev.  Stat,  138,  (5th  ed.).  This  corpora- 
tion  therefore,  prior  to  the  recent  amendment  of  its  charter,  could  not 
take  by  devise  in  New  York,^  and  such  is  the  decision  of  their  Supreme 
Court  and  Court  of  Appeals  in  this  very  case.  And  so  it  is  earnestly 
contended  that  it  cannot  take  by  devise  in  Connecticut.  We  yield 
readily  to  the  doctrine  laid  down  in  this  connection  in  regard  to  cor- 
porations ;  indeed  it  is  too  thoroughly  established  to  be  doubted  or 
questioned.  That  doctrine  perhaps  is  nowhere  better  stated  than  in 
the  case  oX Heady.  Providence  Ins.  Co.,  2  Cranch,  127,  by  the  then 
illustrious  head  of  the  Supreme  Court  of  the  United  States,  the  late 
Chief  Justice  Mausiiall.  "It  [a  corporation]  may  correctly  be  said 
to  be  precisely  what  the  incorporating  act  has  made  it ;  to  derive  all  its 
powers  from  that  act,  and  to  be  capable  of  exerting  its  faculties  only 
in  the  manner  which  that  act  authorizes."  Now  this  corporation 
stands  at  the  bar  of  this  court  claiming  the  right  to  take  lands  within 

1  Corporations  "always  had  the  right  at  common  law  to  take  personal  property 
hj)  bequest ;  .  .  .  and  I  entertain  no  doubt  that  they  have  that  riglit  under  our  stat- 
utes." Wriqiit,  J.,  in  Sherwood  v.  Am.  Bible  Society,  4  Abbott,  N.  Y.  App.  Dec.  227. 
|i  iilil.  —  Kd. 


WHITE   V.   HOWARD. 


303 


cmr  territory  by  devise.  It  is  clothed  with  such  powers  as  have  been 
conferred  by  its  charter.  Those,  a  portion  of  them,  as  we  have  seen, 
are  to  hold,  purchase,  and  convey  real  estate.  It  is  not  expressly 
authorized  to  take  by  devise,  nor  is  it  prohibited  from  so  taking 
it  then  take  b}'  devise  ?  Xot  in  New  York,  as  we  have  seen.  There- 
fore not  in  Connecticut,  say  the  counsel  for  the  heirs  at  law,  for  being 
a  New  York  corporation,  and  by  the  law  of  that  state  devoid  of  power 
to  take  by  devise,  no  argument  is  needed  to  show  its  inability  to  take- 
by  devise  in  Connecticut.  This  conclusion  is  too  hastily  drawn.  If 
the  inabilit}-  to  take  b}'  devise  arose  out  of  a  prohibitory-  clause  in  the 
charter,  the  conclusion  would  be  legal  and  logical.  But  the  inability' 
does  not  so  arise.  There  is  no  prohibition  in  the  charter ;  the  inability 
is  created  by  the  New  York  Statute  of  Wills,  expressly  excepting  cor- 
porations from  taking  b}-  devise.  Now  this  corporation  brings  with  it 
from  New  York  its  charter,  but  it_does  not  bring  with  it  the  New  York 
Statute  of_VVills  and^nnot  bring  it  to  be  recognized  as  law  within 
this  jurisdiction.  There,  is  an  obvious  distinction  between  an  incapa- 
city to  take  createa_b^  the  statute  oT  a  state,  which  is  local,  and  a 
prohibitory  clause  in  the  charter,  which  everywhere  cleaves  to  the  cor- 
poration.  The  reasoning  is  fallacious,  not  recognizing  this  distinction. 
The7e  being  no  prohibition  in  the  charter,  and  the  power  to  hold  and 
convey  real  estate  being  expressly  given,  we  must  look  to  our  own 
statutes  and  laws,  and  not  to  those  of  New  York,  to  determine  whether 
or  not  this  corporation  can  take  by  devise  in  Connecticut. 

The  state  of  New  York  has  partiall}'  adopted  the  policy  of  England 
in  regard  to  devises  to  corporations,  though  the  English  statutes,  usu- 
ally called  the  statutes  of  mortmain,  have  not  been  reenacted  in  that 
state.  Those  statutes  began  with  Magna  Charta,  in  9  Henr3'  III, 
and  embrace  a  succession  of  acts  down  to  and  including  9  George  II. 
They  were  intended  to  check  the  ecclesiastics  of  the  Roman  church 
from  absorbing  in  perpetuity,  in  dead  clutch,  all  the  lands  of  the  king- 
dom, and  so  withdrawing  thera  from  public  and  feudal  charges.  Shel- 
ford  on  Mortmain,  2.  By  the  statute  of  43  Eliz.,  ch.  4,  known  as  the 
Statute  of  Charitable  Uses,  lands  may  be  devised  to  a  corporation  for  a 
charitable  use,  and  the  court  of  chancery  will  support  and  enforce  such 
devises.  Whether  a  court  of  equity  has  power  to  execute  and  enforce 
such  trusts,  as  charities,  independent  of  an}-  statute,  is  a  question  which 
has  been  much  discussed,  and  ver}-  high  authorities  can  be  quoted  both 
in  favor  and  against  the  exercise  of  such  a  power.  We  think  the  latter 
and  better  opinion  to  be  in  favor  of  an  original  and  necessary  jurisdiction 
in  courts  of  equity  as  to  devises  in  trust  for  charitable  purposes,  when 
the  general  object  is  sufficiently  certain,  and  not  contrary  to  any  positive 
rule  of  law.  It  is  unnecessary  however  to  decide  this  question,  for  in 
this  state  we  have  no  statutes  of  mortmain  ;  no  exception  in  our  Stat- 
ute of  Wills  prohibiting  corporations  from  taking  by  devise  ;  aliens, 
resident  in  this  state  or  in  any  of  the  United  States,  may  purchase, 
bold,  inherit,  or  transmit  real  estate,  in  as  full  and  ample  a  manner  as 


\' 


^¥ 


304  WHITE   V.    HOWARD. 

native  born  citizens ;  their  wives  are  entitled  to  dower ;  their  children 
and  other  lineal  descendants  may  inherit ;  and  we  have  besides  a  stat- 
ute, passed  in  our  colonial  days  in  1702,  in  effect  reenacting  the  statute 
of  43  Elizabeth,  and  containing  indeed  more  liberal  and  comprehensive 
provisions  to  sustain  devises  of  this  description  than  are  contained  in 
the  43  Elizabeth.  That  act  provides,  that  "  all  lands,  tenements,  or 
other  estates,  that  have  been  or  shall  be  given  or  granted  by  the  Gen- 
eral Assembly,  or  any  town  or  particular  person,  for  the  maintenance 
of  the  ministry  of  the  gospel,  or  of  schools  of  learning,  or  for  the  relief 
of  the  poor,  or  for  an}-  other  public  and  charitable  use,  shall  forever 
remain  to  the  uses  to  which  they  have  been  or  shall  be  given  or  granted, 
according  to  the  true  intent  and  meaning  of  the  grantor,  and  to  no 
other  use  whatever." 

We  therefore  entertain  no  doubt  that  the  American  Tract  Society 
can  take  b}-  devise  in  this  state.  As  to  the  other  objection,  that  hav- 
ing an  income  greater  in  amount  than  is  allowed  by  its  charter  it  has 
exhausted  its  power  to  take,  it  suffices  to  say  that  no  such  fact  is 
found  by  the  very  competent  committee  whose  report  is  on  the  record.^ 
•  ••••••• 

1  As  to  the  alleged  "distinction  between  acts  of  the  foreign  corporation,  which  the 
charter  does  not  authorize,  or  which  it  may  forbid,  and  acts  which  upon  the  face  of  the 
charter  are  authorized,  but  which  the  general  laws  of  the  foreign  state  may  prohibit:  " 

"•  •  •  it  is  submitted  that  the  distinction  indicated  above  is  neither  convenient  nor  cor- 
rect on  principle.  It  is  not  convenient,  for  nowadaj'S  the  vast  majority  of  corporations 
are  incorporated  under  general  statutes,  and  have  no  'charters'  properly  speaking;  so  the 
distinction  is  fast  losing  its  applicability.  And  the  distinction  seems  incorrect  on  prin- 
ciple ;  it  being  a  curious  comity  which  will  recognize  in  corporations  powers  which,  under 
their  own  constitutions,  they  do  not  possess.  The  constitution  of  a  corporation  is  composed 
of  all  the  laws  affecting  the  corporation;  and  embraces  just  as  much  statutes  affecting  cor- 
porations generally,  as  the  particular  statute  —  enabling  act  or  special  charter — imme- 
diately under  which  the  corporation  was  organized. 

"The  correct  distinction  seems  rather  as  follows:  li  the  validity  of  an  act,  forbidden  by 
the  legislature  of  the  state  incorporating  the  foreign  corporation  on  whose  behalf  or  in 
regard  to  which  the  act  was  done,  is  to  be  passed  on  by  the  court  of  another  state,  by  the 
true  rule  of  comity  the  court  should  give  effect  to  the  prohibition  according  to  the  intent 
of  the  legislature  enacting  it.  If  the  prohibition  were  apparently  intended  to  inhere  in  the 
cor[)oration,  and  to  apply  to  all  its  acts  wherever  done,  the  court  should  give  effect  to  it. 
But  if  it  was  rather  part  of  the  local  policj^  of  the  state  enacting  it,  of  local  policy  which 
there  is  no  reason  for  extending  beyond  state  limits,  nor  even  any  reason  for  supposing 
the  legislature  would  have  desired  to  see  thus  extended,  then  the  prohibition  should  not 
be  enforced  by  the  courts  of  other  states,  at  least  in  regard  to  acts  and  matters  outside  of 
the  state  enacting  it." 

Taylor  on  Corporations,  3d  ed.,  ss.  390,  391. 
I  "  The  main  objection  to  allowing  corporations,  in  the  State  of  their  creation,  to  hold 
lands  not  occupied  and  used  in,  or  necessary  to,  the  exercise  of  their  franciiiscs,  is  based 
ui)on  the  idea  that  it  might  be  prejudicial  to  the  i)ublic  interest  of  that  State,  to  allow  cor- 
liorations  to  become  speculators  in  lands,  or  to  hold  tiiem  in  large  amounts,  kee))ing  them 
out  of  market  for  an  unreasonable  time,  and  preventing  improvement,  &c.;  but  this  ob- 
jection could  not  well  be  urged  in  the  State  of  their  creation,  against  their  holding  lands 
in  other  States,  taken  in  payment  of  debts  justly  due  them,  accruing  in  the  course  of  their 
legitimate  business.  The  State  in  which  the  land  lies  might,  if  it  chose,  object  ;  but  the 
State  of  their  creation  could  not  be  interested  in  raising  such  objection,  but  so  far  as  it 
was  interested  at  all,  it  would  seem  to  be  in  favor  of  sustaining  the  right  ;  .  .  ." 

CiiHisTiANCY,  C.  J.,  in  Thompson  v.  Waters,  (A.  D.  1872,)  25  Michigan,  214,  p.  220.  — 
Ed. 


AURORA,  &c.  SOCIETY   V.  PADDOCK.  305 


SECTION  III. 

Power  to  Alienate.''-    Power  to  Mortgage. fjjf/\ 

1  Kyd  on  Corporations,  1st  ed.,  a.  d.  1793,  pp.  107,  108.  Hav 
ing  considered  the  capacity  of  corporations  to  take  property,  we  are 
naturally  led,  in  the  next  place,  to  treat  of  the  power  they  have  to 
dispose  of  it. 

All  civil  corporations,  such  as  the  corporations  of  mayor  and  com- 
monalty, bailiffs  and  burgesses  of  a  town,  or  the  corporate  companies 
of  trades  in  cities  and  towns,  and  all  corporations  established  by  act 
of  parliament  for  some  specific  purpose,  unless  expressly  restrained  by 
the  act  which  establishes  them,  or  by  some  subsequent  act,  have,  and 
always  have  had  an  unlimited  control  over  their  respective  properties, 
and  may  alienate  in  fee,  or  make  what  estates  they  please  for  years, 
for  life,  or  in  tail,  as  fully  as  any  individual  may  do  with  respect  to 
his  own  property.  * 


AURORA,  &c.  SOCIETY  v.  PADDOCE; 

1875.     80  J llinois,  264.2  jjju  \^^jy  u  / 

Craig,  J.  This  was  a  bill  in  equity,  brought  by  appellees,-  i 
to  foreclose  a  mortgage  executed  by  the  Aurora  Agricultural  andl/*^ 
Horticultural  Society  of  Aurora,  on  the  28th  day  of  December,  1870, 
to  secure  the  payment  of  $6000  loaned  by  John  R.  Coulter  to  the 
society.  The  court,  on  a  hearing  of  the  cause,  rendered  a  decree  direct- 
ing a  sale  of  the  mortgaged  premises  in  satisfaction  of  the  mortgaged 
debt. 

The  society  has  prosecuted  this  appeal,  and  in  order  to  obtain  a 
reversal  of  the  decree,  it  is  insisted  by  the  counsel  for  appellant : 

First  —  That  the  society  had  no  power  whatever  to  mortgage. 

Second  —  That  the  mortgage  in  question  was  wholly  unauthorized. 

The  appellant  was  organized  on  the  6th  day  of  March,  1809,  under]/'         •  J^ 
an  act  approved  Feb.  15,  1855,  which  authorized  the  incorporation  of  f  ^f]  ^  (>r^ 
agricultural  societies.     (Gross'  Statutes,  1869,  page   119.)     By   the 
third  section  of  the  act,  the  society  was  made  a  body  corporate,  with' 
power  to  sue  and  be  sued,  to  acquire  and  hold  real  estate  not  exceed- 1 
ing  five  hundred  acres,  to  construct  the  necessary  improvements  and] 

1  As  to  involuntarl}-  alienation  see  post,  chapter  as  to  rights  and  remedies  of  creditors 
against  corporate  property  and  franchises.  —  Ed. 

2  Statement,  and  part  of  opinion,  omitted.  —  Ed. 


V 


306 


MOKISETTE   V.    HOWAKD. 


buildings  for  its  purpose,  to  have  and  employ  capital,  machinery,  live 
stock,  etc.,  not  exceeding  in  value  $10,000. 

While  it  is  true,  no  section  of  the  act  confers  direct  authority  upon 
the  society  to  sell  or  mortgage  its  property,  except  upon  a  dissolution 
of  the  corporation,  yet  the  act  does  not  prohibit  or  restrict  the  society 
from  selling  or  giving  a  mortgage  upon  its  real  estate.  The  power  to 
mortgage,  wjieii  not  expressly  given  or  denied,  must  be  regarded  as 
anincident  to  the  power  to  acquire  and  hold  real  estate  and  make 
contracts. 

/  We  understand  it  to  be  the  common  law  rule,  that  corporations 
have  an  incidental  right  to  alien  or  dispose  of  their  lands  and  per- 
sonal property,  unless  specially  restrained  by  the  act  under  which 
they  are  organized  or  by  statute. 

It  is  said  in  Angell  &,  Ames  on  Corporations,  p.  153  :  "■  Independent 
of  positive  law,  all  corporations  have  the  absolute  jus  dlsjjonendi  nei- 
ther limited  as  to  objects  nor  circumscribed  as  to  quantity."  The 
same  doctrine  is  clearly  laid  down  by  Kent,  vol.  2,  page  280. 

We  are,  therefore,  of  opinion,  as  the  society  was  not  prohibited 
from  mortgaging  its  lands,  it  possessed  the  power  to  do  so  a§>c|m  in- 
cident to  the  power  to  purchase  and  hold  real  estate  and  ms^le  con- 
tracts. 


:/-/h 


K 


a/^      >,  ^J^OHNSTOx,  J.     This  action  was  brought  by  W.  H.  Howard,  trus- 
)  i>^    -r-tCe.  to  recover  the  possession  of  a    stock  of   merchandise  from  A. 


M^-J^ 


r 

OHNSTOx,  J.     'inis  action  wa?  orougnt  by 
e,  to  recover  the  possession  of  a    stock  of 
^    ^lorisette,  sheriff  of  Cloud  county,  who  had  seized  it  as  the  property 
(  ^On       j(r\*^^  ^^^  Clyde  iNIercantile  Company,  at  the  instance  of  the  creditors  of 
Vj      XT^  that  company.     After  the  action  was  begun,  Fannie  L.  Holman  inter- 
vened, and  alleged  that  she  had  previously  purchased  and  paid  for 
the  merchandise,  and  was  the  actual  owner  and  entitled  to  the  posses- 
■  sion  of  the  same.     The  creditors  of  the  mercantile  company,  through 
the  sheriff,  claimed  that  the  sale  of  the  goods  to  Holman  was  fraudu- 
nt  as  against  them,  and  was  made  by  the  company  without  power  or 


V^h  f\ 


IK 


'r  A- 


J;/^authority  lawfully  exercised,  and  therefore  was  invalid.      The  trial 


resulted  in  a  verdict  in  favor  of  the  purchaser,  and  is,  in  effect,  a 
ling  that  the  sale  was  made  in  good  faith  and  for  a  sufficient  con- 
'sideration.     The  honesty  of  the  transaction  was  decided  by  the  jury, 
^j^-     xf-'and  is  no  longer  open  to  question  ;  but  there  ig  a  contention  that  the! 
\t^ ^    /^r        m^cantile  company  had  no  power  to  transfer  property,  and  that,  if  it/ 

a  legal  and  effective  manner.) 
ood  will  wliich  constituted  the 


^.}lad,~the  j)0\vei'' was  not  exercised  in  r 
ifT  rpj^g  stock  of  goods,  business,  and  goo 


■f\ 


MOEISETTE   '0.    HOWAED. 


307 


entire  assets  of  the  corporation,  were  sold  to  Holman  for  $3000  in 
money,  payable  in  installments,  and  also  for  certain  real  estate  in 
Kansas  City,  Mo.,  known  as  the  "Kamsey  Flats,"  upon  which  there 
was  a  mortgage.  It_2S__argued  that  the  transfer  of  the  entire  assets"^ 
and  good  will  of  the  corporation  would  disable  it  from  continuing  the  j  " « j 
bjisinesajgrjvliich  it  was  organized,  and  that  the  attempt  to  do  so  isjl-i/'^ 
ultra  vires  and  void.  Itjs^ls^jcontended  that  the  acceptance  of  reaT 
])roperty  in  consideration  of  the  transfer,  as  well  as  holding  of  the  j 
same,  are^no.t  within  the  purposes  for  which  the  mercantile  company 
^\:as  organized.  Our  statute,  which  is  only  declaratory  of  the  commoiT^ 
law,  provides  that  a  corporation  shall  not  employ  its  stock,  means, 
asse-S,  or  other  property  for  any  other  purpose  than  to  carry  out  the 
objects  for  which  it  was  created.  Gen.  St.  1899,  §  1243.  The  mer- 
cantile company  was  organized  for  the  purpose  of  buying  and  selling 
merchandise  at  retail,  but  that  does  not  preclude  the  company  from 
disposing  of  its  property  and  closing  out  its  business,  if  it  is  done  in 
good  faith  and  not  for  the  purpose  of  delaying  or  defrauding  its  cred- 
itors. State  V.  Western  Irrigating  Canal  Co.,  40  Kan.  96,  19  Pac.  349. 
Counsel  cites  a  number  of  cases  to  the  effect  that  a  corporation  cau 
not  abdicate  its  corporate  functions  or  relieve  itself  from  carrying 
out  the  object  of  its  creation  by  a  transfer  of  its  entire  property,  or 
by  otherwise  disabling  itself  from  performing  corporate  duties.  The 
doctrine  of  these  cases  is  applicable  to  corporations  established  for 
quasi  public  purposes,  such  as  railroads  and  other  companies  having 
the  right  of  eminent  domain  and  other  extraordinary  privileges ;  but 
it  has  no  application  to  corporations  of  a  strictly  private  character 
like  the  one  in  question.  Holmes  &  Griggs  Mfg.  Co.  v.  Holmes  & 
Wessell  Metal  Co.,  127  I^.  Y.  252,  27  N.  E.  831 ;  Treadwell  v.  Manu- 
facturing Co.,  7  Gray,  393  ;  Howe  v.  Carpet  Co.,  16  Gray,  493  ;  Hodges 
V.  Screw  Co.,  1  R.  I.  312 ;  Evans  v.  Heating  Co.,  157  Mass.  37,  31  X. 
E.  698  ;  27  Am.  &  Eng.  Enc.  Law,  387.  The  mercantile  company 
exercises  no  powers  of  a  public  nature,  and  a  sale  of  its  property  and 
a  retirement  from  business  do  not  contravene  public  policy  or  affect 
the  public  in  any  way.  It  does  not  appear  that  the  mercantile  com- 
pany obtained  the  real  estate  with  a  view  of  carrying  on  a  real  estate 
business,  but,  on  the  other  hand,  that  the  mercantile*  business  was 
unprofitable,  and  the  stockholders  desired  to  wind  up  the  affairs  of 
the  company  by  a  sale  and  transfer  of  the  business ;  and  the  real 
estate  was  taken  in  part  payment,  and  as  a  step  in  the  closing  up  of 
the  corporate  business.  It  appears  to  have  been  done  in  good  faith, 
with  the  consent  of  the  stockholders  ;  and  we  see  no  reason  why  a 
mere  trading  corporation,  like  this  one,  may  not  close  up  its  business 
in  the  manner  pursued  in  this  instance.  The  money  consideration 
of  the  sale  was  used  in  paying  creditors  of  the  corporation  other  than 
those  contesting ;  but  it  has  been  held  that  a  corporation  has  the 
same  dominion  and  control  over  the  disposition  of  its  assets  and  prop- 
erty as  a  partnership  or  an  individual,  and  may  make  any  honest 


U 


^ 


xt. 


^ 


308  COMMONWEALTH  V.   SMITH. 

disposition  of  them,  and  also  that  it  has  the  same  power  and  right 
to  prefer  its  creditors  that  a  partnership  or  an  individual  has.  Grand 
de  Tour  Ploiv  Co.  v.  Rude  Bros.  Mfg.  Co.,  60  Kan.  145,  55  Pac.  848. 
Under  the  general  finding  of  the  jury,  it  must  be  assumed  that  the 
company  and  its  agents  acted  in  good  faith  in  making  the  sale,  and 
also  in  taking  real  estate  in  exchange  for  the  goods,  not  as  an  invest- 
ment, but  as  the  most  advantageous  way  of  disposing  of  an  unprofit- 
able business,  and  closing  it  up  with  the  least  possible  loss,  {i; 
[Eemainder  of  opinion  omitted.]  v  6-      \n    }  \'    ''^ 

I     /^^/     y    J  ^  £;^6mmonwealth  v.  Wt^  ¥  fJ^s, 

J    ^'''\f^^'        >'^^/^  1865.     \QAllen(nas&.)MJj/.^, 

■'    rf^  H^.  r  ■.■  /^"^  i  f  V' 

/ V  '*     tP^         A^BiLL  IN  EQUITY  Seeking  to  impeach  the  validity  of  a  mortgage,  exe- 

*ip  ''^xW*^  ^  6 " '^ '  cuted'^on  the  30th  of  July  1855  by  the  Troy  and  Greenfield  Railroad 

*    '_  ^  /l'^  »  Companj-  to  the  defendants  as  trustees,  covering  by  its  terms  the  fran- 

r  '^  jl  /^,y«^'chise,  railroad,  and  all  other  property  of  the  corporation,  then  owned 

^      ^  j^  or  thereafter  to  be  acquired,  to  secure  bonds  to  the  amount  of  8900,000, 

•  [r^*^  ijp      9'^  -t      ^^  b®  issued  to  the  contractor  as  part  compensation  for  constructing 

'^ ^  ^   Mf    ^t^        the  railroad,  payable  in  thirty  j-ears  from  date.     This  mortgage  recited 

/'l^       ■  ^     j^     ty^^  provisions  of  a  contract  for  the  construction  of  the  railroad,  dated 

U      J-^CiuJ     ,M^'      December  30,  1854,  to  the  effect  that  such  bond  should  be  given  ;  and 

^r>'*^    ^^^  fjb      It  was  made  subject  to  a  prior  mortgage  to  the  Commonwealth  to  secure 

l*^  h^*^^'^ /d'^    f^      ^^^^®  bonds  to  the  amount  of  $2,000,000,  which  the  Commonwealth 


^'^'i.yit^   I  '  ^    i"   ^^'^  ^°  issue  under  the  provisions  of  /St.  1854,  c.  226. 
/    ^'*^-!(    ^  ^     1^  The  following  facts  were  agreed:  Since  the  execut 

U^ii^^'/Ly^'S^o^^'^  ^^^  defendants,  the  Commonwealth  have  received  two  other 

'^J   h>       ■'  <;  A/mortgages  upon  the  railroad  and  franchise  of  the  Troy  and  Greenfield 

O^^M  /  i^  (^ j\4>^'Ra.i\roa.i\  Compan}-,  one  of  which  was  dated  on  the  6th  of  July  1860, 

JtA»^' ^^■'    I  f^^^    and  the  other  on  the  5th  of  March,  1862  ;  and  also  a  surrender  from 

fl     -^/      (i  J^  f"  ^^^^  corporation   of  all   their   property   subject   to   redemption   under 

^^A^jy"^^^    ^  '     ^^-  1^C2,  c.  156.     On  the  4tli  of  September  1862  the  Commonwealth 

tt/^<^^  ^   fi/"^  took  possession  of  the  mortgaged  premises  in  various  towns,  for  breach 

3"'  V    ^^^^    kW^^'  ^^  condition,  in  the  manner  shown  by  various  certificates  thereof,  which 

y^ \    '1"^  ^^^  "*^^^  immaterial.     The  Counnonwealth  under  their  various   mort- 

"n^  A^    ^"^  S^gcs  have  at  various  times,  from  October  1858  to  July  1861,  advanced 

^   yj  H-      -  ■'to  the  Troy  and  Greenfield  Railroad  Company,  large  sums  of  "money, 

i^f-y ,        v\  ^      amounting  in  all  to  several  hundred  thousand  dollars.     The  cbrpora- 

•Ji  t^jj-^^  f^^    '  tion,  under  their  mortgage  to  the  defendants,  have  at  various  times, 

Jy^  f-^   '  from  August  1855  to  July  1861,  issued  l)onds  to  the  amount  in  all  of 

'^\^.     ^,^  S600,000,  payable  in  thirty  years  from  date.     All  of  these  bonds  were 

f     ^S'  issued  in  good  faith,  and  are  held  by  bona  fide  holders,  and  the  corpo- 

KQSif  ration  have  issuc|l  no  other  bonds  than  the  above.     Before  advancing 

any  money  to  the  corporation,  the  Commonwealth  had  actual  notice  of 


A 


COMMONWEALTH   V.   SMITH.  309 

the  execution  of  the  mortgage  to  the  defendants,  and  of  the  fact  that 
a  number  of  bonds  had  been  issued  under  the  same.  The  amount  of 
capital  stock  of  the  corporation  which,  in  December  1856,  had  been 
paid  in  was  §143,905.77. 

Upon  these  facts,  and  others  which  are  now  Immaterial,  the  case  was 
reserved  b}-  the  chief  justice  for  the  determination  of  the  whole  court. 

D.  Foster^  for  the  Commonwealth.  The  mortgage  to  the  defendants  j 
has  never  been  sanctioned  or  ratified  b}-  the  legislature,  and  its  validity] 
must  depend  on  the  question  whether  the  common  law  powers  of  railroa(^/ 
corporations  in  IMassachusetts  permit  them  to  execute  mortgages,  and  if] 
so  to  what  extent.  At  common  law,  a  railroad  corporation  has  no  power 
to  execute  an}-  mortgage.  This  is  clearly  theJEnglish  rule.  Winch  v. 
Birkenhead,  (be.  Kailioay,  7  Railw.  &  Canal  Cas.  384.  Beman  v.  Riif- 
ford.,  lb.  48.  South  Yorkshire  Maihcay,  dbc.  v.  Great  Northern  Mail- 
way,  9  Exch.  84.  Shrewsbury.,  <jtc.  Hallway  v.  North  Western  Railway.,  ^ 
6  H.  L.  Cas.  113.  It  is  also  the  prevailing  opinion  in  this  country. 
Pierce  v.  Emery,  32  X.  H.  504.  Mall\.  Sullivan  Railroad.,  21  Law 
Reporter,  138.  Ti2ypets  v.  Walker,  4  Mass.  595.  Gue  v.  Tide  Water 
Canal  Co.  24  How.  257.  Worcester  v.  Western  Railroad,  4  Met.  564. 
Treadwell  v.  Salisbury  Manuf.  Co.  7  Gray,  404.  Opinion  of  Jus- 
tices, 9  Cush.  611.  Salein  3Iill  Bam  v.  Ro2Jes,  6  Pick.  32.  The 
statutes  of  Massachusetts  confer  no  such  authorit}'.  St.  1854,  c.  286. 
Gen.  Sts.  c.  63,  §§  120-123.  i\     ^. 

[Remainder  of  argument  omitted.] 

S.  Bartlett  &  C  Allen,  for  the  defendants.  Even  if  it  be  conceded 
that  the  franchise  to  be  a  corporation  and  the  delegated  right  of  emi- 
nent domain  are  inalienable,  there  is  nothing  in  the  nature  of  a  fran- 
chise to  operate  a  railroad  which  is  of  that  character.  A  corporation 
enters  into  no  contract  with  the  state  that  it  will  so  on  and  act  under 


its  charter,  fxhe  securit}'  of  the  state  is  founded  upon  the  rules  which 
it  prescribes  and  the  restrictions  which  it  imposes  and  the  power  which  p) 
it  reserves  to  repeal  or  alter  at  will ;  and  upon  the  power  which  resides 
in  courts  to  enforce  the  due  execution  of  the  powers  which^re^rantedj^ 
or  exact  forfeitures  in  case  of  abuse.^  It  is  quite  immaterial  what  per- 
sons maj-^ompose  the  corporation;  the  individuals  may  all  change,  •  /'W/ 
but  tlie  same  duties  will  rest  upon  the  corporation.     The  great  weight  '''' 

of  American  authority  is  in  favor  of  the  existence  of  this  power.  J/br- 
rill  v.  Nbyes,  3  Amer.  Law  Reg.  (N.  S.)  18.  Miller  v.  Rutland,  &c. 
Railroad,,  36  Verm.  452,  and  cases  cited.  Piatt  v.  JSfeio  York,  &c. 
Railroad,  26  Conn,  544.  Hall  v.  Sullivan  Railroad,  21  Law  Re-  t^ 
porter,  138.  ^(9?/-ma;i  v.  TTrtZA-e;?,  2  McLean,  393,394.  Union  Bank 
V.  Jacobs,  6  Humph.  (Tenn.)  515.  Dinsmore  v.  Racine,  &c.  Rail- 
road, 12  AVisconsin,  649.  Macon,  Sc.  Railroad  v.  Parker,  9  Georgia,  /)  &^ 
Zll.     Pollard  v.  Maddo.r,  28  Alab,  321.     Allen  v.  Montgomery  Rail- n    ,  j(pl.  H^'      J^ 


recognized  this  as  a  common  law  power.     Sts.  1857,  c.  178,  §§1,5  "^"^^    Urc-'^* 
1854,  c.  423  ;  c.  286,  §  3  ;  1841,  c.  44;  Rev.  Sts.  c.  39,  §  83 ;  c.   Ui^U    '^U   ^^' 


310 


COMMONWEALTH  V.   SMITH. 


t) 


*> 


^' 


••(5 


§  U,  et  seq.  The  validity  of  a  conve3'ance  executed  by  full  authority 
of  a  corporaiion,  cannot  be  questioned  by  third  parties,  on  the  ground 
that  the  corporation  itself  had  no  authority  to  execute  it.  Althougli 
a  corporation  has  exceeded  its  authority,  yet  the  question  cannot  be 
tried  collaterally,  but  it  is  a  matter  between  the  corporation  and  the 
state.  In  this  case,  the  Commonwealth  stands  in  the  attitude  of  an 
individual.  The  corporation  itself,  while  retaining  the  consideration 
could  not  maintain  a  bill  in  equity  to  escape  from  its  contracts  and 
conveyance.  Chester  Glass  Co.  v.  Dewey,  16  Mass.  102,  and  cases 
cited.  Parish  v.  Wheeler^  22  N.  Y.  502.  The  Commonwealth,  taking 
only  a  quitclaim  title,  take  subject  to  all  equities  of  which  they  have 
notice.  They  succeed  to  the  rights  of  the  corporation  and  to  no  more. 
To  hold  that  the  Commonwealth  can  question  this  conveyance  would 
be  to  hold  that  they  have  greater  rights  than  their  grantor  had.  This 
cannot  be.  Parker  v.  NigJitingale,  6  Allen,  344,  345.  Joslyn  v. 
Wyrnan,  5  Allen,  62.  Taylor  v.  Dean,  7  Allen,  251.  Vermont,  (be. 
Railroad  v.  Vermont  Central  Railroad^  34  Verm.  1.  Morrill  v. 
Noyes,  ubi  supra.     Silver  Lake  Bank  v.  North,  4  Johns.  Ch.  370. 

[Remainder  of  argument  omitted.] 

Hoar  J.  The  question  whether  the  mortgage  made  to  the  defend- 
ants by  the  Troy  and  Greenfield  Railroad  Company  is  of  any  validity 
against  the  Commonwealth  requires  the  court  to  give  a  construction  to 
the  provisions  of  St.  1854,  c.  286.  To  ascertain  what  the  legislature 
intended  to  authorize  or  prohibit  by  that  statute,  it  will  be  expedient 
first  to  consider  what  were  the  powers  of  railroad  companies  in  rela- 
tion to  the  issue  of  bonds  and  the  making  of  mortgages  at  common 
law,  or  before  the  statute  was  enacted. 

There  seems  to  be  no  reason  why  a  railroad  corporation  should  not 
be  considered  as  having  power  to  make  a  bond  for  any  purpose  for 
which  it  may  lawfully  contract  a  debt,  without  any  special  authority  to 
that  effect,  unless  restrained  by  some  restriction,  express  or  implied, 
in  its  charter,  or  in  some  other  legislative  act.  A  bond  is  merely  an 
obligation  under  seal.  A  corporation  having  the  capacity  to  sue  and 
be  sued,  the  right  to  make  contracts,  under  which  it  may  incur  debts, 
and  the  right  to  make  and  use  a  common  seal,  a  contract  under  seal  is 
not  only  within  the  scope  of  its  powers,  but  was  originally  the  usual 
and  peculiarly  appropriate  form  of  corporate  agreement.  The  general 
[•ower  to  dispose  of  and  alienate  its  property  is  also  incidental  to  every 
corporation  not  restricted  in  this  respect  by  express  legislation,  or  by 
"  the  purposes  for  which  it  is  created,  and  the  nature  of  the  duties  and 
liabilities  imposed  by  its  charter."  Treadwell  v.  Salisbury  Manuf. 
Co.  7  Gray,  404. 

But  in  the  case  of  a  railroad  company,  created  for  the  express  and 
Hole  pnr[)ose  of  consti'ucting,  owning,  and  managing  a  railroad  ;  author- 
ized to  take  land  for  this  public  purpose  under  the  right  of  eminent 
domain  ;  whose  powers  are  to  be  exercised  by  officers  expressly  desig- 
nated by  statute  ;  having  public  duties,  the  discharge  of  which  is  the 


COMMONWEALTH  V.  SMITH.  311 

leading  object  of  its  creation  ;  required  to  make  returns  to  the  legisla*  \ 
ture  ;  there  are  certain!}-  great,  and,  in  our  opinion,  insuperable  objec- 
tions to  the  doctrine  tliat  its  franchise  can  be  alienated,  and  its  powers 
and  privileges  conferred  b}-  its  own  act  upon  another  person  or  body, 
without  authority  other  than  that  derived  from  the  fact  of  its  own 
incorporation.  The  franchise  to  be  a  corpora,tion_clearly  cannot  be 
transferred  by  any  corporate  body,  ofJt3  own  will.  Such  a  franchise 
is  not,^n  [ts  own  nature,  transmissible.  The  power  to  mortgage  can 
only  be  coextensive  with  the  power  to  alienate  absolutely,  because 


ever}'  mortgage  may  become  an   absolute  conveyance  b}-  foreclosure. 
And  although  the  franchise  to  exist  as  a  corporation  is  distinguishable 


(p 


from  the  franchises  to  be  enjoyed  and  used  by  the  corporation  after  its       t    ^  (N    Sy^*'  /,  v\ 
creation,  yet  the  transfer  of  the  latter  differs  essentially  from  the  mere  ''/)T-^'rt>        •■JT      •  i 
alienation   of  ordinary  corporate  property.     The  right  of  a  railroad     ^j^\  Al        tM^ 
company  to  continue  in  being  depends  upon  the  performance  of  its^     -f.')  ''  Lf^^ 
public  duties.     Having  once  established  its  road,  if  that  and  its  fran- 't-  "l^     ft- I]  ,n      . 
chise  of  managing,  using  and  taking  tolls  or  fares  upon  the  same  are  ^       ■       ^     ^  l^ 
alienated,  its  whole  power  to  perform  its  most  important  functions  is'^i^';'^     •      .  ^ 
at  an  end.     A  manufacturing   company  may  sell  its   mill,  and   l^"3'X'^^()u**^i^''^*^J, 
another;  but  a  railroad  company  cannot  make  a  new  railroad  at  its  ^^^  vi^  \*  \     ^  , 
pleasure.  1  „  '.'■  ''  ^,^A*;    a  o**    , V  ' 

The  whole  reasoning  of  the  court  in  the  case  of  Whittenton  Mills  v^' Jj^    r/)""'*'^     ^ 
Uj)to/i,  10  Gra}-,  582,  in  which  it  was  held  that  a  manufacturing  cor-r.<V^  NJ-^'' ^e^'^^  v  '*-i 
poration  has  no  power  to  make  a  contract  of  co-partnership  applies  ^,>,'  \    j^    "rl"' 
with  much  greater  force  to  the  transfer  of  its  franchise  bj'  a  railroad-'    ;    ^       J^^^      >a^  * 
company.  i^''  ,f/-''   >    (Jf'     l^t^ 

No  case  has  been  cited  in  which  the  exercise  of  such  a  power  lias.  I     '■     ^^      \  v^ a 
ever  been  judicially  sanctioned  in  this  commonwealth,  where  there  was  '  \^      CA?^T 

not  express  legislative  authority  for  it ;  and  the  cases  in  which  the  ^         ilj 

legislature  has  expressl}'  conferred  the  power,  or  confirmed  its  exercise.  „,v\   jj^       v*^ 
furnish  at  once  a  strong  implication  that  it  would  not  otherwise  exist,^    , ''  '      ^*j 

and  afford  a  solution  of  the  allusion  to  railroad  mortgages  which  occurd.'  '     U i  "^ 

in  the  statutes.  ,  ^    I    L\ 

[The  learned  Judge  then  held,  that  the  issue  of  bonds  was  in  con^i    ^   i\  ^ 
travention  of  Statute  1854,  chapter  286;  and  said  that  "the  bonda-V-^i  t«3  ^ I^ 

being  invalid,  the  mortgage  to  secure  them  is  invalid  likewise."     Th^^^^    jJ^      K  i    a/" 

opinion  concludes  as  follows :]  ^  "X*^  ^  ^^      ^IV'^'^ 

"We  find  no  evidence  that  the  Commonwealth  has  ever  known  and^    i^  ^       *^k      ^\p 
sanctioned  the  irregular  and  illegal  issue  of  the  bonds  in  question,' '■'^'^    ^5'^       ^'^ 
either  directh'  or  by  implication.     Nor  do  we  think  that  the}'  fall  within 
the  class  of  cases  in  which  it  has  been  held  that  a  violation  of  corpo-  ,  .    .^i-  i  ^■^-\  ^  ^ 
rate  powers  cannot  be  taken  advantage  of  collaterall}'.     The  secondi^^^      .  ^  cV      ^ 

mortgage  to  the  Commonwealth  gives  it  a  direct  interest  in  the  prop-          '  "J^tA^ 

erty,  and,  not  being  made  expressly  subject  to  any  prior  incumbrance,  -   /'O 

gives  the  right  to  maintain  and  prove  that  the  supposed  conveyance  to  '^'*  r  r%'^ 

the  defendants  was  illegal  and  void.  '        \yv^      *  J  J" 

The  result  to  which  the  point  decided  leads  is  this  :  that,  the  defend  (l/^' 


312 


CHADWICK   V.   OLD   COLONY  E.    E.   CO. 


ants  having  no  title  which  they  can  maintain  against  either  of  the  mort- 
gages to  the  Commonwealth,  the  plaintiffs  have  a  plain,  complete  and 
adequate  remedy  at  law  for  any  interference  with  the  mortgaged  prop- 
erty, and  the  bill  must  be  dismissed. 


,  ^>'5r 


/*'  ,  CHAttWICK  V.   OLD  COLONY  E.  E.   CO. 

1898.     171  Massachusetts,  239.1 

^    ,  Action  by  the  assignee  of  Wardwell,  an  insolvent  debtor,  to  recover 

^l\/  the  sum^f  $10,000,  previously  paid  by  Wardwell  to  the  defendant. 

The  payment  was  made  under  an  agreement  whereby  Wardwell  was 
■'^-^(r         to  purchase  from  the  defendant  a  note  and  mortgage  given  by  the 
ii^'t      ^  Martha's  Vineyard  E.  E.  Co.  to  the  defendant. 

/5^  M\  *>   /j    lh(^  "^^^  mortgage  was  on  the  property  and  franchises  of  the  M.  V.  E. 
\P  .J^i^       j^-  Co.     The  note  and  mortgage  were  given  in  accordance  with  th€ 


■kM^ih. 


^ 


i/- 


0^^ 

^      [T 

•'^.. 

e^ 


A 


f- 


^- 


> 


^^ 


__^.     „„„_   ^ the 

^j^  provisions  of  St.  1874,  c.  372,  s.  57,  which  authorizes  a  railroad  corpo- 
ration to  aid  in  the  construction  of  any  "  connecting  railroad  within 
the  limits  of  this  Commonwealth,  whether  connected  by  railroad  or 
steamboat  lines,  by  subscribing  for  shares  of  stock  in  such  corpora- 
tion, or  by  taking  its  notes  or  bonds,  to  be  secured  by  mortgage  or 
otherwise,  as  the  parties  may  agree." 
I         ,  The  note  was  in  terms  negotiable,  and  the  mortgage  contained  a 

'^i/*^  power  to  the  mortgagees  to  sell  the  property  and  franchises  at  auction 
(/  jJ^  for  a  breach  of  the  conditions  of  the  mortgage.  The  mortgage  was 
made  to  two  individuals  as  trustees  for  the  defendant.  These  trustees 
were  parties  to  the  agreement  with  Wardwell. 

After  making  partial  payments  under  the  agreement,  Wardwell 
failed  to  pay  the  balance  of  the  purchase  money,  and  became  insolvent. 
His  assignee,  Chadwick,  sued  to  recover  the  sums  paid.  His  con- 
tention was,  in  substance,  that  such  a  mortgage  as  the  statute  author- 
izes could  not  give  a  title  to  the  road  that  could  pass  by  a  foreclosure 
or  otherwise  to  the  hands  of  any  natural  person,  or  to  any  railroad 
company  except  the  one  which  aided  in  the  construction  by  taking  the 
notes  or  bondg. 

Knowlton,  J.  .  .  .  The  questions  raised  in  the  action  at  common 

law  involve  a  consideration  of  the  rights  of  mortgagees  of  railroads. 

Our  statutes  authorize  railroad  corporations  to  mortgage  railroads  in 

certain  cases,  but  they  do  not  particularly  define  the  rights  of  the 

mortgagees.     Pub.  Sts.  c.  112,  §§  62-80.     The  general  language  used 

^implies  that  their  rights  are  like  those  of  mortgagees  of  other  kinds 

I  of  property,  except  so  far  as  they  are  affected  by  the  provisions  of  the 

\  statutes  for  the  management  or  use  of  the  property. 

It  has  sometimes  been  contended  that  the  franchises  of  a  corpora- 
1  Statement  abridged.    Only  part  of  the  report  is  given.  —  Ed. 


L 


) 


¥8>  \ 


/ 


CHAD  WICK   V.   OLD   COLONY  R.   R.   CO.  3lo 

tion  cannot  be  conveyed  by  mortgage  in  connection  with  its  property. 
It  is  true  that  the  franchise  to  be  a  corporation  is  not  assignable,  or 
in  any  way  transferable.  The  distinction  between  the  franchise  to  be 
a  corporation,  and  the  franchise  to  xiseThe  corporate  property  for  the 
purposes  for  Avliii'h  the  corporation  was  organized,  was  pointed  out  by 
Mr.'Justice  Curtis  in  Hall  v.  Sullivan  Railroad,  21  Law  Kep.  138,  (2 
Eedf.  Am.  Ry.  Cas.  621,)  and  has  been  recognized  many  times  by 
courts  of  high  authority.  In  Memphis  &  Little  Rock  Railroad  v. 
Railroad  Commissioners,  112  U.  S.  609,  619,  the  court  says :  "  The 
franchise  of  being  a  corporation  need  not  be  implied  as  necessary  to 
secure  to  the  mortgage  bondholders,  or  the  purchasers  at  a  foreclosure 
sale,  the  substantial  rights  intended  to  be  secured.  They  acquire  the 
ownership  of  the  railroad,  and  the  property  incident  to  it,  and  the 
franchise  of  maintaining  and  operating  it  as  such ;  and  the  corporate 
existence  is  not  essential  to  its  use  and  enjoyment.  All  the  franchises 
necessary  or  important  to  the  beneficial  use  of  the  railroad  could  as 
well  be  exercised  by  natural  persons.  The  essential  properties  of 
corporate  existence  are  quite  distinct  from  the  franchises  of  the  cor- 
poration."  In  the  opinion  in  New  Orleans,  Spanish  Fort,  &  Lake 
Railroad  v.  Delamore,  114  U.  S.  501,  509,  is  this  language :  "  The 
authority  to  mortgage  the  franchises  of  a  railroad  company  necessarily 
implies  the  power  to  bring  the  franchises  so  mortgaged  to  sale,  and 
to  transfer  them  with  the  corporeal  property  of  the  company  to  the 
purchaser.  It  could  not  be  held  that,  when  a  mortgage  on  a  railroad 
and  its  franchises  was  authorized  by  law,  the  attempt  of  the  mortgagor 
to  enforce  the  mortgage  would  destroy  the  main  value  of  the  property 
by  the  destruction  of  its  franchises."  In  Ba.nk  of  Middlehury  v. 
Edgerton,  30  Vt.  182,  190,  the  court  says  :  "  The  right  to  build,  own, ' 
manage,  and  run  a  railroad,  and  take  the  tolls  thereon  is  not  of  neces- 
sity of  a  corporate  character  or  dependent  upon  corporate  rights.  It 
may  belong  to  and  be  enjoyed  by  natural  persons,  and  there  is  nothing 
in  its  nature  inconsistent  with  its  being  assignable."  A  similar  doc- 
trine has  been  stated  or  recognized  in  many  other  cases.  See  Morgan 
v.  Louisiana,  93  U.  S.  217,  223 ;  Trask  v.  Maguire,  18  Wall.  391,  409  ; 
Chesapeake  &  Ohio  Railway  v.  Miller,  114  U.  S.  176  ;  Jackson  v.  Lude- 
li^g,  21  Wall.  616 ;  Jackson  v.  Ludeling,  99  U.  S.  513  ;  State  v.  Sher- 
man, 22  Ohio  St.  411,  428;  Meyer  v.  Johnston,  53  Ala.  237,  327; 
Chaffe  V.  Ludeling,  27  La.  An.  607 ;  Willink  v.  Morris  Canal  &  Bank- 
ing Co.,  3  Green  Ch.  377.  So  far  as  we  are  aware,  the  cases  bearing  upon' 
the  s_ubjects  all  hold  that  a  mortgage  of  a  railroad  and  other  property 
of  a  railroad  corporation  includes  the  franchise  to  use  the  property  ,_- 
for  the  purposes  for  which  it  is  held  by  the  corporation.  This  right  ;  tl_ 
will  pass  to  a  purchaser  at  a  foreclosure  sale,  whether  the  sale  is  to  a  J 
corporation  or  to  an  individual.  A  mortgage  of  property  necessarily  I 
implies  the  right  in  the  mortgagee  to  make  the  property  available../ 
This  may  be  either  by  a  sale  or  by  use.  There  is  no  good  reason  why 
the  right  to  sell  should  be  restricted  to  cases  in  which  an  existing 


314 


CHADWICK   V.   OLD   COLONY   R.   K.   CO. 


railroad  corporation  is  willing  to  become  the  purchaser.  With  such 
a  restriction  a  mortgage  on  the  property  and  franchises  of  a  railroad 
ordinarily  could  only  be  made  available  through  an  actual  vise  by  the 
mortgagee,  or  through  a  contract  under  the  Pub.  Sts.  c.  112,  §  66,  with 
the  mortgagor. 

.  .  ,  The  right  to  foreclose  such  a  mortgage  by  a  sale,  and  the  right 
of  an  individual,  as  well  as  a  corporation,  to  purchase  at  the  sale  and  to 
transfer  to  others  the  title  which  he  acquires,  is  recognized  by  the  St. 
1886,  c.  142,  §  1,  which  is  as  follows  :  "  A  purchaser  of  a  railroad  at  a 
sale  under  a  valid  foreclosure  of  a  legal  mortgage  thereof,  and  his 
grantee  and  successors  in  title,  shall  be  subject  to  all  and  the  same 
^jduties,  liabilities,  restrictions,  and  other  provisions  respecting  such 
jrailroad,  or  arising  from  the  construction,  maintenance,  and  operation 
(thereof ;  and  have  all  and  the  same  powers  and  rights  relating  to  said 
irailroad,  and  the  construction,  maintenance,  and  operation  thereof, 
Avhich  the  corporation  by  which  said  mortgage  was  made  was  subject 
,to,  and  had  at  the  time  of  said  sale."  This  statute  is  declaratory  of 
the  law  as  it  exists  without  legislation  in  other  jurisdictions,  and  as 
doubtless  it  would  have  been  held  to  be  in  this  Commonwealth  upon 
general  principles  before  the  enactment  of  the  statute.  It  follows 
that  the  agreement  under  which  the  payments  were  made  by  Ward- 
well  was  not  contrary  to  pviblic  policy,  and  it  gave  him  equitable  rights 
in  the  mortgaged  property  and  franchises  that  furnish  a  valuable 
consideration  for  his  payments.  It  also  follows  that  the  original 
mortgage  was  not  illegal  in  that  it  was  made  to  secure  a  negotiable 
promissory  note. 

.  .  .  The  fact  that  St.  1874,  c.  372,  §  57,  (Pub.  Sts.  c.  112,  §  80,)  in 
authorizing  the  making  of  mortgages  of  railroads,  does  not  expressly 
mention  their  franchises,  is  immaterial.  The  franchise  to  use  the 
railroad  and  its  appurtenances  goes  with  the  railroad  by  implication 
Avhen  an  entire  railroad  is  conveyed.  That  a  mortgage  can  be  made 
originally  only  to  a  connecting  railroad  under  this  statute  does  not 
indicate  that  the  mortgagee  can  make  it  available  only  by  operating 
the  railroad,  and  that  the  franchises  cannot  be  used  by  a  purchaser. 
So  to  hold  would  put  a  limitation  upon  the  mortgage,  for  which  there 
is  no  warrant  in  the  statute. 

The  grounds  upon  which  the  plaintiff  seeks  to  recover  are  unten- 
able. 

Judgment  for  defendant. 

J.  H.  Benton,  Jr.,  for  R.  R.  Co. 

W.  H.  Cobb  &  L.  LeB.  Holmes,  for  Chadwick. 


V  v/ 


A\A 


PITTSBURGH,   C.   C.   &   ST.   L.   R.    CO.   V.    STICKLE Y.  ^l^i^        rv'       '  V 

PITTSBURGH,   C.   C.   &  ST.   L.  R.   CO.   v.  STICKLEY.  -{/' 

1900.    155  Indiana,  312.1 

From  the  Randolph  Circuit  Court.  iJu     \ 

The  controversy  rehited  to  the  ownership  of  land,  conveyed  to  the"^    ,J 
railway  company  in  1866.     "  This  land  the  company  intended  to  use\  .>-     \V 
for  depot   purposes,  but  has  not   done  so."     The   original  plaintiff," 
Stickley,  claimed  title  by  adverse  possession  for  twenty-five  years. 
Judgment  below  for  Stickley,  and  the  E.  R.  Co.  appealed.  ' 

iV.  0.  Boss  and  G.  E.  Ross,  for  appellant. 

J.  S.  Engle  and  W.  G.  Parry,  for  appellee.  \^.   v,' 

Baker,  C.  J.  [After  stating  the  case,  and  disposing  of  other  points.]  "^  v 
Appellant  finally  insists  that  land  acquired  by  a  railway  company  i. 
for  right  of  way  or  station  purposes  cannot  be  taken  from  it  by  ad- 
verse possession,  because  a  railroad  is  a  public  highway,  and  because 
the  statute  forbids  interference  with  the  company's  exclusive  use.  A 
railway  company  owes  certain  duties  to  the  public,  but  it  holds  and 
uses  its  property  for  the  profit  of  its  stockholders.  The  cases  hold- 
ing that  the  statute  of  limitations  affords  no  defense  to  actions  for 
encroachment  upon  streets  and  roads  are  inapplicable.  A  railroad  is 
not  a  public  highway  in  the  sense  that  it  belongs  to  the  people.  Rail- 
road officers  are  not  governmental  agents  whose  laches  creates  no  bar. 
It  is  true  that,  for  reasons  of  public  policy,  a  judgment  creditor  will 
not  be  permitted  to  destroy  a  railroad  by  cutting  it  into  parcels  on 
execution  sales,  if  the  company  resists.  Farmers,  etc.,  Co.  v.  Canada, 
etc.,  R.  Co.,  127  Ind.  250,  11  L.  R.  A.  740.  If  a  company  voluntarily  ^ 
disable  itself  to  perform  its  duties  to  the  public,  its  charter  may  be  ' 
forfeited.  But  there  is  no  reason  why  a  railway  company  should  not 
be  permitted  to  dispose  of  land  it  does  not  need  in  fulfilling  its  public  I  U 
duties,,  or  why,  if  it  disposes  of  land  it  does  need,  it  should  not  be 
compelled,  if  it  wishes  to  avoid  a  forfeiture  of  its  charter,  to  reac- 
quire the  land  by  purchase  or  condemnation.  It  is  true  that  the  I 
statute  entitles  a  railway  company  to  take  land  in  fee  and  forbids 
interference  with  the  company's  exclusive  use.  But  the  right  to  the 
exclusive  use  (which  is  an  incident  to  every  unqualified  ownership) 
must  be  asserted.  If  one  occupies  adversely  for  twenty  years  land 
owned  by  a  railway  company,  the  statute  of  limitations  should  raise 
the  presumption  of  a  grant,  for  the  company  holds  its  lands  for  pri- 
vate gain  as  a  private  proprietor.  The  State  confers  the  power  of 
eminent  domain  to  enable  railway  companies  to  perform  eflficiently 
their  duties  as  common  carriers.  But  it  is  not  apparent  why  the 
State  should  be  concerned  in  preventing  investors  in  railway  stocks 
from  sustaining  loss  through  the  negligence  of  their  agents.  Illinois, 
etc.,  R:  Co.  V.  Houghton,  126  111.  233,  18  N.  E.  301,  1  L.  R.  A.  213; 
1  Statement  abridged.    Only  part  of  the  case  is  given.  —  Ed. 


•A 


316  COLLINS  V.   TOWNSEND. 

Illinois,  etc.,  B.  Co.  v.  O'Connor,  154  111.  550,  39  N.  E.  563;  Elinois, 
etc.,  R.  Co.  V.  Moore,  160  111.  9,  43  N.  E.  364 ;  Donahue  v.  Illinois, 
etc.,  R.  Co.,  165  111.  640,  46  N.  E.  714 ;  Illinois,  etc.,  R.  Co.  v.  Wake- 
field, 173  111.  564,  50  N.  E.  1002 ;  Matthews  v.  Lake  Shore,  etc.,  R. 
Co.,  110  Mich.  170,  67  N.  W.  1111 ;  Bobbett  v.  South  Eastern  R. 
Co.,  L.  E.  9  Q.  B.  Div.  424 ;  Norton  v.  London,  etc.,  R.  Co.,  L.  E.  13 
Ch.  Div.  268 ;  Erie,  etc.,  R.  Co.  v.  Rousseau,  17  Ont.  App.  483. 

Judgment  affirmed. 


Collins,  J.,  ik  N0ETHEE:N^  PACIFIC  E.  CO.  v.  TOWNSEND. 

Supreme  Court  of  Minnesota,  July  12,  1901.   86  Northwestern  Reporter,  1007,  pp.  1009, 1010. 

Collins,  J.  .  .  .  The  real  object  of  this  statute  of  limitations  is  to 
prevent  litigation,  and  to  quiet  title  to  land  which  has  remained  in 
the  possession  of  another  adversely  and  in  hostility  to  its  true  owner 
for  the  specified  period  of  time.  Such  a  law  is  a  continual  and  deci- 
sive notice  to  owners  that,  if  they  allow  others  to  adversely  occupy, 
use,  and  improve  their  land  for  fifteen  years  continuously,  they  must 
be  deemed  to  have  acquiesced  in  the  assertion  of  the  occupants'  claim 
of  right  to  use  the  same,  and  to  have  abandoned  all  opposition  thereto. 
There  may  be  exceptional  instances  in  which  the  nature  of  the  right 
affected  or  the  character  of  the  party  in  whom  the  title  is  vested  will 
prevent  the  operation  of  the  statute,  but  the  facts  here  do  not  come 
'within  the  exception.  That  a  railway  company  may  be  deprived  of  a 
part  of  its  right  of  way  by  adverse  occupation  for  the  statutory  period 
of  time,  and  that  such  an  occupation  will  bar  its  right  to  eject  its  ad- 
iversary,  has  often  been  determined  by  the  courts  of  this  country. 
Railway  Co.  v.  Stickley,  155  Ind.  312,  58  N".  E.  192 ;  Mattlmos  v.  Rail- 
way Co.,  110  Mich.  170,  67  N.  W.  1111 ;  Littlefield  v.  Railroad  Co., 
146  Mass.  268,  15  N.  E.  648 ;  Railroad  Co.  v.  Wakefield,  173  111.  564, 
50  N.  E.  1002,  and  cases  cited.  See,  also,  upon  this  subject,  15  Harv. 
Law  Eev.  146.  It  has  also  been  decided  that  it  is  immaterial  whether 
title  is  held  by  the  company  in  fee  simple,  or  is  a  mere  easement,  or  a 
qualified  fee,  or  an  absolute  fee  ;  for,  whichever  it  is,  the  right  con- 
ferred is  a  possessory  one,  and  sufficient  to  sustain  an  action  of  eject- 
ment. Nor  is  it  material  whether  the  statute  under  which  the  defend- 
ant's claim  is  regarded  as  one  indulging  in  the  presumption  of  a  grant 
by  the  true  owner  or  is  simply  a  statute  of  repose.  We  have  held  that 
it  is  the  latter  in  Dean  v.  Goddard,  55  Minn.  290,  56  N.  W.  1060.  We 
have  also  decided  that  real  property  belonging  to  municipal  corpora- 
tions and  quasi  public  corporations  can  be  lost  under  the  statute  by 
adverse  possession.  City  of  St.  Paul  v.  Chicago  M.  &  St.  P.  Ry.  Co. 
45  :\rinn.  387,  48  N.  W.  17";  St.  PoaiI,  M.  &  M.  Ry.  Co.  v.  City  of 
Minneapolis,  45  Minn.  400,  48  N.  W.  22;  Village  of  Wayzatav.  Great 


BRADBURY  v.  BOSTON  CANOE  CLUB. 


317 


Northern  Ry.  Co.,  50  Minn.  438,  52  N.W.  913.^  Municipal  corporations 
hold  real  property  for  public  use  and  for  public  purposes  in  a  greater 
sense  than  do  railway  companies  hold  their  right  of  way.  There  is 
no  reason  whatever  for  determining  that  the  former  are  subject  to  the 
operation  of  the  statute,  and  at  the  same  time  hold  that  the  latter  are 
exempt  from  the  operation  of  the  same  law.  Such  a  conclusion  would 
take  front  rank  among  the  legal  absurdities. 

.  .  .  No  matter  what  rights  the  beneficiary  of  the  grant  may  have 
to  use  and  occupy,  if  it  so  chooses,  its  right  of  way  over  and  through 
public  domain  to  the  full  extent  of  400  feet,  it  is  obvious  that  it  must 
take  this  right  subject  to  the  statute  relating  to  adverse  possession. 
No  other  conclusion  can  be  tolerated.  .  .  .^ 


\ 


./ 


^^ 


A 


SECTION  IV. 


^ 


yT- 


Power  to  borrow  Money.     Power  to  issue  Negotiable  Noies.^ 

BRADBURY  v.   BOSTON   CANOE  CLUB.  ^\  - 

1891.     153  Massachusetts,  77. 

Holmes,  J.  This  is  an  action  upon  a  promissor}'  note  for  one 
hundred  and  fifty  dollars  and  interest,  given  b}'  the  defendant  to  the 
plaintiff  for  mone}'  lent  to  it  by  the  plaintiff  to  be  used  in  building  a 
club-house.  There  is  a  second  count  for  mone}-  lent.  At  a  meeting, 
duly  called,  the  corporation  passed  a  vote  authorizing  its  treasurer  to 
borrow  money  in  terms  sufficiently  broad  to  cover  the  loan  in  question.  -^ 
The  suggestion  that  no  sufficient  notice  of  the  business  to  be  transacted 
was  given,  does  not  seem  to  us  fairly  open  on  the  agreed  facts.  More- 
over, it  would  be  impossible  to  argue  that  the  defendant  had  not  recog- 
nized and  ratified  the  act  of  its  treasurer  in  borrowing  from  the  plaintiff. 

»  But  see  1  Dillon,  Mun.  Corp.  4th  ed.  s.  675.  —  Ed. 

2  In  the  same  direction  is  Midland  R.  Co.  v.  Wright,  L.  R.  (1901),  1  Chan.  738. 

For  a  different  view,  see  Southern  Pacijic  R.  Co.  v.  Hyatt,  California,  1901,  64  Pacific 
Reporter,  272. 

In  Sapp  V.  Northern  Central  R.  Co.,  1878,  51  Maryland,  115,  it  was  held,  that  an  ease- 
ment of  a  footway  by  the  side  of  a  railroad  track  cannot  be  acquired  b}'  prescription.  So  in 
Canadian  Pacific  R.  Co.  v.  Guthrie,  Supreme  Court  of  Canada,  Feb.  19,  1901,  it  was  held, 
that  user  of  a  way  across  (or  under)  a  railway  line  "  could  never  ripen  into  a  title  by  pre- 
scription of  the  right  of  way."     37  Canada  Law  Journal,  272.  —  Ed. 

8  Logically,  a  discussion  of  the  question  whether  a  corporation  has  power  to  incur  any 
indebtedness  at  all  should  precede  the  discussion  as  to  its  power  to  incur  indebtedness  in 
the  form  of  borrowing. 

It  is  generally  assumed  that  corporations  are  not  bound  to  do  a  strictly  cash  business; 
but  are  impliedly  authorized  to  incur  debts,  in  the  ordinary  waj-  of  business,  for  objects 
within  the  scope  of  the  corporate  purposes  as  defined  by  the  charter.  See  Green's  Brice's 
Ultra  Vires,  2d  Am.  ed.  pp.  207,  208.  And  "a  limitation  upon  the  right  of  a  corporation 
to  borrow  money  does  not  necessarily  restrict  the  right  of  the  company  to  incur  debts  in  the 
course  of  its  usual  business."    1  Morawetz,  Corp.  2d  ed.  s.  344.  —  Ed. 


518  BATEMAN   V.   MID-WALES   KAILWAY   CO. 

The  monej*  was  received  b}"  the  corporation,  and  was  used  by  it  for  the 
purpose  mentioned.  The  onl^^  question  for  us  is,  whether  the  corpora- 
tion acted  illegally  in  borrowing  mone}-  for  the  purpose  of  erecting  a 
club-house  upon  land  of  which  it  held  a  lease. 

The  defendant  is  a  corporation  formed  under  the  Pub.  Sts.  c.  115, 
§  2,  for  encouraging  athletic  exercises.  By  §  7  it  "  may  hold  real  and 
personal  estate,  and  may  hire,  purchase,  or  erect  suitable  buildings  for 
its  accommodation,  to  an  amount  not  exceeding  five  hundred  thousand 
dollars,"  etc.  We  are  of  opinion  that  under  these  words  the  defendant 
had  power  to  take  a  lease  of  land  and  to  erect  a  suitable  club-house 
upon  it.  Having  this  power,  it  was  entitled  to  raise  money  for  the  pur- 
pose. No  argument  is  needed  to  show  that  the  power  at  the  end  of  §  7, 
to  receive  and  hold  in  trust  funds  received  b}"  gift  or  bequest,  does  not 
confine  the  corporations  to  that  mode  of  raising  it.  Borrowing  money 
is  a  usual  and  proper  means  of  accomplishing  what  the  statute  ex- 
pressly permits.  See  Fay  v.  Noble,  12  Cush.  1, 18  ;  Morvilh  v.  Ameri- 
can Tract  Societij,  123  Mass.  129,  136;  Davis  y.  Old  Colony  Hail- 
road,  131  Mass.  258,  271,  275.  As  this  is  a  suflScient  reason  forgiving 
the  plaintiff  judgment,  it  is  unnecessary  to  consider  whether  there  are 
not  others.  Judgment  for  the  plaintiff . 

C.  J.  Mclntire  <&  F.  Hunt,  for  the  plaintiff. 

C.  H.  Spraque,  for  the  defendant.  i  vi  i  '    . 


\ 


BATEMAN  v.  MID- WALES  RAILWAY  CO.'     '^ 


NATIONAL,   &c.,   CO.  v.  SAME. 

OVEREND,   GURNEY,  &  CO.  (Limited)  v.  SAME.* 

1866.     Law  Reports,  I  Cotnmon  Pleas,  499, 

These  were  actions  brought  by  the  respective  plaintiffs  against  the 
defendants,  a  railway  company,  incorporated  under  the  22  &  23  Vict, 
c.  Ixiii.,  the  5th  section  of  which  prescribed  the  limit  of  their  capital 
(170,000Z.),  and  the  7th  and  9th  the  mode  of  raising  it;  the  37th  and 
38th  impowered  them  to  contract  for  working  the  traffic  upon  the  rail« 
way,  and  the  1st  section  incorporated  the  provisions  of  the  Companies 
Clauses  Consolidation  Act,  1845  (8  «fe  9  Vict.  c.  16)  ;  the  Lands  Clauses 
Consolidation  Act,  1845  (8  &  9  Vict.  c.  18),  and  the  Railways  Clauses 
Consolidation  Act,  1845  (8  &  9  Vict.  c.  20) ;  but  there  was  no  pro- 
vision in  terms  impowering  them  to  draw,  accept,  or  indorse  bills  of 
exchange  or  promissor}*  notes. 

The  declaration  in  each  case  charged  the  company  as  the  acceptors 
of  several  bills  of  exchange,  drawn  respectively  by  John  Watson  &  Co., 

*  ArgurneiitH  omitted  ;  also  tlie  concurring  opinions  of  Bvlfs  J.,  and  Keating  J 
—  Ed. 


BATEMAX   V.   MID-WALES   RAILWAY   CO.  319 

and  purporting  to  be  accepted  in  the  following  form  :  —  "  Accepted  by 
order  of  the  board  of  directors,  and  payable  at  the  Agra  and  Master- 
man's  Bank.  John  Wade,  secretary,"  with  the  seal  of  the  company 
annexed.  It  was  proved  (or  admitted)  in  each  case,  that  the  company 
bad  actually  commenced  business  as  a  railwa}-  compan}',  and  that  there 
was  a  resolution  of  a  board  of  directors  authorizing  the  acceptance  of 
the  bills  in  question,  as  above. 

Under  the  plea  traversing  the  acceptance,  it  was  contended  on  the 
part  of  the  defendants,  at  the  trial  before  Erie,  C.  J.,  at  the  sittings  in 
London  after  last  Hilary  Term,  that  the  company  had  no  power  by  law 
to  accept  bills  of  exchange  ;  and  further,  that,  assuming  that  they  had 
such  power,  the  bills  declared  on  were  not  accepted  in  such  form  as  to 
be  binding  on  thera. 

His  Lordship  directed  verdicts  to  be  entered  for  the  plaintiffs  in  each 
action,  reserving  leave  to  the  defendants  to  move  to  enter  nonsuits  if 
the  Court  should  think  the  objections  or  either  of  them  well  founded. 

Karslake,  Q.  C,  obtained  rules  nisi. 

E.  James,  Q.C.,  and  Sir  G.  Honyman,  for  plaintiffs  in  first  and 
second  actions. 

KarslaJie,  Q.  C. ,  and  Holland,  for  the  defendants. 

BoviU,  Q.  C,  and  JIathetc,  for  plaintiffs  in  third  action. 

Erle,  C.J.  These  were  actions  by  the  indorsees  against  the  accept- 
ors of  several  bills  of  exchange.  The  defendants  pleaded  in  each  action 
that  they  did  not  accept.  It  appeared  that  the  defendants  are  a  com- 
pany incorporated  by  an  act  of  22  &  23  Vict.  c.  Ixiii.  for  the  purpose  of 
making  and  working  a  railway  in  Wales.  The  precise  purposes  for 
which  they  are  incorporated,  and  the  powers  which  are  intrusted  to 
them,  are  limited  and  defined  by  the  special  act  and  the  provisions  of 
the  general  acts  incorporated  therewith.  I  take  it  to  be  well  estab-  ' 
lished  that  a  corporation  established  for  a  specific  purpose  cannot  bind 
itself  by  a  contract  which  is  entirely  unconnected  with  the  purposes  of  j 
its  incorporation.  The  question  then  is,  whether  this  compan}-,  being  a 
corporation  created  for  the  specific  purpose  of  making  a  railwa}',  can 
lawfully  bind  itself  by  accepting  a  bill  of  exchange.  I  am  of  opinion] 
that  it  cannot.  The  bill  of  exchange  is  a  cause  of  action,  a  contract  b}' 
itself,  which  binds  the  acceptor  in  the  hands  of  any  indorsee  for  value  ; 
and  I  conceive  it  would  be  altogether  contrary  to  the  principles  of  the 
law  which  regulates  such  instruments  that  they  should  be  valid  or  not 
according  as  the  consideration  between  the  original  parties  was  good 
or  bad,  —  or  whether,  in  the  case  of  a  corporation,  the  consideration 
in  respect  of  which  the  acceptance  is  given  is  sufficiently  connected 
with  the  purposes  for  which  the  acceptors  are  incorporated.  It  would 
be  inconvenient  to  the  last  degree  if  such  an  inquir}'  could  be  gone  into. 
Some  bills  might  be  given  for  a  consideration  which  was  valid,  as  for 
work  done  for  the  company,  and  others  as  a  security  for  mone}'  obtained 
on  loan  beyond  their  borrowing  powers.  It  would  be  a  pernicious  thing 
io  hold  that,  in  respect  of  the  former,  the  corporation  might  be  sued  bj? 


320  BATEMAN   V.   MID-WALES   KAILWAY   CO. 

an  indorsee,  but  in  repect  of  the  latter  not.  So  much  for  the  general 
bearing  of  the  question  upon  principle.  How  stands  the  matter  as  to 
authority?  Subject  to  three  exceptions,  I  find  no  case  in  which  an 
action  upon  a  bill  of  exchange  or  promissory  note  has  been  sustained 
against  a  corporation  :  and  these  exceptions  prove  the  rule.  In  Slark 
V.  Highgate  Archway  Company^  the  company  was  impowered  b}^  its 
act  of  parliament  to  accept  bills  for  the  specific  purpose :  and  in  the 
'cases  of  the  Bank  of  England  and  the  East  India  Company,  the  negoti* 
'  ation  of  bills  and  notes  was  within  the  very  scope  and  object  of  their 
incorporation.  In  no  other  case  that  I  am  aware  of  has  the  liability  of 
a  corporation  ever  been  enforced.  In  Broughton  v.  Manchester  Water- 
works Com^Kmy,'  the  doctrine  I  have  stated  is  laid  down  in  general 
terms  :  and  Bayle}^,  J.,  entertained  a  doubt  whether  the  holder  of  a  bill 
of  exchange  accepted  b}'  a  corporation  could  sue  the  corporation  with- ' 
out  shewing  that  the  acceptance  was  given  for  a  purpose  for  which  it 
^was  competent  to  the  corporation  to  accept.  That  proposition  derives 
much  more  force  when  applied  to  the  case  of  a  corporation  created  for 
a  specific  purpose,  as  we  have  judicial  notice  from  the  act  of  parliament 
that  this  is.  Upon  both  principle  and  authorit}-,  therefore,  I  am  of 
opinion  that  the  acceptances  given  by  this  compan^^  are  not  binding 
■.acceptances,  and  that  the  plea  is  established. 

Montague  Smith,  J.  I  am  of  the  same  opinion.  The  plaintiffs  are 
indorsees,  and  not  immediate  parties  to  these  bills,  and  therefore  cannot 
recover  unless  the  bills  are  in  their  inception  valid  instruments.  I  am 
clearl}'  of  opinion  that  it  was  not  within  the  competency  of  this  compan}' 
to  accept  bills.  It  is  a  compan}'  incorporated  for  the  formation  of  a 
railwa}',  with  a  limited  capital  and  limited  powers  of  borrowing  mone}'. 
If  such  a  company  had  power  to  accept  bills  of  exchange,  the  conse- 
quence would  be  either  that  they  might  bind  themselves  b}'  acceptances 
to  an  unlimited  extent,  or  there  must  in  each  case  be  an  inquir3^  whether 
the  bill  was  given  for  the  payment  of  a  just  debt,  or  for  a  purpose  not 
warranted  by  their  incorporation.  I  think  that  it  was  not  the  intention 
of  the  legislature  that  they  should  accept  bills  at  all.  The  shareholders 
advance  their  money  upon  the  faith  of  the  limited  borrowing  powers. 
This  limit  would  be  illusory  if  the  directors  could  be  held  bound  by 
acceptances.  There  is  no  authority  to  shew  that  they  have  power  to 
accept,  and  there  is  much  authority  in  analogous  cases  the  other  wa}'. 
It  has  been  held  that  mining  companies,  waterworks  companies,  gas 
companies,  salt  and  alkali  companies,  and  many  others,  all  more  in  the 
nature  of  trading  companies  than  this  company,  are  incapable  of  draw- 
ing, accepting,  or  indorsing  bills  of  exchange.  The  first  object  of  a 
railway  is  the  making  of  a  railway,  though  they  may  and  practically 
always  do  carry  on  the  business  of  carriers.  That  corporations  created 
for  the  purpose  of  trading  may  have  power  to  issue  negotiable  instru- 
ments is  the  well-known  exception.     But  that  applies  where  the  pri- 

-  o  Taunt.  :92.  2  3  b.  &  A.  1. 


UNION   BANK   V.   JACOBS, 


321 


mar}'  object  of  the  incorporation  is  the  carrying  on  of  trade  as  other 
persons  carr}'  it  on,  viz.  b}'  buying  and  selling.  In  addition  to  the 
cases  alread}'  referred  to,  there  is  the  distinct  authority  of  many  emi- 
nent text-writers  that  a  railway  company  cannot  accept.  I  will  refer  to 
one  considerable  authorit}',  the  late  J.  W.  Smith.  In  his  treatise  on 
Mercantile  Law,  after  speaking  of  the  disability  of  corporations  in 
general  to  accept  bills  he  sajs  :  *  "  However,  it  has  been  considered 
that  a  trading  corporation  ma}'  differ  from  others  as  to  its  powers  of 
contracting,  and  its  remedies  on  contracts  relating  to  the  purposes  for 
which  it  was  formed.  Thus,  such  a  corporation  may  in  some  cases 
bind  itself  by  promissory  notes  and  bills  of  exchange  ;  and  it  was 
even  held  that  the  Bank  of  England  might  without  deed  appoint  an 
agent  for  such  purposes.  But  a  corporation  will  not  have  these  extra- 
ordinary powers  unless  the  nature  of  the  business  in  which  it  is  engaged 
raises  a  necessary  implication  of  their  existence."  No  express  power  \ 
to  accept  is  given  to  this  company  :  nor  is  there,  in  my  judgment,  any  3 
necessary  implication  from  the  purposes  for  which  it  was  created.  For  -.'^ 
these  reasons,  I  am  of  opinion  that  the  rule  in  each  of  these  actions 
should  be  made  absolute.  ,      ■         Rules  absolute  to  enter  a  nonsidtt 

."  'j^  f  f  \-' 

Suit   asrainst  Jacobs,    as 


^ 


■>. 


ic 


■y 


K 


h\'^ 


\  \ 


1845. 


Hiwassee  Rail  Road  Company.  !^^  ^     \>*     L 

By  Act  of  the  Tennessee  Legislature,  in  1835-6,  the  Hiwassee  R.  "Rif^  %r  ^a^   jfi 
Co.  was  created  a  body  corporate,   with  perpetual  succession,  with''-,  j5  ^   H  ' 


IJNION  BANK  V.   JACOBS. 

6  Humphrey  [Tennessee),  515.^  ,'•" 

endorser   of  the  negotiable  note 


v^. 


of 


to  possess  and  enjoy  all  the  rights,  ^ 
power   to  make  such  by-laws,  ordi- 


power  to  sue  and  be  sued,  and 

privileges   and  immunities,   with 

nances,  rules,  and  regulations,   not  inconsistent  with  the  laws  of  this 

,  State  and  the  United  States,  as  shall  be  necessary  to  the  well  ordering^ 

/and  conducting  the  affairs  of  said  company, 

By  the  2d  section,  the  capital  stock  was  declared  to  be  S600,000y^*' 
and  the   corporate   powers  were   to   commence  when   $400,000  were     ^ 
subscribed. 

By  the  4th  section,  after  4000  shares  shall  have  been  subscribed, 
there  was  to  be  paid  on  each  share  such  sum  as  the  company  might 
direct,  and  in  such  instalment,  not  exceeding  one  fourth  of  the  subscrip- 
tions in  any  one  year. 

By  the  12th  section,  if  the  capital  stock  of  the  company  be  found 
.Insufficient  for  the  purposes  of  the  road,  the  company  may  enlarge  it 
from  time  to  time,  so  as  not  to  exceed  in  the  whole  81,500,000,  and 
new  subscriptions  for  that  purpose  to  be  opened. 


(^l/,>^ 


'(  v^^^' 


.t 


.^ 


V, 


1  7th  ed.  by  Dowdeswell,  pp.  105-6. 


2  Statement  abridged.  —  Ed 


•  lJ^ 


t 


322  UNION   BANK   V.    JACOBS. 

By  the  13th  section,  the  president  and  directors  are  invested  with  all 
the  powers  and  rights  necessary  for  the  building,  constructing,  and  keep- 
ing in  repair  of  the  railroad  ;  and  they  may  cause  to  be  made,  or  con- 
tract with  others  for  making  of  said  road  or  an}'  part  thereof. 

Under  tlie  provisions  of  the  charter,  the  company-  was  legally  organ- 
ized and  proceeded  to  construct  the  road.  The  company  became  in- 
debted to  Lonergin,  a  contractor,  for  grading  the  road,  in  the  sum  of 
$5000.  For  the  payment  of  this  debt,  the  company-,  by  its  president, 
Jacobs,  executed  its  promissory  note  to  Jacobs,  negotiable  and  payable 
at  the  Union  Bank  four  months  after  date.  The  note  was  indorsed  by 
Jacobs  to  Trautwine,  and  by  him  to  the  Union  Bank,  and  the  proceeds 
were  passed  by  the  bank  to  the  credit  of  Lonergin.  At  maturity  the 
note  was  protested,  and  notice  given  to  the  endorsers.  Suit  was 
brought  against  Jacobs  as  endorser.  The  circuit  Judge  charged  the 
jury  "■  that  the  note  was  drawn  b}-  the  Hiwassee  Rail  Road  Company 
in  violation  of  its  corporate  powers  ;  that  it  was  therefore  null  and  void; 
and  that  the  plaintiffs  were  not  entitled  to  recover."  ^ 

Verdict  for  defendant,  and  judgment.     Plaintiff  brought  error, 

Lyon,  for  plaintiff. 

W.  Sivan,  Maynard,  and  Sneed,  for  defendant. 

TuRLEY,  J.  [After  stating  the  facts.]  It  is  contended  against  the 
plaintiff's  right  to  recover,  that  there  is  no  power  given,  either  ex- 
pressly or  by  necessary  implication,  by  the  charter  to  the  Hiwassee 
Rail  Road  Company,  to  borrow  money  or  to  execute  promissory  notes  ; 
and  that,  therefore,  the  note  executed  and  endorsed  to  the  Bank  is 
void,  both,  as  against  the  maker  and  endorsers,  and  that  no  action  can 
be  maintained  against  them  thereon. 

The  construction  of  the  powers  of  corporations  has  been  a  fruitful 
source  of  litigation,  both  in  the  courts  of  Great  Britain  and  the  United 
States.  In  the  earlier  cases  they  were  construed  with  great  strictness, 
and  a  stringent  rule,  as  to  the  mode  of  exercising  them  enforced. 

I  Whatever  of  strictness  may  have  existed  in  the  earlier  cases,  in  re- 
stricting their  power  of  contracting  to  the  express  grant  of  authority, 
has  been  also  greatly  relaxed,  and  the  doctrine  upon  the  subject  been 
made  more  conformable  to  reason  and  necessity,  the  powers  granted 
to  corporations  being  now  construed  like  all  other  grants  of  power, 
,not  according  to  the  letter,  but  the  spirit  and  meaning.  In  Augell  & 
Ames  on  Corporations,  page  192,  sec.  12,  it  is  said,  ''a  corporation 
having  been  created  for  a  specific  purpose,  can  not  only  make  no  con- 
tracts forbidden  by  its  charter,  which  is,  as  it  were,  the  law  of  its 
nature,  but  in  general  can  make  no  contract  which  is  not  necessary, 
either  directly  or  incidentally,  to  enable  it  to  answer  that  puri:)0se.  In 
deciding,  therefore,  whether  a  corporation  can  make  a  particular  con- 

1  The  above  is  the  charge  as  recited  in  the  opinion  of  the  Supremo  Court.  Tlie  state- 
ment by  the  reporter  says  that  the  Judge  charged  "that  the  Hiwassee  Company  haa 
no  power  to  borrow  money,  and  that  the  note  given  in  execution  of  a  void  contract  was 
null  and  void  also."  —  Ed. 


UNION   BANK  V.    JACOBS.  323 

tract,  we  are  to  consider,  in  the  first  place,  whether  its  charter,  or 
some  statute  binding  upon  it,  forbids  or  permits  it  to  make  such  a 
contract ;  and  if  the  charter  and  valid  statutory  law  are  silent  upon 
the  subject,  in  the  second  place,  whether  the  power  to  make  such  a 
contract  may  not  be  implied  on  the  part  of  the  corporation,  as  directly 
or  incidentally  necessary  to  enable  it  to  fulfil  the  purpose  of  its  exist- 
ence, or,  whether  the  contract  is  entirely  foreign  to  that  purpose.  In 
general,  an  express  authority  is  not  indispensable  to  confer  upon  a 
corporation  the  right  to  become  .drawer,  endorser,  or  acceptor  of  a  bill 
of  exchange,  or  to  become  a  party  to  any  other  negotiable  paper.  It 
is  sufficient,  if  it  be  implied  as  the  usual  and  proper  means  to  accom- 
plish the  purposes  of  the  charter.  —  Chitty  on  Bills,  5th  Ed.  17  to  21 ; 
Baily  on  Bills,  ch.  2,  sec.  7,  p.  69  (oth  Ed.)  Story  on  Bills  of  Exchange- 
sec.  79,  p.  94."  In  the  case  of  Munn  vs.  Commission  Co.,  loth  John- 
son 52,  Spencer,  J.,  who  delivered  the  opinion  of  the  court,  says  :  "  It 
has  been  strongly  urged,  that,  under  the  act  incorporating  this  com- 
pany, they  could  neither  draw  nor  accept  bills  of  exchange.  Their 
power  is  undoubtedly  limited  ;  they  are  required  to  employ  their  stock 
solely  in  advancing  money,  when  required,  on  goods  and  articles  manu- 
factured in  the  United  States,  and  the  sale  of  such  goods  and  articles 
on  commission.  The  acceptance  of  a  bill  is  an  engagement  to  pay 
money ;  and  the  company  may  agree  to  pay  or  advance  money  at  a 
future  day,  and  they  may  engage  to  do  this  by  the  acceptance  of  a 
bill."  When  a  charter  or  act  of  incorporation  and  valid  statutory  law 
are  silent  as  to  what  contracts  a  corporation  may  make,  as  a  general 
rule,  it  has  power  to  make  all  such  contracts  as  are  necessary  and 
usual  in  the  course  of  business,  as  means  to  enable  it  to  attain  the 
object  for  which  it  was  created,  and  none  other.  The  creation  of  a  ' 
corporation  for  a  specific  purpose,  implies  a  power  to  use  the  necessary  ' 
and  usual  means  to  effectuate  that  purpose.  — Angell  &  Ames  on  Corp. ' 
200,  sec.  3.  — ^ 

Mr.  Story,  in  his  treatise  on  bills  of  exchange,  p.  95,  speaking  of  the 
power  of  corporations  to  draw,  endorse,  and  accept  bills  of  exchange,  |[   '^'<v*^ 
says  :  "  it  is  sufficient  if  it  be  implied  as  a  usual  and  appropriate  means     ^'^ 
lo  accomplish  the  objects  and  purposes  of  the  charter.     But  when  the 
drawing,  indorsing  or  accepting  such  bills  is  obviously  foreign  to  the 
purposes  of  the  charter,  or  repugnant  thereto,  then  the  act  becomes  a. 
nulUt}',  and  not  binding  on  the  corporation." 

In  the  case  of  the  People  vs.  the  Utica  In.  Co.,  15th  Johns.,  Tliomp- 
son,  Chief  J.,  who  delivered  the  opinion  of  the  court,  says,  at  page 
383,  "  an  incorporated  compan}-  has  no  rights  but  such  as  are  specially 
granted,  and  those  that  are  necessar}'  to  carry  into  effect  the  powers  so 
granted." 

In  the  case  of  Mott  vs.  Hicks,  a  quantit}'  of  wood  was  purchased  for 
the  president  and  directors  of  the  Woodstock  Glass  Compan}-,  by  White- 
head Hicks,  the  president  thereof,  for  which  he  executed  the  promis- 
sory note  of  the  company  at  six  mouths.     It  appears,  from  a  reference 


(? 


824  UNION   BANK  V.    JACOBS. 

in  argument  to  the  charter  of  the  companj',  that  there  was  no  clause 
authorizing  it  to  issue  bills  or  notes,  or  making  such,  if  issued,  bind- 
ino-  and  obligator}'  upon  the  company ;  jei  it  was  held  by  the  court, 
that  an  action  would  lie  against  the  corporation  upon  the  note,  it  hav- 
ino-  been  executed  by  its  legally  authorized  agent,  acting  within  the 
scope  of  the  legitimate  purposes  of  such  corporation.  —  1st  Cowen  513. 

In  the  case  of  Hay  ward  vs.  the  Pilgrim  Societ}^  21st  Pick.  270,  it 
was  held  that  the  trustees  of  a  society  incorporated  for  the  purpose  of 
building  a  monument,  in  virtue  of  their  authority  to  manage  the  finances 
and  property  of  the  society,  were  held  competent  to  bind  the  society  by 
a  promissor}^  note  through  the  agency  of  their  treasurer. 

These  authorities  fully  establish  the  proposition,  that  in  the  construc- 
tion of  charters  of  corporations,  the  power  to  contract,  and  the  mode 
— «.  of  contracting,  is  not  limited  to  the  express  grant,  but  may  be  extended 

jj         by  implication  to  all  necessary  and  proper  means  for  the  accomplish- 
ijment  of  the  purposes  of  the  charter.     Now,  what  are  necessary  and 
Iproper  means?     Mr.  Stor}',  as  we  have  seen,  sa^'S,  if  the  means  are 
usual  and   appropriate,   the   implication   of  power  arises.  —  Story  on 
Bills,  95. 

Chief  Justice  Marshall,  in  the  case  of  McCullock  vs.  the  State  of 
Maryland,  4th  Wheaton  413,  sa^s  :  "  But  the  argument  on  which  most 
rehance  is  placed,  is  drawn  from  the  peculiar  language  of  this  clause  of 
the  constitution.  Congress  is  not  empowered  by  it  to  make  all  laws 
which  may  have  relation  to  the  powers  conferred  on  the  government, 
but  such  only  as  may  be  necessary  and  proper  for  carrying  them  into 
execution.  The  word  '  necessary' '  is  considered  as  controlling  the  whole 
sentence,  and  as  limiting  the  right  to  pass  laws  for  the  execution  of  the 
granted  powers,  to  such  as  are  indispensable,  and  without  which  the 
power  would  be  nugatory.  That  it  excludes  the  choice  of  means,  and 
leaves  Congress,  in  each  case,  that  onl}^  which  is  most  direct  and  simple. 
Is  it  true,  that  this  is  the  sense  in  which  the  word  '  necessary '  is  alwa3's 
used  ?  Does  it  always  import  an  absolute  ph3'sical  necessity,  so  strong 
that  one  thing  to  which  another  ma}'  be  termed  necessary  cannot  exist 
without  that  other?  We  think  it  does  not.  If  reference  be  had  to  its 
use  in  the  common  affairs  of  the  world,  or  in  approved  authors,  we  find 
tliat  it  frequently  imports  no  more  than  that  one  thing  is  convenient  or 
«-^  useful  or  essential  to  another.  To  employ  the  means  necessary  to  an 
\^  end,  is  generally  understood  as  employing  an}'  means  calculated  to  pro- 
duce the  end,  and  not  as  being  confined  to  those  single  means,  without 
f  J  ^liL^^  ^^^  end  would  be  entirely  unattainable.     Such  is  the  character 

of  the  human  mind,  that  no  word  conveys  to  it,  in  all  situations,  one 
single,  definite  idea,  and  nothing  is  more  common  than  to  use  words  in 
a  figurative  sense.  Almost  all  compositions  contain  words  which,  taken 
in  their  rigorous  sense,  would  convey  a  meaning  dilTercnt  from  that 
which  is  obviously  intended.  It  is  essential  to  just  construction,  that 
many  words,  which  import  something  excessive,  should  be  understood 
in  a  more  mitigated  sense  —  in  that  sense  which  common  usage  justifies. 


UNION  BANK  V.   JACOBS.  825 

•» 
The  word  '  necessaiy  '  is  of  this  description.     It  has  no  fixed  character  ^r^ 

pecuUar  to  itself.     It  admits  of  all  degrees  of  comparison,  and  is  often 

connected  with  other  words,  which  increase  or  diminish  the  impression  ^  •   -yV*^_|,^ 

the  mind  receives  of  the  urgenc}-  it  imports.     A  thing  may  be  neces-   ,     ^,  -\       i-.  f 
sar}',  ver}'  necessar}-,  absolutely  or  indispensably  necessar}'.     To  no        -O-      ^,  ^^yf^'t 
mind  would  the  same  idea  be  conve3'ed  by  these  several  phases."     In  '*''    j^i^     v  ^    ^ 
conclusion  upon  this  subject,    he  says,   page  421,  same   case:    "We)tO^^'      zV, 
admit,  as  all  must  admit,  that  the  powers  of  the  government  are  lim-f;;^"'^.    «^    " 
ited,  and  that  its  limits  are  not  to  be  transcended.      But  we  think  the  /V-    ,  '  r, 
sound  construction  of  the   constitution   must  allow  to   the   National    '/..a^  ' 
Legislature  that  discretion,  witli  respect  to  the  means  by  which   the 
powers  it  confers  are  to  be  carried  into  execution,  which  will  enable 
that  body  to  perform  the  high  duties  assigned  to  it,  in  the  manner  most 
beneficial  to  the  people.     Let  the  end  be  legitimate,  let  it  be  within  the 
scope  of  the  constitution,  and  all  the  means  which  are  appropriate, 
which  are  plaiulj-  adapted  to  that  end,  which  are  not  prohibited,  but 
consist  with  the  letter  and  spirit  of  the  constitution,  are  constitutional." 

Xow,  if  this  be  true  doctrine  in  relation  to  the  constitution  of  the , 
United  States,  surely  it  will  not  be  contended  that  a  more  stringent        g- 
rule  will  be  applied  in  the  construction  of  the  powers  of  a  corporation,        | 
than  is  applied  in  the  construction  of  the  powers  of  Congress  under! 
the  constitution  of  the  United  States. 

To  apply  these  principles  as  established  b}'  the  authorities  cited,  to 
the  case  under  consideration.  The  Hiwassee  Rail  Road  Company  is 
chartered  to  construct  a  rail  road,  a  thing  of  itself  necessaril}'  involv- 
ing a  heavy  expenditure  of  money ;  but  in  addition  thereto,  it  is  em- 
powered to  sue  and  be  sued,  to  acquire  and  hold,  sell,  lease  and  convey 
estates  real,  personal  and  mixed,  which  uecessarilj'  involves  the  power  (-     ^v/S  1 

of  making  contracts  for  the  same.     How  shall  these  contracts  be  made,  *^   j     ' 

both  for  the  construction  of  the  road  and  the  purchase  of  the  propert}'?        <^^^f^ 
It  is  argued,  that  the  capital  stock  of  the  compan}-  is  the  only  means] 
provided  for  the  payment,  and  that  no  other  can  be  resorted  to  for  that  j    ^ 
purpose  ;  or,  in  other  words,  that  it  must  p&y  cash  for  every  contract,     --j 
for  that  no  power  is  given  by  which  it  ma}'  contract  upon  time  ;  for  if  fT* 
may  create  a  debt,  of  necessar}'  consequence,  it  may  create  written  evi- 
dences of  that  debt,  and  these  may  be  either  promissory  notes  or  bills 
of  exchange.     It  is  true,  that  the  capital  stock  of  the  company  is  thel 
source  from  whence  an  ultimate  payment  of  the  debts  of  the  company  ; 
must  be  made,  but  to  hold  that  a  sufficient  amount  of  this  stock  must  al-  1  Xl 
ways  be  on  hand,  to  pay  immediatel}'  for  every  contract  made,  would  be     "^         '' ' 
destructive  of  the  operations  of  the  company.    By  the  provisions  of  thej 
charter,  not  more  than  one  fourth  of  the  stock  shall  be  called  for  in  any 
one  year,  and  this  upon  thirty  days  notice ;  and  if,  within  thirty  daj's 
after  such  notice,  the  amount  called  for  be  not  paid,  the  company  is 
authorized  to  take  steps  against  the  delinquent  stockholders,  to  enforce 
payment.     Now,  it  is  obvious  that  it  never  was  intended  that  all  the 
stock  should  be  paid  in  before  the  company   commenced  operations 


I 


826  UNION   BANK  V.  JACOBS. 

The  early  completion  of  the  road  was  a  desirable  object  for  commercia. 
purposes,  and  can  it  be  pretended,  that  the  expenditures  of  the  com- 
pany were  to  be  limited  and  restricted  to  the  amount  of  capital  actually 
paid  in  by  the  stockholders,  and  that  under  no  circumstances  were  the 
company  to  exceed  them?  If,  upon  a  failure  of  the  means  on  hand, 
the  stockholders  should  neglect  to  pay  upon  a  proper  call,  are  the 
works  to  be  suspended  until  such  time  as  payments  could  be  enforced? 
Are  the  persons  who  may  have  done  work  for  it,  and  for  which  they 
have  not  been  paid,  to  wait  the  slow  process  of  the  law  before  they  can 
receive  satisfaction  ?  And  shall  the  company  not  be  permitted  to  use 
its  credit  in  such  emergency  ?  It  is  so  argued  for  the  defendant.  This 
construction  of  the  charter  would  be  ruinous  in  its  consequences.  The 
company  might  be  compelled  to  suspend  all  operations  at  a  time  when 
great  loss  would  result  from  deterioration  to  unfinished  work,  and  be 
greatly  injured  also  in  its  credit. 

The  restriction  contended  for  is  too  refined  and  technical.  It  might 
have  suited  the  days  of  the  Year  Books,  when  it  was  held  that  a  corpo- 
ration could  contract  for  nothing  except  under  its  corporate  seal ;  but 
it  is  strange  that  it  should  be  urged  at  this  day  of  enlightened  jurispru- 
dence, when  the  substance  of  things  is  looked  to  rather  than  forms. 
A  corporation  is,  in  the  estimation  of  law,  a  body  created  for  special 
purposes,  and  there  is  no  good  reason  why  it  should  not,  in  the  execu- 
tion of  these  purposes,  resort  to  an}"  means  that  would  be  necessary 
and  proper  for  an  individual  in  executing  the  same,  unless  it  be  pro- 
hibited by  the  terms  of  its  charter,  or  some  public  law,  from  so 
>  doing. 

There  is  no  principle  which  prevents  a  corporation  contracting 
debts  within  the  scope  of  its  action  ;  and,  as  has  been  observed,  if  it 
may  contract  a  debt,  it  necessarily  may  make  provision  for  its  pay- 
ment, by  drawing,  or  endorsing,  or  accepting  notes  or  bills.  It  Is 
not  pretended  that  this  power  extends  to  the  drawing,  endorsing  or 
accepting  bills  or  notes  generally,  and  disconnected  from  the  purposes 
for  which  the  corporation  was  created. 

Tlie  corporation,  in  the  present  case,  was  indebted  to  one  of  its  con- 
tractors for  work  done  upon  the  road,  for  the  payment  of  which,  the 
note  in  question  was  drawn.  This,  upon  principle  and  authorit}',  was 
a  usual  and  ai)propriate  means  for  accomplishing  the  object  and  pur- 
poses of  the  charter,  viz:  the  construction  of  the  road.  Not  only  do 
all  the  elementary  writers  sustain  this  view  of  the  subject,  but  as  we 
have  seen,  there  are  three  adjudicated  cases  in  courts  of  high  authority 
directly  in  its  favor.  The  case  of  Munn  vs.  Commission  Company,  15th 
John.  52;  the  case  of  Mott  lis.  Hicks,  1st  Cowen,  513;  and  the  case 
of  Hayward  vs.  the  Pilgrim  Society,  21st  Pickering,  270. 

There  has  not  been  produced  a  single  case  to  the  contrary.  The 
cases  cited  relied  upon  are  decided  upon  different  grounds  entirely. 

[The  learned  Judge  here  commented  upon  the  cases  relied  upon  by 
the  defendant.] 


NOERIS  V.  STAPS.  327 

We  are  then  of  opinion,  (to  use  tlie  words  of  Chief  Justice  Mar- 
shall, in  the  case  of  McCullock  vs.  the  State  of  Maryland,)  that  the 
end  proposed  by  the  Hiwassee  Rail  Road  Company,  in  executing  the 
note  in  question,  was  legitimate,  and  within  the  scope  of  its  charter ; 
that  as  a  means  it  was  appropriate,  and  plainly  adapted  to  that  end, 
which  is  not  prohibited,  but  consistent  with  the  letter  and  spirit  of 
the  charter  and  therefore  not  void,  but  binding  and  effectual  upon  the 
company  and  the  endorsers. 

Let  the  judgment  of  the  circuit  court  be  reversed,  and  the  case  be 
remanded  for  a  new  trial.  ^ 


SECTION  V.  A' 

Power  to  make  By-Laws.  ^ 

HoBART,  C.  J.  [?],  IK  NORRIS  V.  STAPS.  |  ^  ^ 

1614-1625  [?].     HobarVs  Reports,  p.  211  a.  *  A 

Now  I  am  of  opinion,  that  though  power  to  make  laws  is  given  by 
special  clause  in  all  incorporations,  yet  it  is  needless ;  for  I  hold  it  to 
be  included,  by  law,  in  the  very  act  of  incorporating,  as  is  also  the 
power  to  sue,  to  purchase,  and  the  like.  For,  as  reason  is  given  to 
the  natural  body  for  the  governing  of  it,  so  the  body  corporate  must 
have  laws,  a,s  a  politic  reason  to  govern  it ;  but  those  laws  must  ever 
be  subject  to  the  general  law  of  the  realm,  as  subordinate  to  it.  And 
therefore,  though  there  be  no  proviso  for  that  purpose,  the  law  sup- 
plies it. 

1  The  reporter  has  printed,  as  an  appendix  to  this  case  (pp.  528-532),  an  opinion  given 
by  Ex-Chancellor  Kent,  of  New  York,  as  counsel.  He  came  to  the  conclusion  that  the 
company  had  not  power  to  borrow  money  ;  and  that  the  notes,  being  illegal  and  impliedly 
prohibited,  could  not  be  enforced  against  any  of  the  parties  thereto. 

After  stating  the  substance  of  the  charter  provisions.  Chancellor  Kent  said  (inter  alia) : 

"Here  we  have  the  delineation  of  the  powers  of  the  company,  and  it  cannot  but  strike 
any  attentive  reader  of  the  act,  that  those  powers  are  very  specially  designated  and  con- 
fined within  strict  and  narrow  limits.  The  road  is  to  be  made  out  of  capital  or  funds 
raised  by  subscrii)tions,  and  to  be  called  for  from  time  to  time,  under  reasonable  and 
guarded  checks,  from  the  subscribers  or  stockholders.  The  power  of  acquiring  and  making 
the  road,  the  extent  of  the  expenditures  to  be  bestowed  in  making  it,  the  source  from 
which  the  moneys  requisite  for  the  work  are  to  be  procured,  and  the  manner  in  which 
the}'  are  to  be  raised,  are  all  declared  in  the  charter  with  a  certainty  and  precision  that 
cannot  be  mistaken  ;  and  here  we  may  confidently  conclude  that  the  charter  contains  no 
power  in  the  president  and  directors  to  borrow  money  upon  loan,  or  to  give  their  promis- 
sory notes  to  the  lender  of  money,  for  the  purpose  of  making  the  road  and  carrying  into 
effect  the  object  of  the  charter.  The  mode  of  raising  the  funds,  and  the  Innitation  to  th* 
amount  of  those  funds,  are  specifically  prescribed,  and  all  the  other  modes  are  necessarily 
excluded. 

"That  it  is  an  established  and  deemed  a  salutary  rule  in  the  construction  of  corporate 
powers,  where  the  charter  is  for  special  purposes,  and  the  powers  and  the  manner  of  exe- 
cuting  them  specially  designated,  that  no  other  powers  and  no  other  mode  of  exercising 
the  powers  granted  can  be  deemed  lawfully  to  exist,  I  would  refer  to  the  English  and 
American  cases."  —  Ed. 


328  HOKNE   V.    IVY. 

CHAPTER  IX. 
MODE  OF  CONTRACTING  AND  OF  APPOINTING  AGENTS. 


,  ^  HORNE  V.   IVY. 

V-Tv        ''  20  Car.  2.     1  il/oc?erw,  18. 

Trespass  for  taking  away  a  ship.  The  defendant  justifies  as  servant 
under  the  patent  whereby  The  Canary  Company  is  incorporated,  and 
whereby  it  is  granted,  "That  none  but  such  and  such  should  trade 


>-  iS-  \^  thither,  on  pain  of  forfeiting  their  ships  and  goods,  &c."  and  says,  that 
y  }J  .lJ    the  defendant  did  trade  thither,  &c.     The  defendant  demurs. 

^y^    PoLLEXFEN/br  the  plaintiff  QoxA^w^Q^^  that  the  defendant  ought  to 


'\/*  Vr  have  shewn  the  deed  whereby  he  was  authorized  by  the  Company  to 

if^  u  seize  tiie  goods  ;  ^   though  he  agreed,  that  for  ordinary  employments 

and  services  a  corporation  ma}'  appoint  a  servant  without  deed,  as  a 
cook,  a  butler,  &c.^  A  coiporation  cannot  license  a  stranger  to  fell 
trees  without  deed.^  Nor  can  the}'  make  a  disseisor  without  deed, 
nor  deliver  a  letter  of  attorney  without  deed.^  Secondly,  The  plea  is 
double ;  for  the  defendant  alledges  two  causes  of  a  breach  of  their 
charter,  viz.  their  taking  in  wines  at  the  Canaries,  and  importing  tliem 
here  ;  which  is  double.  Then  there  is  a  clause  that  gives  the  forfeiture 
of  goods  and  imprisonment,  which  cannot  be  by  patent.^  This  patent 
I  take  also  to  be  contrar}^  to  some  acts  of  parliament,  viz.  2.  Edw.  3. 
c.  1.  2.  Edv^.  3.  c.  2.  2.  Rich.  2.  c.  1.  11.  Rich.  2.  c.  2  ;  and  these 
statutes  the  king  cannot  dispense  withal  by  a  non  obstante. 

TwiSDEN,  Justice.  For  the  first  point,  I  think,  they  cannot  seize 
without  deed,  no  more  than  they  can  enter  for  a  condition  broken  with- 
out deed. 

Kelynge,  CI def  Justice.  We  desire  to  be  satisfied,  Whether  this  is 
a  monopoly  or  not?  —  It  was  ordered  to  be  argued  again.' 

1  26,  lien.  6.  pi.  8.     14  Edw.  4.  pi.  8.     Bro.  "  Corporation  "  59. 

2  Plowd.  95. 

8  12.  Hen.  4.  pi.  17. 

<  9.  Edw.  4.  pi.  59.  Bro.  "Corporation,"  24.  34.  14.  Hen.  7.  pi.  1.  7.  Hen.  7. 
pi.  9.     1.  Roll.  Abr. 

6  8.  Co.  125.     Noy,  123. 

6  It  appear.s  in  Kehle  and  Veniris,  that  judpjment  was  ^\v^x\.  in  this  case  for  the 
plaintiff,  on  the  first  ol)jection,  because  the  defendant  justified  by  the  command  of  a 
corporation,  without  shewing  that  his  authority  to  seize  the  ship  was  by  a  deed ;  and 
S.  C.  Siderjin  says,  tliat  the  Court  also  held  the  bar  bad  in  substance,  because  the 
king  by  his  jiutent  cannot  create  it.  forfeiture  for  the  doing  those  tilings  which  his 
patent  prohibits.  See  3.  Teer.  Wms.  424.  Ilardres,  55.  ykiiiner,  135,  224.  8.  Co. 
125  Palmer,  5.  3.  Lev.  353.  1.  8alk.  32.  5.  Com.  Dig.  "  Trade,"  (B.).  1.  Borr. 
fc26.     1.  Term  Rep.  118. 


9-" 
BANK   OF   UNITED   STATES   V.   DANDEIDGE^/         A'^      329 
IVlARSHALL,  C.  J.,  IN  BANK  OF  U.  S.  r.  DANDRIDGE. 

1827,     12  Wheaton,  64. 

[In  this  case  the  majority  of  the  Court  held,  that  the  acceptance  of  a 
cashier's  bond  by  the  board  of  directors  of  a  bank  may  be  proved  with- 
out the  production  of  a  written  record ;  and  that,  althoug)i  there  was 
no  recorded  vote  of  acceptance,  the  acceptance  might  be  proved  by 
evidence  of  the  facts  that  the  person  acted  as  cashier  and  was  recog-( 
nized  as  such  by  the  directors,  and  that  the  bond  was  required  to  be 
given  as  a  condition  precedent  to  his  so  acting,  and  was  actually  found  '  la  *    /^,  ^ 

among  the  corporate  documents.  Lll^        ly^'    ■/     ' 

Marshall  C.  J.,  delivered  a  dissenting   opinion,   from  which  thai     (  o^     l^'"     /^ 
following  extracts  have  been  made.]  jjy   .       'jfS^^  a^y 

Marshall  C.  J.  , )))  ^  "  4  k",  <  ^t^i^X 

'     .      I  ^^IVT  1^ ,  / 

The  plaintiff  is  a  corporation  aggregate;  a  being  created  by  law,""  JS'    '.)^^    }}j^ 
itself  impersonal,  though  composed  of  many  individuals;    these  indi-"^  y-^  ^V^       >Y 
viduals  change  at  will;  and,  even  while  members  of  the  corporation^^  (r^  ij^i'- 
can,  in  virtue  of  such  membership,  perform  no  corporate  act,  but  are      "  '' 

responsible  in  their  natural  capacities,  both  while  members  of  the  corpo-     {^ 
ration  and  after  the}'  cease  to  be  so,  for  every  thing  they  do,  whether  in  the»^^ '     y^         ' 
name  of  the  corporation,  or  otherwise.     The  corporation  being  one  entire  tLj^  •.. -' 
impersonal  entity,  distinct  from  the  individuals  who  compose  it,  musjt,     iJ- /^ 
be  endowed  with  a  mode  of  action  peculiar  to  itself,  which  will  alvva3-s  ^^,     0' 
distinguish  its  transactions  from  those  of  its  members.     This  faculty^  ^  ,  ^-^ 
must  be  exercised  according  to  its  own  nature. 

Can  such  a  being  speak,  or  act  otherwise  than  in  wa-iting?     Being 
destitute  of  the  natural  organs  of  man,  being  distinct  from  all  its  mem- 
bers, can  it  communicate  its  resolutions,  or  declare  its  will,  without  thci  v    .  ^  '^'' 
aid  of  some  adequate  substitute  for  those  organs?     If  the  answer  to  this  ^-r-''^     -t 
question  must  be  in  the  negative,  what  is  that  substitute  ?     I  can  imagine        *         ,  '^ 
no  other  than  writing.     The  will  to  be  announced  is  the  aggregate  will.       ^^■ 
The  voice  which  utters  it  must  be  the  aggregate  voice.     Human  organs &'"     ^ 
belong  only  to  individuals.     The  words  they  utter  are  the  words  of  <•    '^^       a 
individuals.     These  individuals  must  speak  collectivel}' to  speak  corpo-          /    (>^     //*^ 
ratel}',  and  must  use  a  collective  voice.     They  have  no  such  voice,  and  '  [jJ-       ■  t'T 
must  communicate  this  collective  will  in  some  other  mode.     That  other     yiV^  >^ 
mode,  as  it  seems  to  me,  must  be  by  writing.                                           p*^'^  U        ,.^ 

A  corporation  will  generally  act  by  its  agents  ;  but  those  agents  have^^'^x,^^ 
no  self-existing  power.     It  must  be  created  by  law,  or  communicated^        -^  ^^ 
by  the  body  itself.     This  can  be  done  only  b}'  writing.  /!^  '    \  ^   ' 

If,  then,  corporations  were  novelties,   and  we  were  required  now  to  1 

devise  the  means  b}'  which  they  should  transact  their  affairs,  or  communi- 
cate their  will,  we  should,  I  think,  from  a  consideration  of  their  nature, 
of  their  capacities  and  disabilities,  be  compelled  to  saj',  that  where  other 


.^ 


D 


830  BANK   OF   UNITED   STATES   V.   DANDKIDGE. 

means  were  not  provided  by  statute,  such  will  must  be  expressed  in 
writing. 

But  they  are  not  novelties.  They  are  institutions  of  very  ancient 
date ;  and  the  books  abound  with  cases  in  which  their  character  and 
their  means  of  action  have  been  thoroughly  investigated.  In  Brooke's 
Abridgment  (title  Corporation),  we  find  many  cases,  cited  chiefly  from 
the  Year  Books,  from  which  the  general  principle  is  to  be  extracted, 
that  a  corporation  aggregate  can  neither  give  nor  receive,  nor  do  any- 
thing of  importance,  without  deed.  Lord  Coke,  in  his  commentary 
on  Littleton  (66  b.),  says:  "But  no  corporation  aggregate  of  many 
persons  capable  can  do  homage."  "And  the  reason  is,  because 
homage  must  be  done  in  person,  and  a  corporation  aggregate  of  many 
cannot  appear  in  person  ;  for,  albeit,  the  bodies  natural,  whereupon  the 
body  politic  consists,  may  be  seen,  yet  the  body  politic  or  corporate,  itself, 
cannot  be  seen,  nor  do  any  act,  but  b}'  attorney."  So,  too,  a  corpora- 
tion is  incapable  of  attorning  otherwise  than  b}'  deed  (6  Co.  386),  or  of 
surrenderhig  a  lease  for  years  (10  Co.  676),  or  of  presenting  a  clerk  to 
a  living  (Br.  Corp.  83),  or  of  appointing  a  person  to  seize  forfeited 
goods  (1  Vent.  47),  or  agreeing  to  a  disseisin  to  their  use  (Br.  Corp.  34). 
These  incapacities  are  founded  on  the  impersonal  character  of  a  corpo- 
ration aggregate,  and  the  principle  must  be  equally  applicable  to  every 
act  of  a  personal  nature. 

;  Sir  William  Blackstone,  in  his  Commentaries  (v.  1,  p.  475),  enumer- 
ates, among  the  incidents  to  a  corporation,  the  right  "  to  have  a  com- 
mon seal."  "  For,"  he  adds,  "a  corporation  being  an  invisible  body, 
1  cannot  manifest  its  intention  b}'  any  personal  act  or  oral  discourse. 
It  therefore  acts  and  speaks  only  by  a  common  seal.  For  though  the 
particular  members  ma}-  express  their  private  consents  to  any  acts,  by 
words,  or  signing  their  names,  yet  this  docs  not  bind  the  corporation  ; 
it  is  the  fixing  of  the  seal,  and  that  only,  which  unites  the  several  assents 
of  the  individuals  who  compose  the  communitj',  and  makes  one  joint 
assent  of  the  whole." 

Though  this  general  principle,  that  the  assent  of  a  corporation  can 
appear  only  l>y  its  seal,  has  been  in  part  overruled,  yet  it  has  been  over- 
ruled so  far  only  as  respects  the  seal.  The  corporate  character  remains 
what  Blackstone  states  it  co  be.  The  reasons  he  assigns  for  requiring 
their  seal  as  the  evidence  of  their  acts,  are  drawn  from  the  nature  of 
.corporations,  and  must  always  exist.  If  the  seal  may  be  exchanged  for 
something  else,  tliat  something  must  yet  be  of  the  same  character,  must 
be  equally  capable  of  "  uniting  the  several  assents  of  the  individuals 
who  compose  the  community,  and  of  making  one  joint  assent  of  the 
whole."  The  declaration  that  a  seal  is  indispensable,  is  equally  a 
declaration  of  the  necessity  of  writing  ;  for  the  sole  purpose  of  a  seal 
is  to  give  full  faith  and  credit  to  the  writing  to  whicli  it  is  appended. 

I  The  seal  in  itself,  not  affixed  to  an  instrument  of  writing,  is  nothing ; 
is  meant  as  nothing,  and  can  operate  nothing.  The  writing  is  the  sub- 
Btauce,  and  the  seal  appropriates  it  to  the  corporation. 


BANK   OF   COLUMBIA   V.   PATTEKSON'S   ADMINISTRATOR.  331 

The  English  cases  on  this  subject  are  ver}'  well  summed  up  by  Mr. 
Kyd,  p.  259.  The  result  of  the  whole  appears  to  be,  that  in  England  i 
the  general  rule  is  that  a  corporation  acts  and  speaks  by  its  common 
seal,  at  least  so  far  as  respects  the  appointment  of  officers,  whose  duties 
and  powers  are  important.  In  tliose  transactions  where  the  use  of  the 
seal  would  be  unnecessarj'  and  extremel}'  inconvenient,  it  is  frequentl}' 
dispensed  with ;  but  in  all  of  them,  I  think,  writing  is  indispensable. 
In  almost  ever}-  case  which  I  can  imagine,  there  ought  to  be  and  is  a 
record  in  the  corporation  books.  With  respect  to  the  necessit}'  of 
a  seal,  the  difference  is  certainly  great  between  ancient  and  modern 
times  ;  and  between  corporations  whose  principal  transactions  respected 
land,  and  those  which  are  commercial  in  their  character.  This  distinc- 
tion ma}'  and  ought  to  influence  the  use  of  the  seal,  but  not  the  use  of 
writing.  The  inability  of  a  corporation  aggregate  to  speak  or  act  other- 
wise than  In'  writing,  is  constitutional,  and  must  be  immutable,  unless 
it  be  endowed  hy  the  legislature  with  other  qualities  than  belong  to  the 
corporate  character.  The  English  cases,  so  far  as  I  have  had  an  oppor- 
tunity of  examining  them,  concur  in  the  principle  that  a  corporation 
aggregate  can  act  only  by  writing. 

"When  a  being  is  created  without  the  organs  of  speech,  and  endowed 
only  with  the  faculty'  of  communicating  its  will  by  writing,  we  need  not 
look  in  the  laws  given  by  its  creator  for  a  prohibition  to  speak  or  a  man- 
date to  write.  These  are  organic  laws  which  it  is  compelled  to  observe. 
If  we  find,  in  the  act  of  its  creation,  an  enumeration  of  duties  and  powers 
which  are  to  be  performed  and  exercised  by  writing,  it  is  evidence  that 
the  creator  considered  it  as  certain  that  the  creature  would  write,  and 
that  the  evidence  of  its  conformitv  to  the  will  of  the  creator  would  be 
found  in  writing.  Itji^  equivalent  to  a  declaration  that  it  shall  act  by 
writing.  A;/t>\    /   )  X"  'C^ 


•^&M/ 


\  V » 


I 

gOLUMBiyv.  PATTERSON'S  AITMINISTRATOIt.  c  y^  ^ .^'^  ^ 

Y/  ^-    \  18^13.     7  Cra«c^,  299.1  '  '  \n   ''^ ''' ^^y  ^ /-^    ^^ 

Error  to  the  Circuit  Court  for  the  District  of  Columbia.        ^>  '      '>        aT .  J '*'  '^    r^  ,t '^ 
Indebitatus  assumpsit  by  Patterson's  Adm'r  against  the  Bank  of  ^    \\i^  t^  ^j\   J^    *• 
Columbia.     In  1804,  a  written  agreement  was  made  between  Patterson  j'jLMi  ;i-     y    i  ^  i 
and  a  committee  of  the  directors,  whereby  the  committee  agreed  to  pay     "^    ka'^-^   •'   "^ 
Patterson  for  carpenter  work  which  lie  was  to  do  upon  a  new  bank'^v^  ^       Jt      J' 
building  agreeably  to  a  certain  plan  and  in  a  particular  manner.     InK       /yv     ^.      \^^ 
1807,  a  sealed  agreement  was  entered  into  between  Patterson  and  a   .a.  /'i^\  ^       ^ 


1  Statement  abridged.     Part  of  opinion  omitted. — Ed. 


332  BANK    OF   COLUMBIA    V.    PATTERSON'S    ADMINISTRATOR. 

committee  of  the  directors,  under  their  private  seals.  It  recites,  that 
a  difference  of  opinion  had  arisen  between  Patterson  and  the  com- 
mittee for  building  the  new  banking-house,  as  to  certain  work  extra 
of  an  agreement  made  between  Patterson  and  the  said  committee, 
in  1804,  and  thereto  annexed ;  whereupon  it  was  agreed.,  that  all 
the  work  done  b}-  Patterson  should  be  measured  and  valued  b}'  two 
persons  therein  mentioned,  according  to  certain  rates,  called  in  George- 
town old  prices,  and  the  sum  certified  by  them  should  be  taken  by 
both  parties,  in  their  settlement,  as  the  amount  thereof.  It  was  also 
thereby  agreed,  that  the  outhouses,  respecting  which  there  had  been 
no  specific  agreement,  should  be  measured  and  valued  by  the  same 
persons  in  the  same  manner. 

Evidence  was  offered  as  to  the  work  done,  including  a  paper  of  par- 
ticulars  of  the  work,  certified  by  the  persons  named  in  the  agreement 
of  1807.  It  was  proved  that,  while  the  work  was  going  on,  the  defend- 
ants paid  Patterson  sundr}*  large  sums  of  money  on  account  thereof. 

Defendants  requested  an  instruction  that  the  plaintiflT  was  not  enti- 
tled to  recover,  which  was  refused. 

Defendants  also  asked  an  instruction  —  that  the  plaintiff  could  not 
recover,  unless  he  should  prove  that  the  defendants,  after  the  meas- 
urement and  valuation,  expressly  promised  to  pay  the  amount  thereof 
to  the  plaintiff;  and  that  the  jur}'-  could  not,  from  the  evidence  offered, 
presume  any  such  promise.     This  request  was  also  refused. 

Morsell  and  Kdi/i  for  plain tiflfs. 

Jones  and  C  Xee,  for  defendants. 

Story^  J.  [The  court  overruled  various  objections.  Among  other 
points  they  held:  1st,  that  indebitatus  assumpsit  will  lie  to  recover 
the  stipulated  price  due  on  a  special  contract,  not  under  seal,  where 
the  contract  has  been  completely  executed  ;  and  that  it  is  not  in  such 
case  necessar}'  to  declare  upon  the  special  agreement :  2d,  that  a  prom- 
ise wliich  would  be  im[)lied  by  law  for  the  extra  work,  against  the  cor- 
poration, was  not  extinguished,  by  operation  of  law,  by  the  provisions 
of  the  sealed  contract  of  1807;  the  said  sealed  instrument  merely 
recognizing  an  existing  debt,  and  providing  a  mode  to  ascertain  its 
amount  and  liquidation. 

After  deciding  the  above  and  other  points,  the  opinion  proceeds  as 
follows :] 

The  case  has  thus  been  considered  all  along,  as  though  the  con- 
tracts were  made  between  the  plaintiff's  administrator  and  the  corpora- 
tion, and  indeed  some  points  in  the  argument  have  proceeded  upon 
this  ground.  It  is  very  clear,  however,  that  neither  the  first  nor  sec- 
ond ageecments  were  made  by  the  corporation,  but  by  the  committee, 
'M  ,'v  ^'  5J,  J  ^  in  their  own  names.  In  consideration  of  the  work  ])eing  done,  the 
HKr/  ^  ^5  \\' '  committee,  and  not  the  cori)oration,  personally  and  expressly  agree  to 
Vrt*'      0^  ^^^-  ^'^^  stipulated  price.     A  question  has  therefore  occurred,  how  far 

A         •    ^  the  corporation  were  capable  of  contracting,  except  under  their  corpo- 

^irate  seal ;  and  if  it  were  capable,  as  no  special  agreement  is  found  in 


\> 


BANK   OF   COLUMBIA   V.   PATTERSON  S   ADMINISTRATOR.  333 

the  case,  how  far  the  facts  proved  show  an  express  or  an  implied  con- 
tract on  the  part  of  the  corporation. 

Ancientl}',  it  seems  to  have  been  held,  that  corporations  could  not  do 
anything  without  deed.      13  H.  8,  12  ;  4  H.  6,  7  ;  7  H.  7,  9. 

Afterwards,  the  rule  seems  to  have  been  relaxed,  and  they  were,  for 
conveniency's  sake,  permitted  to  act  in  ordinary  matters  without  deed  ; 
as  to  retain  a  servant,  cook,  or  butler.  Plow.  91,  b. ;  2  Sand.  305  ; 
and  gradually'  this  relaxation  widened  to  embrace  other  objects.  Bro. 
Corp.  51  ;  1  Salk.  191  ;  3  Lev.  107  ;  Moore,  512.  At  length,  it  seems 
to  have  been  established,  that  though  they  could  not  contract  directly, 
except  under  their  corporate  seal,  yet  they  might  by  mere  vote  or 
other  corporate  act,  not  under  their  corporate  seal,  appoint  an  agent, 
whose  acts  and  contracts,  within  the  scope  of  his  authority,  would  be 
binding  on  the  corporation.  Rex  v.  Bigg,  3  P.  Wms.  419  :  and  courts 
of  equit}',  in  this  respect  seeming  to  follow  the  law,  have  decreed  a 
specific  performance  of  an  agreement  made  bj-  a  major  part  of  a  cor- 
poration, and  entered  in  the  corporation  books,  although  not  under  the 
corporate  seal,  1  Fonb.  296,  Phil.  ed.  note  (o.)  The  sole  ground  upon '  \ 
which  such  an  agreement  can  be  enforced,  must  be  the  capacity  of  the  j 
corporation  to  make  an  unsealed  contract. 

As  it  is  conceded,  in  the  present  case,  that  the  committee  were  fully  ' 
authorized  to  make  agreements,  there  could  then  be  no  doubt,  that  a 
contract  made  by  them  in  the  name  of  the  corporation,  and  not  in  their 
own  names,  would  have  been  binding  on  the  corporation.     As,   how-        jK 
ever,  the  committee  did  not  so  contract,  if  the  principles  of  law  on  this  i 
subject  stopped  here,  there  would  be  no  remedy  for  the  plaintiff,  except  * 
against  the  committee. 

The  technical  doctrine,  that  a  corporation  could  not  contract,  except 
under  its  seal,  or,  in  other  words,  could  not  make  a  promise,  if  it  ever 
had  been  fully  settled,  must  have  been  productive  of  great  mischiefs. 
Indeed,  as  soon  as  the  doctrine  was  established  that  its  regularly  ap- 
pointed agent  could  contract  in  their  name  without  seal,  it  was  impos- 
sible to  support  it ;  for  otherwise  the  part}"  who  trusted  such  contract  1 
would  be  without   remedy   against   the   corporation.     Accordingl}',  it  '     [^ 
would  seem  to  be  a  sound  rule  of  law,  that  wherever  a  corporation  js  | 
acting  within  the  scope  of  the  legitimate  purposes  of  its  institution,  alii 
parol  contracts  made  b}'  its  authorized  agents,  are  express  promises  ofJ 
the  corporation  ;  and  all  duties  imposed  on  them  by  law,  and  all  bene^ 
fits  confen-ed  at  their  request,  raise  implied  promises,  for  the  enforcfi-1 
ment  of  which  an  action  may  well  lie.     And  it  seems  to  the  court,  that! 
adjudged  cases  fully  support  the  position.     Bank  of  England  v.  Moffat, 
3  Bro.  Ch.  Rep.  262  ;  Rex  v.  Bank  of  England,  Doug.  524,  and  note 
ib. ;  Gray  v.  Portland  Bank,  3  Mass.  Rep.  364 ;  Worcester  Turnpike 
Corporation  v.  Willard,  5  IMass.  Rep.  80  ;  Gilmore  v.  Pope,  5  Mass. 
Rep.  491  ;    Andover  &  Medford  Turnpike  Corporation   v.   Gould,  6 
Mass.  Rep.  40. 

In  the  case  before  the  court,  these  principles  assume   a  peculiar 


J) 


334         BANK   OF   COLUMBIA   V.   PATTERSONS   ADMINISTRATOR. 

importance.  The  act  incorporating  the  Bank  of  Cokimbia,  (act  of 
Maryland,  1793,  ch.  30,)  contains  no  express  provision  authorizing  the 
corporation  to  make  contracts.  And  it  follows  that  upon  principles  ot 
the  common  law,  it  might  contract  under  its  corporate  seal.  No  power 
is  directly  given  to  issue  notes  not  under  seal.  The  corporation  is 
made  capable  to  have,  purchase,  receive,  enjoy,  and  retain,  lands, 
tenements,  hereditaments,  goods,  chattels,  and  effects,  of  what  kind, 
nature,  or  qualit}',  soever,  and  the  same  to  sell,  grant,  demise,  alien,  or 
dispose  of  —  and  the  board  of  directors  are  authorized  to  determine 
the  manner  of  doing  business,  and  the  rules  and  forms  to  be  pursued ; 
to  appoint  and  pay  the  various  officers,  and  dispose  of  the  money  or 
credit  of  the  bank,  in  the  common  course  of  banking,  for  the  interest 
and  benefit  of  the  proprietors.  Unless,  therefore,  a  corporation,  not 
expressly  authorized,  ma}-  make  a  promise,  it  might  be  a  serious  ques- 
tion, how  far  the  bank  notes  of  this  bank  were  legally  binding  upon 
the  corporation,  and  how  far  a  depositor  in  the  bank  could  possess  a 
legal  remedy  for  his  property  confided  to  the  good  faith  of  the  corpora- 
tion. In  respect  to  insurance  companies  also,  it  would  be  a  difficult 
question  to  decide,  whether  the  law  would  enable  a  part}'  to  recover 
back  a  premium,  the  consideration  of  which  had  totally  failed.  Public 
policy,  therefore,  as  well  as  law,  in  the  judgment  of  the  court,  fully 
justifies  the  doctrine  which  we  have  endeavored  to  establish.  Indeed, 
the  opposite  doctrine,  if  it  were  yielded  to,  is  so  purely  technical,  that 
it  could  answer  no  salutary  purpose,  and  would  almost  universally  con- 
travene the  public  convenience.  Where  authorities  do  not  irresistibly 
require  an  acquiescence  in  such  technical  niceties,  the  court  feel  no  dis- 
position to  extend  their  influence. 

Let  us  now  consider  what  is  the  evidence  in  this  case,  from  which 

'the  jur}'  might  legally  infer  an  express  or  an  implied  promise  of  the 
corporation^-^  The  contracts  were  for  the  exclusive  use  and  benefit  of 
the  corporation,  and  made  by  their  agents  for  purposes  authorized  bj- 
their  charter.  The  corporation  proceed,  on  the  faith  of  those  con- 
tracts, to  pay  money  from  time  to  time  to  the  plaintifTs  intestate. 
Although,  then,  an  action  might  have  laid  against  the  committee  per- 
sonally, upon  their  express  contract,  yet  as  the  whole  benefit  resulted 
to  the  corporation,  it  seems  to  the  court,  that  from  this  evidence  the 
jury  might  legally  infer  that  the  corporation  had  adopted  the  contracts 
of  the  committee,  and  had  voted  to  pay  the  whole  sum   which  should 

i.  become  due  under  the  contracts,  and  that  the  plaintiff's  intestate  had 
accepted  their  engagement.     As  to  the  extra  work  respecting  which 

j  there  was  no  specific  agree?hent,  the  evidence  was  3'et  more  strong  to 
l)ind  the  corporation. 

In  every  wa}'  of  considering  the  case,  it  appears  to  the  court  that 
there  was  no  error  in  the  court  below,  and  that  the  judgment  ought  to 
be  affirmed. 


Y" 


y 


S> 


SHERMAN   V.   FITCH,     iT  V  "^      ^       ^ 

\  'b 


i/r 


SHERMAN  V.  FITCH.     .. 

98  Massachusetts,  59.1  '     f\  JtV^ttJ^  \\  Y^"^  U  -Vvlll  ' 

assignees   of  the   Northampton   Street   Sugar 


Vi 


K. 


Bill   in  equity   by 
Refinery,    an    insolvent   corporation,    praying   for   a    decree   that     a 
recorded  mortgage  of  personal  property,  held  forth  by  the  respondent 
as  having  been  made  to  hira  by  the  corporation,  might  be  declared  ^t^    ^  „ 
void.      The  mortgage  (dated  Jan.  19,   1865)  purported,   by  the  Ian-      '*^  j*^ 
guage  of  the  grant,  covenants,  and  condition,  to  be  the  mortgage  of  ^'     \ 
the  corporation.     It  was  signed  "George  R.  Sampson,  President  of 4*^ 
Northampton  Street  Sugar  Refinery.     [Seal.]  "  *  ^    ^  \  ^    \y'^  -y 

After  a  demurrer  had  been  overruled,  the  respondent  filed  an  answer^''"  V  kj^t'^ C^  a] 
putting  in  issue  the  validity  of  the  mortgage  as  a  mortgage  of  the  cor-^/^      V^      j-    S^^ 
poration.     Tlie  case  was  reserved  for  determination  by  the  full  courtT^       '^LAjj^        (^ 
on  agreed  facts,  which  were,  in  part,  as  follows  :  —  <j>'' '  ^     ^  ^     ■" 

For  some  time  prior  to  January  19,  1865,  the  respondent  had  been,     f/^(J^      *-      i^ 
and  then  was,  selling  agent  of  the  corporation,  which  owed  him  about^^  ^^  jiy      I 
eighteen  thousand  dollars,  to  secure  the  payment  of  which  b}' the  cor-, ''*'     'I  " 
poration,  George  R.  Sampson,  who  was  president  and  a  director,  and  ' 

was  also  manager  of  the  manufacturing  department,  executed  and  de- 
livered to  him  the  instrument  in  question.     At  that  date  there  werej^A^    ^  ^ 
four  directors  (who  were  the  principal  stockholders) :  Sampson ;    his   a  *-      Cv 
son  ;  a  nephew  ;  and  one  Tappan,  who  was  in  Europe.     That  was  the     ^  ^^ 
full  number  of  the  board  required  bv  the  bj'-laws,  which  also  provided  '^       7  4 
that   "'the  board  of  directors  shall  manage  and  control  the  business,   i\-- 
jjroperty  and   affairs   of  the   corporation."     The  records  of  the  cor- 
poration contained  no  express  vote  of  either  directors  or  stockholders 
authorizing  the  execution  and  delivery  to  the  respondent  of  a  mortgage 
on  the  corporate  property- ;  but  the  execution  and  delivery  of  the  instru- 
ment was  known  to  all  the  directors  except  Tappan,  at  the  time  thereof, 
"  and  was  approved  by  them,  provided  their  neglect  to  make  any  ob- 
jection to  the  same  can  be  construed  as  an  approval." 

C.  H.  Drew,  for  complainants  [argument  omitted.] 

D.  P.  Kimhnll,  for  respondent. 
Wells,  J.     [The  court  held,  that  the  mortgage  was,  upon  its  face, 

the  mortgage  of  the  corporation,  and  not  the  individual  contract   of 
Sampson.     The  court  then  said  :] 

The  remaining  consideration  relates  to  the  authority  of  Sampson  to 
execute  the  mortgage  in  behalf  of  the  corporation.  It  is  not  necessary 
that  the  authority  should  be  given  by  a  formal  vote.  Such  an  act  by 
the  president  and  general  manager  of  the  business  of  the  corporation, 
with  the  knowledge  and  concurrence  of  the  directors,  or  with  their  sub- 
sequent and  long  continued  acquiescence,  may  properly  be  regarded  as  , 
the  act  of  the  corporation.     Authoritv  in  the  agent  of  a  corporation 


; 


v 


iA^ 


Only  80  much  of  the  case  is  given  as  relates  to  a  single  point.  — Ed. 


»36 


ROBERTS   V.   DEMING   WOODWORKING   CO. 


maj'  be  inferred  from  the  conduct  of  its  officers,  or  from  their  knowl- 
edge and  neglect  to  make  objection,  as  well  as  in  the  case  of  indi- 
viduals. Emmons  v.  Providence  Sat  Mamifacturing  Co.  12  Mass. 
237.  Milledge  v.  Boston  Iron  Co.  5  Cush.  158.  Lester  v.  Webb,  1 
Allen,  34.  The  absence  of  one  of  the  directors  in  Europe  could  not 
deprive  the  corporation  of  the  capacity  to  act  and  bind  itself  by  the  acts 
of  the  officers  in  actual  charge  of  its  affair^.   V  \     )*         ^ 


w>A 


K.-^ 


\i-' 


CO. 


f 


i 


ROBERTS  V.   P.   A.   DEMING  WOODWORKINO 

p^  1892.     \\\  North  Carolina,  ^m. 

This  was  a  civil  action,  tried  at  the  August  Term,  1892,  of  Buncombe 
Superior  Court,  before  Bynum.,  J.,  for  the  value  of  work  and  labor  done 
for  the  defendant  corporation. 

The  defendant  denied  the  debt,  and  resisted  paj'ment  upon  the  fur- 
4her  ground  that  the  contract  was  not  in  writing  under  seal  of  the  cor- 
poration, nor  signed  by  an}'  authorized  officer  thereof,  and  therefore 
void  under  section  683  of  The  Code.^  When  the  plaintiff  rested  his 
case,  the  Court  intimated  he  could  not  recover  on  his  own  showing  ,- 
the  contract,  being  above  $100,  was  not  according  to  the  formalities 
prescribed  by  The  Code,  s.  683.  Whereupon  the  plaintiff  submitted  to 
a  nonsuit  and  appealed. 
H.  B.  Carter,  for  plaintiff. 
T  H.  Cobb,  for  defendant. 

Clark  J.     The  court  ruled  that  the  plaintiff  could  not  recover  in 
(any  aspect  of  the  evidence,  because  the  contract  of  the  defendant  com- 
(pany  was  not  "in  writing  and  under  the  seal  of  the  corporation,  or 
'jSigned  by  some  officer  of  the  company  dul}'  authorized,"  as  required  by 
)  The  Code,  s.  683.    That  section  and  its  purport  was  construed  in  Curtis 
v.  Piedmont   Company,  109  Nor.  Car.  401.     It  is  there  held  that  it 
applies  to  executory  contracts  and  protects  corporations  from  enforce- 
ment of  such  unless  evidenced  in  the  manner  prescribed  by  the  statute. 
But  the  Court  adds  that  it  does  not  apply  to  cases  where  the  corpora- 
tion has  received  and  availed  itself  of  property  sold  and  actually  deliv- 
»m-<h1  to  it.     In  such  cases,  the  company  can  be  compelled  to  pay  the 
fair  value  of  such  property.     In  the  present  case  the  claim  is  for  work 
and  labor  done  at  a  specified  rate.     The  contract  not  being  in  writing 
and  signed  (or  sealed),  as  required  by  the  statute,  the  plaintiff  cannot 
y  force  Uie  defendant  to  continue  the  contract  as  to  the  unexecuted  part, 

1  "  Every  contr.ift  of  every  corporation,  by  which  a  liability  maybe  incurred  by 
the  company  excecdinj;  one  hundred  dollars,  shall  he  in  writiti<;j,  and  either  under  the 
common  seal  of  the  corporation  or  signed  by  some  officer  of  the  company  authorized 
thereto,"  —  Code,  a.  683.  —  Ei). 


ROYAL   BANK   OF   LIVERPOOL   V.    GRAND   JUNCTION,   ETC.    CO.      337 

but  the  plaintiff  is  entitled  to  recover  a  fair  value  for  the  labor  already 
performed,  and  which  the  company  has  accepted,  and  of  which  it  has 
enjoyed  the  benefit. 

The  defendant  contends,  however,  that  this  action  is  brought  upon  , 
the  express  c'ontractj_  and  that  no  recovery  can  be  had  upon  a  quantum     /Q 
meruit,  and  that  if  this  is  not  so,  still  there  was  no  evidence  to  justify  j  "^"^^^^^ 
a  verdict  for  the  value  of  the  services.     The  complaint  is  sufficient  tOj 
warrant  a  recovery,  either  upon  express  contract  or  for  the  value  of  the}     y? 
work  and  labor  done.     Stokes  v.  Taylor,  104  Nor.  Car.  394,  and  cases     ' 
there  cited;  FuJps  v.  Mock,  108  Nor.  Car.  601.     No  amendment  was 
necessarv,  but  if  desirable,  the  Court,  in  accordance  with  the  present 
system  of  procedure,  which,  without  undue  neglect  of  form,   favors  a 
trial  upon  the  merits,  could  and  should  have  allowed  an  amendment  of 
the  complaint  after  a  verdict  in  favor  of  the  plaintiff,  if  successful.     The 
Code,  s.  273.     As  to  the  second  objection  raised,  the  contract  price 
agreed  upon   between  the  authorized  agent  of  the  companj-  and  the 
plaintiff,  while  not  conclusive  (since  the  express  contract  was  perforce 
abandoned),  was  certainly  some  evidence  sufficient  to  go  to  the  jury  as 
to  the  value  of  the  services. 

The  nonsuit  must  be  set  aside,  and  the  case  remanded  for  further 
proceedings  in  accordance  with  this  opinion.^ 

Per  Curiasi.  Error. 


^ 

i. 


Foster,  J.,   in  ROYAL  BANK  OF  LIVERPOOL  v.  GRAND    ^  jJi^^-^if^ 
JUNCTION   R.  &  D.  CO.  .     ^       J" 


1868.     100  Massachusetts,  page  445. 


K^^ 


[In  an  action  of  contract  on  corporate  bonds.] 

Foster,  J.  A  sealed  instrument  conclusiveh"  imports  a  consideration.  / 
And  these  bonds,  having  been  duly  executed  and  delivered,  the  holders  ' 
could  have  maintained  an  action  upon  them,  if  their  delivery  had  been  / 
merely  gratuitous,  and  no  value  had  ever  been  given  for  them.*  / 

1  For  a  more  elaborate  opinion  reaching  substantially  the  same  result  upon  a  somewhat 
similar  statute,  see  Pixley  v.  W.  P.  B.  R.  33  Calif.  183";  and  compare  Foulhe  v.  B.  Co.  51 
Calif.  365. 

2  But  i««  1  Morawetz  on  Corporations,  2d  ed.  s.  341.  —  Ed. 


D  !>' 


■^ 


A 


338 


MAYOK,   ETC.    OF   NORWICH 


..Ay^Kco/y^^ 


Lord  Campbell,  C.  J.,  in  MAYOR 
NORFOLK  R 

1855.     4  Ellis  &,-  Blackburn,  p.  443  to> 

[In  an  action  against  a  railway  compan}-  on  a  covenant  under 
seal  that,  unless  certain  works  were  completed  within  twelve  months,* '^^.^^ 
whether  an  Act  of  Parliament  then  agreed  to  be  obtained  should  be  ^^  pn' f  ' 
obtained  or  not,  the  company' would  pay  1000^.  as  liquidated  damages.]  j,  %l^  ' 

Lord  Campbell  C.  J.     Although  the  agreement  be  under  seal,  we^^j_^,«*,«*--^*^ 
ma}'  examine  to  see  whether  there  was  an}-,  and  what,  consideration.  ■^ffXt^'tk 
for  the  contract  to  pay  mone}',  when  we  are  to  determine  whether  the/        /Uvirw^. 
contract  was  or  was  not  ultra  vires.     The  mere  circumstance  of  a  cov-      ,  ^,j 
ena£t_b}^jdirectors  jn_the  name  of  the  Compan^^  being  ulti'a   vires, ^^^^ 
as  between  them  and  the  ^shareholders^  does  not  jiecessaril^;  disentitlet-  -*^u<-j>-» 
the  coyeiiantee  to  sue  upon  it.     For  example,  if  the  directors  of  a  rail-/  A<»^ 
wa}'  compan}'  were  to  enter  into  a  contract  under  the  seal  of  the  Com4^'**''^^>' 
pany  for  the  purchase  of  a  large  quantity  of  iron  rails  and  to  pay  for 
them  at  a  fixed  price,  as  the  vendor  had  reasonable  ground  for  suppos- 
ing that  the  rails  were  wanted  for  the  purpose  of  the  railroad,  it  would 
be  no  defence  to  an  action  for  the  price,  or  for  not  accepting  them, 
that  the  rails  were  illegally  purchased  on  speculation,  to  be  resold  by 
the  directors  for  their  own  profit.     But  suppose  that  the   directors  of  a 
railway  company  should  purchase  a  thousand  gross  of  green  spectacles, 
as  a  speculation,  and  should  put  the  seal  of  the   Company  to  a  deed 
covenanting  to  pa}'  for  these  goods,  here  would  be  a  clear  excess  of 
authority  on  the  part  of  the  directors  ;  this  excess^  of  authority  would 
necessarily  be  known  to  the  covenantee ;  and,  he  being  in  pari  delicto, 
I  conTielve  that  the  maxim  would  apply  potior  est  conditio  possidentis. 
This  would   be  an  illegal  contract  to  misapply  the  funds  of  the  Com- 
pany ;  and  the  illegality  might  be  set  up  as  a  defpnce.     Sji^jf^jwithout, 
any  consideration  whatever,  the  directors  of  a  railway  company  wejie 
to  put  the  Company's  seal  to  a  deed  covenanting  to  pay  a  mere  stranger 
1000^.,  this  would  be  ultra  vires,  to  the  knowledge  of  the  covenaiitee, 
and  he  could  not  maintain  an  action  to  recover  the  1000/.  fiom  the 
funds  of  the  Company  in  fraud  of  the  shareholders.     When  the  excess 
oTliuthority,  with  the  knowledge  of  both  parties,  is  shewn  by  plea,  this 
joint  violation  of  the  law,  I  aj2prchend,  is  a  bar  to  the  action. 

It  has  been  contended,  I  am  aware,  that  the  deeds  of  such  companies 
are  to  be  treated  like  the  deeds  of  individuals  or  of  common  partner- 
ships. But  there  seems  to  be  an  essential  distinction  between  them. 
The  individual  may  do  what  he  likes  with  liis  own  ;  and  he  may  bind 
liimsclf  by  a  deed  disposing  of  his  property,  however  capriciously,  and 
without  any  consideration,  so  that  no  fraud  has  been  practised  upon 
him.  In  such  a  case,  want  of  consideration  is  immaterial ;  no  one  is 
injured  ;    and  there  is  no  illegality  to  be   pleaded.     ''  To   look   upon 


AMERICAN   NATIONAL   BANK   V.   AMERICAN   WOOD   PAPER   CO.      339 

a  railway  companj',"  says  Lord  Langdale^  in  Colman  v.  Eastern 
Counties  Huilway  Company^  10  Beav.  1,  14,  "in  the  light  of  a  com- 
mon partnership,  and  as  subject  to  no  greater  vigilance  than  common 
partnerships  are,  would,  I  think,  be  greatly  to  mistake  the  functions 
which  they  perform,  and  the  powers  which  they  exercise  of  interference, 
not  only  with  the  public,  but  with  the  private  rights  of  all  individuals 
in  this  realm.  We  are  to  look  to  these  powers  as  given  to  them,  in 
consideration  of  a  benefit  which,  notwithstanding  all  other  sacrifices,  it 
is  to  be  presumed  and  hoped,  on  the  whole,  will  be  obtained  by  the 
public;"  "and  I  am  clearly  of  opinion,  that  the  powers  which  are 
given  by  an  Act  of  ParUament  like  that  now  in  question,  extend  no 
farther  than  is  expressly  stated  in  the  Act,  or  is  necessarily  and  prop- 
erl}-  required  for  carrying  into  effect  the  undertaking  and  works  which 
the  Act  has  expressly  sanctioned."  The  same  learned  Judge,  in 
answer  to  an  argument  that  the  directors  may  apply  the  funds  of  the 
Company  as  the}"  please,  so  that  their  object  is  to  increase  the  traffic 
upon  the  railway,  and  thereby  to  increase  the  profits  of  the  share- 
hoklers,  exclaims,  "surely  that  has  no  where  been  stated;  there  is  no 
authority  for  saying  anj'  thing  of  that  kind."  ^  "  Unless  acts  so  done 
can  be  proved  to  be  in  conformity  with  the  powers  given  b}'  the  stat- 
utes under  which  those  Acts  are  done,  they  furnish  no  authority 
whatever." 

The  equity  reports  abound  with  cases  in  which  injunctions  have  been 
granted  against  the  application  of  the  funds  of  such  companies  to  pur- 
poses not  authorized  by  the  Acts  of  Parliament  creating  them,  although 
professedly  for  the  benefit  of  the  shareholders  :  and  I  apprehend  that  a 
contract,  against  the  performance  of  which  an  injunction  would  be 
granted  in  equity,  must  be  considered  illegal  and  void  at  law,  on  proof 
that,  to  the  knowledge  of  both  parties,  it  is  beyond  the  power  of  The' 
directors,  and  leads  to^a  misapplication  of  the  Tunds  of  the  Company. 


y^^  J.^/j: 


AMERICAN   NAT.  BANK  v.  AMERIC^  \H^OOD   PAPER  Q(^\)      \f 

1895.     19  Rhode  Island,  139F  ^T    VjA   'V    'A 

Debt  on  bond.     Certified  from  the  Common  Pleas  Division  on 
murrer  to  the  declaration.  y 

Plaintiff  sues  as  purchaser  and  bearer  of  certain  coupon  bonds,  issued'' 
by  the  defendant  corporation  under  its  corporate  seal,  payable  to  the 

1  This  citation  is  from  the  judgment  as  reported  in  16  Z.  J.  N.  S.  Chancery,  78. 
The  passage  in  the  judgment  as  reported  in  10  Beav.  p.  15,  is  to  the  same  effect,  but 
not  in  the  same  language. 

2  Statements  abridged. .  Part  of  opinion  omitted.  —  Ed. 


ri 


^  340      AMERICAN   NATIONAL   BANK   V.   AMERICAN   WOOD   PAPER   CO. 

-f /}    '  -        Girard  Life  Insurance,  Annuity  and  Trust  Company,  or  bearer,  or  in 
^  \j,,  ^      case  of  registry  to  the  registered  owner. 
(\     )*     '1%  7^*^   .^Richard  B.  Comstock  S  Rathhone  Gardner^  for  plaintiff. 

/^  s.«^  t'      P''    lI^  Arnold  Green  &  James  T'dlmghast^  for  defendant. 
\/J^,,    ^       (^         Stiness,  J.     Tlie  plaintiff  sues  to  recover  the  principal  and  interest 
A^l    ^^  due  on  certain  bonds  and  coupons  issued  by  the  defendant  May  1, 

v^  *^  A.  D.  1890,  and  payable  May  1,  1900,  or  sooner  after  five  years.     The 

(iA^,  ^  ■•       bonds  are  secured  by  a  mortgage  of  all  the  defendant's  property,  in  the 

State  of  Pennsylvania,  given  to  a  trustee  for  the  bondholders,  in  which 
j^  it  is  provided  that  in  case  of  default  in  the  payment  of  interest  for  more 
-X  than  six  months,  the  principal  of  said  bonds  shall  be  due  and  payable. 

'^  The  declaration  sets  out  the  bonds  and  mortgage,  profert  of  which  is 

made,  and  alleges  default  in  payment  of  interest  for  more  than  six 
.^ontlis  after  demand  made  therefor.  The  defendant  demurs  to  the 
^y»/^^declaration,  upon  several  grounds  ;  but  the  two  grounds  pressed  in  the 
argument  are  that  the  bonds  are  not  negotiable  so  as  to  give  the  plain- 
tiff a  right  of  action  in  its  own  name,  and  that  the  terms  of  the  mort- 
gage cannot  be  imported  into  the  bonds  so  as  to  give'a  right  of  action 
for  the  principal  thereof  before  maturity. 

AVe  think  that  the  bonds  must  be  treated  as  negotiabjp.  Rpp.nn't.ips. 
"While  there  has  been^some  drversTty  of  opinion  upon  this  subject,  the 
tendenc}'  of  recent  decisions  and  the  weight  of  authority  and  reason 
seem  now  to  be  in  favor  of  negotiabilit}-.  At  first,  before  such  bonds 
had  become  common,  courts  naturally  held  that  they  lacked  the  tech- 
nical and  established  characteristics  of  negotiable  instruments.  Thus, 
in  Crouch  v.  The  Credit  Fonder,  L.  R.  8  Q.  B.  374  (1873),  it  was 
held  that  the  contract  embodied  in  similar  bonds  prevented  them  from 
being  promissory  notes,  even  if  they  had  been  without  a  seal,  and  that 
the  custom  to  treat  them  as  negotiable,  being  of  recent  origin,  could  not 
attach  as  incident  to  a  contract  contrary  to  the  general  law.  But  in 
Goodwin  v.  Robarts,  L.  R.  10  Exch.  337  (1875),  the  court,  by  Cock- 
burn,  C.  J.,  does  not  concur  in  thinking  the  latter  ground  conclusive. 
In  the  recent  case  Venahles  v.  Baring,  L.  R.  3  Ch.  Div.  527  (1892), 
American  railroad  bonds,  upon  the  evidence  of  an  American  lawj-er  as 
to  their  negotiability  in  this  country,  were  held  to  have  acquired  in 
England,  in  the  city  of  London,  among  English  merchants,  the  char- 
acter of  negotiability.  Notwithstanding  the  limitations  of  this  decision 
we  think  it  may  be  taken  as  practically  settling  tlie  rule  in  England. 
See  also  In  re  Imperial  Land  Co.,  L.  R.  11  Eq.  Cas.  478.  In  this 
country  the  decisions  have  been  quite  explicit.  The  principle  on  which 
tliey  rest  was  well  stated  by  INIr.  Justice  Grier,  in  Mercer  County  v. 
Ilachit,  1  Wall.  83  (1863),  as  follows: 

"This  species  of  bonds  is  a  modern  invention,  intended  to  pass  by 
manual  delivery  and  to  have  the  qualities  of  negotiable  paper ;  and 
their  value  depends  mainl}'  upon  this  character.  Being  issued  b3'  States 
and  corporations  they  are  necessarily  under  seal.  But  there  is  nothing 
immoral  or  contrary  to  good  policy  in  making  them  negotiable,  if  the 


AMEEICAN   NATIONAL   BANK   V.   AMERICAN   WOOD   PAPER   CO.      341 

necessity  of  commerce  require  that  they  should  be  so.  A  mere  tech- 
nical dogma  of  the  courts  of  common  law  cannot  prohibit  the  commer- 
cial world  from  inventing  or  using  any  species  of  security  not  known  in 
the  last  century.  Usage  of  trade  and  commerce  are  acknowledged  by 
courts  as  part  of  the  common  law,  although  they  may  have  been  un- 
known to  Bracton  or  Blackstone.  And  this  malleability  to  suit  the 
necessities  and  usages  of  the  mercantile  and  commercial  world  is  one 
of  the  most  valuable  characteristics  of  the  common  law.  When  a  cor- 
poration covenants  to  pay  to  bearer  and  gives  a  bond  with  negotiable 
qualities,  and  bj'  this  means  obtains  funds  for  the  accomplishment  ot 
the  useful  enterprises  of  the  daj^,  it  cannot  be  allowed  to  evade  the  paj-- 
ment  b}-  parading  some  obsolete  judicial  decision  that  a  bond,  for  some 
technical  reason,  cannot  be  made  payable  to  bearer.  That  these  secu- 
rities _are.txeated  51S  negotiable  by  the  commercial  usages  of  j,he  whole 
civilized  world  and  have  received  the  sancfions  of  judicial  recognition, 
not  only  injthis  court  {TFAj^g  v.  Vermont  R.  E.,  21  How.  575)^bjitjif 
nearly  every  State  in  \be  Union,  is  well  known  and  admitted." 

After  this  strong  statement  it  is  needless  to  say  more,  except  to  refer 
to  a  few  cases  to  the  same  effect.  Kneeland  v.  Laun-ence,  140  U.  S. 
209  ;  Chicago  Railway  Co.  v.  Merchants^  Bank,  136  U.  S.  268 ; 
DeHass  v.  Roberts,  59  Fed.  Rep.  853  ;  Reid  v.  Bank  of  Mobile,  70 
Ala.  199  ;  National  Exchange  Bank  v.  Hartford,  Prov.  &  Fishkill 
R.  R.  Co.,  8  R.  I.  375  ;  1  Randolph  on  Commercial  Paper,  §  74,  note  1, 
and  cases  cited.  It  is  true  that  some  States  have  statutes  which  declare 
bonds  of  this  kind  to  be  negotiable,  (see  2  Amer.  &  Eng.  Ency.  of  Law, 
319),  and  the  point  is  taken  that  it  is  not  so  in  this  State,  since  Pub. 
Stat.  R.  I.  cap.  142,  §§  6,  7,  relate  only  to  promissory  notes.  We  do 
not  think,  however,  that  this  fact  prevents  us  from  holding  these  bonds 
to  be  negotiable.  Such  statutes  are  declaratory  and  remedial  and  are 
evidently  not  intended  to  exclude  other  forms  of  negotiable  paper. 
Bonds  of  this  sort  are  clearly  within  the  intent  of  the  statute  to  give  a' 
title  by  delivery  and  a  right  of  action  to  the  holder  of  negotiable  paper, 
and  the  bonds  in  effect  are  promissory  notes.  The  special  provisions 
contained  therein  are  not  such  as  to  deprive  them  of  their  fundamental 
character  of  a  promise  to  pay  at  a  certain  time.  These  bonds  are  not 
given  as  collateral  to  a  note  secured  bj'  mortgage,  but  the  mortgage  is 
securit}'  for  the  bonds  themselves.  Riker  v.  Sjtrague  Manuf.  Co.,  14 
R.  I.  402.     See  Costello  v.  Crowell,  127  Mass.  293,  and  134  Mass.  280. 

[Omitting  opinion  on  remaining  point.] 

Our  conclusion  is  that  tlie  demurrer  to  the  negotiability  of  the  bonds 
must  be  overruled,  and  the  demurrer  to  the  statements  of  the  plaintiffs 
present  right  of  action  must  be  sustained. 


^)/o(\f 


Jt^ 


342 


GAS 


,  ^- .  e'  ^  (^  ysft);^is(&^«).  Wilder  gas  co. 


^'^-^^v*^'^ 

^^"l^-^ 

^:!:< 


91  Maine,,  492.1 


WiSWELL,  J. 


'5- 


i>^' 


This  action  is  to  recover  tlie  purchase  price  of  cer- 
tain materials  furnished  by  the  plaintiffs  for  the  construction  of  a  gas 
plant  at  Eockland.  The  defendant  denied  that  it  had  ordered  the 
goods,  or  received  them,  or  that  it  had  any  connection  whatever  with 
the  construction  of  the  gas  plant. 

For  the  purpose  of  showing  that  the  defendant  did  construct  this 
plant,  and  that  it  received  and  used  these  articles  in  the  construction, 
^>4he  plaintiffs  were  allowed  to  introduce  in  evidence,  against  the  de- 
fendant's  objection,  a  written  instrument  which  purported  to  be  exe- 
cuted by  the  defendant  corporation  and  which  provided  for  the  con- 
struction of  the  plant.  The  attestation  clause  and  form  of  execution 
were  as  follows  :  —  "In  witness  whereof,  said  Wilder  Gas  Company 
by  the  hands  of  its  chairman  of  the  executive  committee,  Luke  A. 
^  •  "  n'J>^^  caT^^^^^^®^'  thereunto  duly  authorized,  has  hereunto  set  its  corporate  name 
'  f^>^  I  jl)i^  and  affixed  its  corporate  seal,  and  said  Knox  Gas  and  Electric  Com- 
//^*  jJ  T  j/t^  pany  by  the  hand  of  A.  D.  Bird,  its  Treasurer,  thereunto  duly  author- 
*^'^  ^  ^  ized,  has  set  its  corporate  name  and  affixed  its  corporate  seal  the  year 
and  day  above  written. 

The  Wilder  Gas  Co.,  by  Luke  A.  Wilder, 

Chairman  of  Executive  Committee  (L.  S.) 
Knox  Gas  &  Elec.  Co.,  by  A.  D.  Bird,  Treas.  (L.  S.)  " 
Objection  was  made  to  the  introduction  of  this  instrument  upon 
two  grounds :  because  it  was  not  a  contract  between  the  parties  to  the 
suit,  and^ecause  there  was  no  evidence  showing  that  the  contract  had 
been  authorized  by  the  defendant  corporation^  We  have  no  doubt  that 
a  contract  between  the  defendant  and  the  owner  of  the  plant,  if  shown 
by  colnpetent  testimony  to  have  been  authorized  by  the  defendant, 
was  admissible  in  evidence  for  the  purpose  for  which  it  was  introduced. 
But  was  there  any  evidence  showing  that  this  instrument  was  the 
contract  of  the  defendant  ?  The  signature  of  Luke  A.  Wilder,  and 
the  fact  that  at  the  time  he  was  a  member  of  the  board  of  directors 
and  of  the  executive  committee  of  the  deferidant  corporation,  were 
proved  and  admitted;  but  there  was  no  evidence  by  record  or  other- 
wise, outside  of  the  instrument  itself,  and  the  fact  that  it  bore  the 
corporate  seal,  that._the  contract  was  ever  authorized  by  the  corpora- 
tionj__pr  that  Wilder  had  authority  to  execute  this  contract  or  contracts 
of  this_general  description,  or  that  the  executive  committee  or  aify 
member  thereof- had  any  authority  to  make  contracts  of  this  nature. 

Some  cases  and  text  writers  have  laid  down  the  rule  that  the  pre- 
sence of  the  corporate  seal  upon  an  instrument  that  jmrports  to  be  the 
contract  of  a  corporation  gives  rise  to  a  prima  facie  presumption  that 
it  was  affixed  by  proper  authority ;  while  others  very  materially  limit 
1  Statement  and  arguments  omitted.  — Ed. 


(O^ 


;>^^ 


MORRISON   V.   WILDER  GAS   CO. 


343 


the  rule  by  saying,  that  when  the  seal  is  affixed  by  a  proper  official,  in 
the  line  of  his  authority,  it  is  evidence  of  the  assent  and  act  of  the 
corporation. 

Here  the  only  proof  was  that  Wilder  was  a  director  and  member  of 
the  executive  committee.    But  a  director,  as  such,  has  no  authority  to 
make  contracts  for  his  corporation.     He  may  of  course  have  such  au- 
thority, —  it  may  be  either  express  or  implied,  and  it  may  be  shown 
by  record  or  parol,  —  but  it  does  not  follow  that  he  had,  merely  from 
the  fact'of  his  being  a  director.     It  is  a  familiar  rule,  which  requires^ 
no  citation  of  authority,  that  directors  of  a  corporation,  as  such,  have  / 
no  implied  authority  to  act  singly ;  they  can  only  act  as  a  board,  un-/ 
less  there  be  an  express  or  implied  delegation  of  authority  to  act  in^ 
dividually.     So  far  as  this  case  shows,  Wilder  had  no  such  authority; 
he  was  not  the  proper  official,  either  to  sign  the  corporate  name  or  to 
affix  the  corporate  seal ;  it  was  not  within  the  line  of  his  authority. 

We  can  see  no  reason  why  the  presence  of  a  corporate  seal,  which 
does  not  appear  to  have  been  affixed  by  one  having  authority,  or  by  a 
proper  official  in  the  general  line  of  his  authority,  should  be  even 
prima  facie  evidence  that  a  contract,  signed  and  sealed  by  a  person, 
who,  so  far  as  the  case  shows,  had  no  authority  to  make  or  execute 
this  or  such  a  contract,  was  the  contract  of  the  corporation. 

We  very  much  prefer  the  doctrine  laid  down  by  Mr.  Morawetz  in 
his  work  on  Private  Corporations.  We  quote  from  that  work  a  por- 
tion of  section  340 :  "  It  has  sometimes  been  said,  that,  if  the  seal  of 
a  corporation  appears  to  be  affixed  to  an  instrument,  the  presumption 
is  that  it  was  rightfully  affixed,  —  that  the  seal  is  itself  prima  facie 
evidence  that  it  was  affixed  by  the  proper  authority.  The  meaning  of 
these  statements  is  not  perfectly  clear.  The  seal  of  a  corporation  cer- 
tainly has  no  mysterious  virtue  not  possessed  by  other  seals ;  and  a 
contract  under  seal  executed  by  the  agents  of  a  corporation  is  subject 
to  the  same  rules  of  evidence,  and  of  law,  as  a  similar  contract  exe- 
cuted by  the  agents  of  an  individual.  In  order  to  prove  the  execution 
of  a  contract  purporting  to  have  been  executed  under  the  corporate 
seal,  two  facts  must  be  shown.  First,  it  must  be  shown  that  the 
agents  by  whom  the  contract  purports  to  have  been  executed  were  in 
fact  agents  of  the  corporation,  having  authority  to  execute  the  con- 
tract in  question,  or  contracts  of  that  general  description ;  and,  sec- 
ondly, it  must  be  shown  that  the  signatures  are  genuine,  or,  in  other 
words,  that  these  agents  did  actually  execute  that  particular  contract. 
The  mere  circumstance  that  a  seal  was  affixed  to  the  contract  would 
evidently  not  tend  to  establish  either  one  of  these  facts." 

Here  there  was  sufficient  evidence  that  Wilder  executed  the  contract  \C^ 
in  the  name  of  the  corporation  and  affixed  thereto  the  corporate  seal. 
There  was  no  evidence  whatever  that  he  had  any  authority,  express 
or  implied,  to  execute  this  contract,  or  contracts  of  this  nature,  or 
any  contract  whatsoever  for  the  defendant  corporation.  We  think 
therefore,  that  the  instrument  was  improperly  admitted. 

Exceptions,  sustained. 


<K<^: 


^  y  ^ 


GASHWILEE  V.   WILLIS. 


CHAPTEK  X. 

DIEECTOKS. 


4/   S,ff^^^^  rWC^"^  SECTION  I.  / ..  .        J 

X;'^  ^.^^  y^^     ^  jft'-  Powers  of  Directors.      W   /^  ^ 

^/^^•<     M.^-(^*        U^  GASHWILEE  v.   WILLIS. 

^ij    y^pt^     JV        Ul^Jl^  1867.     33  California,  11.1 

^tp^  Ia^^  ^^  Action  for  false  representation.     The  defendants  were  stockholders 

'       i^)'      y^       lys^  ^  California  corporation,  The   Eawhide   Eanch    Gold  and  Silver 

^y^'^^  Jf  y      Mining  Company.     Plaintiffs  averred  that  they  were  induced  to  pur- 

t\f4^^  L  ^     ^    chase,  on  October  2, 1865,  the  company's  mine ;  and  that  this  purchase 

Xr  ^^^ -  o'^^'''^   jjyJ+was  induced  by  the  false  representations  of  defendants  as  to  the  terms 

^^  "•^    ^  e^^^      of  a  trust  deed  which  had  been  executed  by  the  corporation  to  Barney, 

'V^  ,  u^     /ULA'^*'^^^    June  5,  1865,  and  under  which  other  parties  had  a  better  title  than 

!a^      0f^     '.»>/^       plaintiffs  acquired  by  their  subsequent  purchase  in  October. 

^/^^    ^.  "X?"     ^  On  April  29, 1865,  at  a  stockholders'  meeting,  afwhich  all  the  stock- 

^\.  ^'  *_     i'^  holders  were  present,  a  resolution  was  unanimously  adopted  authoriz- 

'""^  ing  Turner,  Willis,  and  Hodges,  Trustees  of  the  corporation,  for  and 

^-^  ^     'fc,^     ^^  behalf  of  the  corporation,  to  sell  and  convey  the  mine  to  Barney. 

V"*^  fi^^^^^^  (ij^     In  pursuance  of  said  resolution,  and  without  any  other  authority 

V-  ^^^  \yS-^'  shown,  a  conveyance  was  executed  to  Barney,  on  June  5,  by  said 

/  ^  \y^'^  Trustees,  purporting  to  be  the  deed  of  the  corporation.     The  deed  was 

,  »  (5.'  signed  by  the  Trustees,  for  and  on  behalf  of  the  corporation;  the 

--  Trustees  afi&xing  their  own  seals,  "the  said  corporation  having  no 

seal." 

On  the  trial,  after  proving  the  adoption  of  the  resolution,  plaintiffs 
offered  in  evidence  the  said  deed  of  June  6,  which  was  excluded  by 
the  court.  To  this  exclusion,  the  plaintiffs  excepted,  and  the  case 
came  up  on  appeal. 

11.  P.  Barber,  and  James  H.  Hardy,  for  Appellants. 
John  B.  Hall,  and  Caleb  Dorsey,  for  Eespondents. 
Sawyer,  J.  .  .  . 

Under  the  view  we  take,  it  will  only  be  necessary  to  consider  the 
t,  1  Statement  abridged.    Argument  and  parts  of  opinion  omitted. — Ed. 


GASHWILER   V.   WILLIS.  345 

first  ground  of  the  objection,  and  the  question  is,  does  the  instrument 
in  question  appear  to  be  the  act  or  deed  of  the  corporation  ? 

We  are  not  aware  of  anything  in  the  law,  independent  of  any 
authority  expressly  conferred  by  the  corporation,  which  authorizes 
Turner,  Willis  and  Hodges,  in  their  official  character  as  Trustees,  to 
execute  the  instrument  in  question  on  behalf  of  the  corporation.  No 
law  of  the  kind  has  been  called  to  our  attention,  and  we  do  not  under- 
stand that  any  is  claimed  by  appellants'  counsel  to  exist.  And  there 
is  nothing  in  the  nature  of  those  ofiices,  as  connected  with  the  ob- 
ject and  business  of  the  company,  from  which  a  general  power  in  the 
Trustees,  when  not  acting  as  a  Board,  to  sell  and  convey  the  mine, 
mill  and  other  property  of  the  company,  could  be  implied.  {McCul- 
lough  v.  Moss,  5  Den.  575.)  The  parties  executing  the  instrument, 
then,  if  they  had  any  authority  in  the  premises,  must  have  derived  it 
from  some  corporate  act ;  and  the  only  act  proved  or  relied  on  is  the 
resolution  adopted  at  the  stockholders'  meeting  before  mentioned. 
This  was  a  meeting  of  the  stockholders  only.  It  was  called  as  such, 
and  the  proceedings  all  appear  to  have  been  conducted  as  a  stock- 
holders' meeting.  The  resolution  authorizing  the  sale  and  convey- 
ance of  the  mine,  etc.,  in  question,  was  adopted  by  the  stockholders, 
as  such,  at  said  meeting,  and  not  by  the  Board  of  Trustees,  or  at  any 
meeting  of  said  Board.  The  Board  of  Trustees  do  not  appear  to  have 
ever  acted  at  all  upon  the  matter  in  the  character  of  a  Board,  but  the 
testimony  shows  that  they  acted  in  pursuance  of  the  said  resolution 
adopted  at  the  meeting  of  stockholders. 

Section  five  of  the  Act  authorizing  the  formation  of  corporations 
for  mining  purposes  provides  :  "  That  the  corporate  powers  of  the*\ 
corporation  shall  be  exercised  by  a  Board  of  not  less  than  three  Trus-        , 
tees,  who  shall  be  stockholders,"  etc.     And  section  seven  provides    '^V 
that:  "A  majority  of  the  whole  number  of  Trustees  shall  form  a 
Board  for  the  transaction  of  business,  and  every  decision  of  a  ma- 
jority of  the  persons  duly  assembled  as  a  Board  shall  be  valid  as  a 
corporate  act."     (Laws  1853,  p.  88,  Sec.  5;  7  Hittell's  Gen.  Laws, 
Arts.  936,  938.)      Conferring  authority  to  sell  and  convey  the  corpo*-^ 
rate  property  is  the  exercise  of  a  corporate  power,  and  under  these    1 
provisions  the    "  corporate   powers  of  the   corporation "   are   to  be  u 
exercised  by  the  Board  of  Trustees  when  the  majority  are  "  duly 
assembled  as  a  Board."     When  thus  assembled  and  acting  the  decision    f,     '  t 
of  the  majority  "  shall  be  valid  as  a  corporate  act."     We  find  nothing     J^ 
in  the  Act  authorizing  the  stockholders,  either  individually  or  collec- 
tively in  a  stockholders'  meeting,  to  perform  corporate  acts  of  the 
character  in  question.     The  property  in  question  was  the  property  of 
the  artificial  being  created  by  the  statute.     The  whole  title  was  in  the' 
corporation.     The  stockholders  were  not  in  their  individual  capacities 
owners  of  the  property  as  tenants  in  common,  joint  tenants,  copart- 
ners  or  otherwise.     (^Gorham  v.   Gilson,  28   Cal.   484 ;  Mickles  vT 


346  GASHWILER  V.  WILLIS. 

Rochester  City  Bank,  11  Paige,  128.)  This  proposition  is  so  plain 
that  no  citation  of  authorities  is  needed.  Had  the  stockholders  all 
executed  a  deed  to  the  property,  they  could  have  conveyed  no  title, 
for  the  reason  that  it  was  not  in  them  (  Wheelock  v.  Moulton  et  al.,  15 
Vt.  521) ;  and  what  they  could  not  do  themselves  they  could  not  by 
resolution  or  otherwise  authorize  another  to  do  for  them.  Thecor- 
poration_could  only  act  —  could  only  speak —^through  the  medium 
prescribed Jjy  law,  andl;hat  is  its  Board  of  Trustees.  As  well  might 
tHe^citizens  of  San  Francisco  in  public  meeting  assembled,  by  unani- 
mous resolution  authorize  certain  Supervisors,  designated  by  name,  to 
sell  and  convey  the  City  Hall.  It  is  said,  however,  that  the  Trustees 
were  also  all  present  and  participated  in  the  proceedings  at  the  stock- 
holders' meeting  and  assented  to  the  resolution ;  that  the  resolution 
therefore  was  approved  by  all  of  the  constituents  of  the  corporation, 
and  the  powers  of  the  corporation  were  exhaustively  exercised.  But 
they  were  acting  in  their  individual  characters  as  stockholders,  and 
not  as  a  Board  of  Trustees.  In  this  character  they  were  not  author- 
ized to  perform  a  corporate  act  of  the  kind  in  question.  As  well, 
also,  might  a  valid  ordinance  be  passed  by  the  citizens  of  San  Fran- 
cisco in  public  meeting  assembled,  at  which  the  Supervisors  were  all 
present  and  voted  in  the  affirmative.  Such  an  ordinance,  when  signed 
by  the  Mayor,  would  have  the  assent  of  all  the  constituents  of  the 
corporation  as  clearly  as  the  resolution  in  question  has  in  the  present 
instance.  But  such  is  not  the  mode  in  which  the  corporation  is 
authorized  by  the  law  of  its  creation  to  manifest  its  will  and  exercise 
its  corporate  powers.  The  power  to  sell  and  convey  could  only  be 
conferred  by  the  Trustees  when  assembled  and  acting  as  a  Board. 
IThis  is  the  mode  prescribed.  As  a  Board  they  could  perform  valid 
jcorporate  acts,  and  confer  authority  within  the  province  of  their 
/powers,  upon  the  Trustees  individually  or  upon  any  other  parties  to 
.perform  acts  as  the  agents  of  the  corporation.  We  are  not  without 
lauthorities  upon  this  precise  point. 

In  Conro  v.  Port  Henry  Iron  Company,  12  "Barb.  27,  the  same  ql^es- 
tion  arose.  A  lease  of  the  company's  iron  works  was  made  in  pursu- 
ance of  a  resolution  adopted  at  a  meeting  of  the  stockholders  at  which 
the  Directors  were  present.  It  was  held  that  the  resolution  imparted 
no  authority  to  make  the  lease.  The  Court  say  :  "  The  stockholders 
in  this  case  had  no  power  to  make  a  lease  or  do  any  other  adminis- 
trative act  in  the  management  of  the  affairs  of  the  corporation.  If  a 
lease  could  be  made  at  all,  it  could  be  executed  only  in  pursuance  of 
the  act  of  the  Directors,  who  are  the  body  appointed  by  the  charter 
for  the  management  of  its  affairs.  It  is  no  answer  that  the  individual 
stockholders,  who  were  present  at  the  meeting  when  the  lease  was 
ordered,  were  also  Directors.  They  did  not  meet  as  Directors,  but  as 
stockholders.  The  Mayor  and  Common  Council  of  a  municipal  cor- 
poration can  only  act  in  the  manner  prescribed  by  law.  When  not 
acting  in  their  official  character  and  in  the  mode  prescribed  by  law, 


GASHWILER   V.    WILLIS.  ti^l 

their  acts  are  no  more  binding  than  those  of  other  private  citizens. 
(See,  per  Lord  Mansfield,  Bex  v.  I[ead,.4:  Burr.  2,515,  2,521.)  "  (lb. 
63.) 

[After  commenting  on  various  cases.]  These  cases  are  in  point, 
and  none  to  the  contrary  have  been  called  to  our  attention.  They  a^ 
the  necessary  consequence  of  the  principles  established_by_the  great 
body  of  the^xitliorities,  that  the  corporate  powers  of  corporations  can 
onlj  be  exercisedTih  the  mode  and  through_the  instrumentalities  pre- 
scribed by  their  charters.  In  this  case,  the  resolution  adopted  by  the 
stockholders  was  not  a  corporate  act,  and  it  conferred  on  the  three 
Trustees  named  —  whether  they  constituted  the  whole  number  of 
Trustees  does  not  appear  —  no  authority  to  perform  a  corporate  act, 
to  execute  the  deed,  or  adopt  a  seal  for  the  occasion.  It  not  only 
does  not  appear,  then,  that  the  instrument  in  question  is  the  act  or 
deed  of  the  corporation,  but  it  affirmatively  appears  that  it  was  ex- 
ecuted in  pursuance  of  a  resolution  that  conferred  no  authority 
whatever  to  perform  a  corporate  act;  for  the  plaintiffs  themselves 
introduced  in  evidence  the  authority  under  which  they  claimed  the 
act  to  have  been  performed,  and  upon  which  they  relied.  Having 
done  this,  we  are  not  at  liberty  to  indulge  the  presumption  that  the 
parties  executing  the  deed  on  behalf  of  the  corporation  were  other- 
wise duly  authorized.  The  authority  acted  upon  is  affirmatively 
shown,  and  this  fails.  We  think  the  deed  properly  excluded.  But 
even  if  it  had  been  admitted  without  further  proof  of  the  authority  of 
the  parties  to  execute  it,  it  would  not  have  availed  the  plaintiffs.  As 
there  does  not  appear  to  have  been  any  authoritj'  in  the  parties  assum- 
ing to  act,  to  sell  or  convey  at  all,  it  is  unnecessary  to  discuss  the 
other  questions. 

.Judgment  affirmed. 

Mr.  J'ustice  Rhodes  did  not  express  an  opinion. 

By  the  Court,  Sawyer,  J.,  on  petition  for  rehearing : 

'The  consequences  assumed  as  the  only  basis  of  the  argument  in  the 
petition  for  rehearing  do  not  follow  from  anything  determined  or  in 
any  way  suggested  in  the  opinion  in  this  case.  We  have  nowhere 
held,  or  even  intimated,  that  the  Board  of  Trustees  of  a  corporation 
can  convey  all  the  property  of  the  corporation  necessary  to  enable  it 
to  carry  on  the  business  for  which  it  was  organized,  or  do  anything 
else  destructive  of  the  objects  of  its  creation  without  the  consent  of 
its  stockholders.  We  have  not  even  held  that  it  was  competent  for 
the  Trustees,  acting  as  a_board,  to^Hthbrize^  the  conveyance^ 


grop^erty  now  in_question  without  the  consent  of  the  stockholders. 
There  was  no  such  question  in  the  case.  We  simply  held  that  the)  ^ 
stockholders  themselves  could  not  authorize  the  Trustees,  acting  as  j 
individual  Trustees,  or  anybodsijelse,^  to  convey  it;^^  that  nobody] 
could  convey  it  unless  authorized  by jome  act  of_the^gardof  Trus-J 
tees,  acting'as  a  Boaivd.  It  may  be  conceded  for  the  purposes  of  this* 
case  thaFthe~Board  of  Trustees  itself  could  not  authorize  a  convey 


348 


ELLERMAN  V.  CHICAGO   JUNCTION  R.    CO. 


auce  of  the  i^roperty  in  question  without  the  consent  of  the  stock- 
holders.     But  it  is  unnecessary  to  consider  that  question,  for  the 
case  does  not  present  or  even  suggest  it.     It  will  be  time  enough  to 
decide  that  question  when  it  arises. 
Eehearing  denied. 


EN,  V.  C,  IN  ELLERMAN  v.  CHICAGO  JUNCTION  E.  CO. 

/■^  1891.     49  Ntw  Jersey  Equity,  219,  pp.  231-233. 

ly^  tf    s  (T   1^  Green,  Vice-Chancellor.     The  bill  is  filed  by  a  stockholder  in 

,1 ,      jX^  t/    behalf  of  himself  and  any  other  applying  stockholders  against  the 

jtv    V*  -y^  corporation  to  prevent  its  carrying  a  contract,  made  by  the  directors, 

*/"  '  -.g^  1p  "tr^^L-into  execution,  on  the  ground  that  the  same  is  not  legally  within  the 
jC^ (s^    //    jj-^  powers  conferred  by  its   charter.     No  question   is  raised  as  to  the 

*'      '  y/  validity  of  the  organization,  or  the  legality  of  the  purposes  stated  in 

the  certificate  of  incorporation  as  not  contemplated  by  the  Corpora- 
tion act,  if,  indeed,  such  questions  could  be  raised  by  a  private  person 
in  this  court.  National  Docks  Co.  v.  Central  It.  JR.  Co.,  5  Stew.  Eq. 
lC)0 ;  Elizahetlitoivn  Gas  Light  Co.  v.  Green,  1  Dick.  Ch.  Rep.  118. 
He  appeals  not  through  or  by  the  attorney-general,  but  bases  his 
claim  for  relief  solely  upon  his  ownership  of  certain  shares  of  the 
stock  of  the  Junction  Company.  The  theory  of  the  suit  is,  that 
the  agreement  will  be  an  injury,  primarily,  to  the  company  and,  in- 
cidentally, to  him  as  a  stockholder ;  that  appeal  to  the  present  direc- 
^^'^      L. "  tors  to  protect  the  company  and  stockholders  will  be  futile,  as  they 

y'-r^  ^  have  decided  otherwise,  and,  therefore,  he  asks  to  be  permitted  to 

V.      "^        ii  act    for  himself  and  others   in  like   position.      The   only   damages 

with  which  complainant,  as  a  stockholder,  can  be  threatened  are  to 
the  security  of  his  investment,  and  to  the  dividends  he  expects  to 
receive  —  whether  the  latter  is  imminent  depends  mainly  upon 
the  probable  results  of  the  arrangement  challenged,  as  a  business 
operation.  As  a  holder  of  preferred  stock,  his  fixed  yearly  dividend 
is  secured  by  the  articles  of  incorporation,  while  the  dividend  on  his 
common  stock  must  depend  on  the  success  of  the  business  and  the 
action  of  the  directors,  for  such  dividends  may  be  lawfully  dimin- 
ished if  the  diversion  of  the  same  be  for  a  purpose  which  is  within 
the  corporate  powers,  unless  the  non-declaration  of  them  be  in  fraud 
of  the  rights  of  the  stockholders.  Beach  Corp.  p.  601.  Nor  is 
his  right  to  challenge  action  which  he  may  deem  dangerous  to  his 
investment  absolute.  Individual  stockholders  cannot  question,  in 
judicial  proceedings^  thercorporate  acfs  of  directors,  ifthe^  sameare 
within  the  powers  of  the  corporation,  and,  in  furtherance  of  its 
purposes,  are  not  unlawful  or  against  good  jaorals,  and  arfTHone^in 
good  t'arth  and  in  the  exercise  of  an  honest  judgment.  Questions 
oF  policy  of  management,   of  expediency  of  contracts  oraction^of 


"n 


f^ 


K 


HOYT  V.    THOMPSON'S   EXECUTOR.  349 

adequacy  qf^ consideration  not  grossly  disproportionatCj  of  lawful 
agpropriation  of  corjDorate  funds  to  advance  corporate  interests,  are 
left  solely  to  the  honest  decision  oT  the  directors  if  their  powers  are 
without  liimtation_andiree  from  restraint.  To  hold  otherwise  would 
be  tosubstitute  the  judgment  and  discretion  of  othersjn  the  place  of 
those  determined  on  by  the  scheme  of  incorporation.  Park  v.  Grant 
Locomotive  Works,  13  Steiu.  Eq.  114  ;  affirmed,  18  Steiv.  Eq.  244  ; 
Elkins  V.  Camden  and  Atlantic  R.  R.  Co.,  9  Stew.  Eq.  241 ;  Rutland 
and  B.  R.  Co.  v.  Proctor,  29  Vt.  93 ;  Morawetz  Corp.  §  243  ;  Beach 
Corp.  p.  388. 

By  the  Corporation  act  {Rev.  p.  177  §  1  If  6)  power  is  given  to  cor- 
porations to  make  by-laws  for  the  regulation  and  government  of  its 
affairs. 

By  the  by-laws  of  the  Junction  Company,  article  2,  section  1,  it  is 
provided  that  the  business  of  the  company  shall  be  managed  and  con- 
ducted by  a  board  of  ten  directors. 

The  bill  alleges  that  the  board  of  directors  of  the  Junction  Com- 
pany did,  by  a  resolution,  order  and  direct  the  execution  of  the  con- 
tract in  question,  and  the  answer  of  the  company  states  that  each  and 
every  director  of  the  company  has  voted  in  favor  of  the  agreement 
as  being  for  the  best  interests  of  the  company. 

The  agreement,  then,  has  the  unanimous  sanction  of  the  board  of 
directors,  to  whose  judgment  and  determination  the  management  and 
control  of  the  affairs  of  the  company  has  been  entrusted  without 
restriction. 

[The  court  held,  that  the  covenants  entered  into  by  the  company 
in  this  contract  "  are  referable  to  the  objects  stated  in  their  certificate   *  - 

of  incorporation  or  to  power^  incident  to  the  corporation,  and  are  au-^^-f  i^u^^  '^ 


thorized  by  its  charter."]/  ,-\  ,  Ap'  ^/ <  k^^^^^o^     6~^  ^i^^* 

e/?^^/^o4j;Ptj^^  EXECUTOR  i<-^  ^^y*^  U  rd>{% 

CoMSTOCK,  J.  .  .  .  The  precise  point  in  controversy  is,  whether  the^^'/Hnvz/t-'^w^f  -y  "^ 
plaintiff  or  one  Abraham  G.  Thompson  became  entitled  to  a  bond  and  \s>K.*,Jii^^ ^  -^  £y^4''t 
mortgage  of  $G0,000,  executed  in  November,  1839,  by  the  Long  Island  ■^  _  ,  •  ^^ 
Railroad  Company,   a  corporation  chartered   by  this  State,  to   the^  f^ 

Morris  Canal  and  Banking  Company.     The  last  mentioned  company^ ^f  --^fl-^7*'.    v*^^f^ 
was  a  New  Jerse}''  corporation,  and  held  and  owned  this  security  until  ^  ,^    L,  ♦  ^ 

December  9,  1840,  when  an  assignment  of  it  was  made  to  the  State  of  ^  _   zv     fkjhit, 

Michigan.     Thompson  claimed  title  and  acquired  possession  of  the^^*^  ^^  T^ 

security  under  this  transfer,  having  purchased  it  at  auction  from  the'-^'^    unw    *♦     ^-^ 
agent  of  Michigan,  in  May,  1843.     The  plaintiff  claims  under  a  trans-  -^.c^^*-^^*-^    **  ^ 
fer,  junior  in  point  of  time,  made  to  one  Sanxay  his  immediate  as-  L^^^Jt-^'C**-**  i-J*^*^ 
1  Only  part  of  the  report  is  given.  —Ed.  -^ ^    '^  >(xri^>v/»      /?vj^  h^l<A^i  '^i'^ 


^^ 


350  HOYT  V.  THOMPSONS   EXECUTOR. 

yignor,  by  the  receivers  of  the  Morris  Canal  and  Banking  Company, 
on  the  13th  of  November,  1845.  Those  receivers  were  appointed  in 
January,  1842,  by  the  Court  of  Chancery  of  the  State  of  New  Jersey, 
in  a  suit  instituted  against  the  company  in  August,  1841,  by  Richards 
and  Selden,  who  were  its  judgment  creditors.  If  the  plaintiff  can 
impeach  the  prior  transfer  to  the  State  of  Michigan  and  the  title  which 
the  plaintiff  derived  from  that  State,  no  doubt  exists  in  regard  to  the 
validity  of  his  own  title.  The  validity  of  that  assignment  to  Michigan 
is  denied  by  the  plaintiff  on  two  grounds :  First,  that  it  was  made  by 
the  executive  officers  of  the  company  without  the  authority  of  the 
board  of  directors,  in  other  words,  that  it  was  not  the  act  of  the  cor- 
poration, and  for  that  reason  was  utterly  void.  Second,  on  the  ground 
that  it  was  voidable  as  to  creditors,  under  an  act  of  the  Legislature  of 
New  Jersey,  passed  February  16,  1829,  *'  To  prevent  frauds  by  incor- 
porated companies."  These  two  grounds  of  objection  have  no  depend- 
ence on  each  other,  and  they  will,  therefore,  be  separately  considered. 

First.  The  Morris  Canal  and  Banking  Company  was  authorized  by 
its  charter,  granted  in  1824,  to  construct  a  canal  in  the  State  of  New 
Jersey,  and  also  to  carry  on  the  business  of  banking ;  to  buy  and  sell 
bills  of  exchange ;  to  deal  in  public  and  corporate  stocks ;  to  loan 
money  on  bond  and  mortgage  ;  to  receive  money  or  property  in  trust 
and  to  execute  trusts.  Its  capital  stock,  for  the  purpose  of  building 
the  canal,  was  fixed  at  $1,000,000,  and  $1,000,000  more  could  be  added 
for  the  purposes  of  banking.  The  number  of  directors,  originally 
fifteen,  was  increased  by  a  supplementary  act  to  twenty-three,  and  it 
was  declared  that  "the  corporate  powers  of  the  company  should  be 
exercised  by  tlie  board."  Authority  was  given  to  establish  such  by- 
laws, ordinances  and  regulations  as  should  be  deemed  necessary  or 
convenient  for  the  transaction  of  its  business.  A  code  of  by-laws  was 
adopted,  one  of  which  provided  for  stated  meetings  of  the  directors, 
in  each  week,  and  declared  that  five  directors,  including  the  president, 
should  form  a  quorum  for  the  transaction  of  the  ordinary  business  of 
the  company.  In  the  intervals  between  the  stated  meetings  of  the 
directors,  the  business  and  affairs  of  the  company  were  to  be  managed 
by  the  standing  and  special  committees,  whicii  were  to  report  their 
proceedings  for  the  approbation  of  the  board.  The  same  by-laws  set 
forth  certain  acts  which  could  not  be  done  without  the  concurrence  of 
a  majority  of  all  the  directors,  such  as  the  election  of  officers  and  the 
filling  of  vacancies  in  the  board. 

We  come  now  to  the  transaction  between  the  company  and  the 
State  of  Michigan,  examining,  in  this  connection,  only  the  question 
wliether  the  transfer  to  that  State  of  the  bond  and  mortgage  in  con- 
troversy is  to  be  regarded  as  made  by  the  authority  of  the  corporation. 
In  tlio  course  of  its  dealings  the  com])any  became  largely  indebted  to 
Micliigan,  and  in  the  year  1840,  the  State  was  pressing  for  payment; 
the  amount  due  then  being  about  $800,000.  The  negotiations,  which 
were  carried  on  for  a  considerable  time,  resulted  in  an  agreement, 


HOYT   V.    THOMPSON'S   EXECUTOR.  851 

dated  3)ecember  9, 1840,  professing  to  be  between  the  company  of  the 
one  part,  and  the  State  of  Michigan  of  the  other,  whereby  certain 
securities  held  by  the  company  were  to  be  delivered  over  to  the  State, 
and  the  debt  was  to  be  paid  by  installments,  extending  through  a 
period  of  some  ten  or  twelve  years.  The  State,  on  its  part,  agreed  to 
receive  the  debt  in  those  installments,  and  to  extend  the  time  accord- 
ingly, provided  the  payments  were  made  pursuant  to  the  stipulation. 
The  securities  mentioned  in  the  agreement  consisted  of  various  bonds, 
mortgages,  stocks  and  bills  receivable,  amounting  nominally  to  be. 
tween  $500,000  and  $600,000 ;  and  among  them  was  the  bond  and 
mortgage  of  the  Long  Island  Railroad  Company,  which  is  the  subject 
of  the  present  controversy.  The  agreement  was  under  the  corpojiate 
^fial_Ql_the_company,  and_was^gned  on  its  behalf  by  its  president 
and  cashier.  It  was  carried  into  effect  by  an  actual  transfer  and  de- 
nVery  of^the  securities  specified.  On  the  part  of  the  plaintiff  it  is 
insisted  that  the  agreement  and  transfer  were  wholly  inoperative  and 
void,  on  the  ground  that  they  were  never  formally  authorized  by  the 
board  of  directors.  It  appears,  however,  from  the  recorded  proceed- 
ings of  the  board,  that  at  a  meeting  held  on  the  5th  of  November, 
1840,  there  being  present  a  quorum  of  five  members,  in  accordance 
with  the  by-law  above  mentioned,  the  negotiations  with  Michigan 
were  mentioned  by  the  president  as  being  nearly  completed ;  and  it 
also  appears  that  at  a  meeting  held  on  the  31st  of  December,  1840,  the 
same  quorum  being  present,  including  the  president,  a  formal  resolu- 
tion was  adopted,  approving  of  the  said  agreement  entered  into  on  the 
9th  of  the  same  month,  and  directing  the  executive  officers  of  the 
company  to  comply,  in  all  respects,  with  the  provisions  thereof.  The 
company,  at  the  time  of  this  transaction,  was  embarrassed  in  its  affairs, 
but  it  kept  its  office  open  and  continued  to  transact  business  until 
September,  1841,  when  it  went  into  open  insolvency.  During  the 
period  of  its  existence  remaining  after  these  arrangements  were  made 
with  Michigan,  no  objection  thereto  appears  to  have  been  made  on  the 
part  of  the  company.  On  the  contrary,  there  seems  to  have  been 
entire  acquiescence,  and  the  company  received  the  advantages  result- 
ing from  an  extension  of  a  very  large  debt,  which  had  been  pressed 
with  great  earnestness,  and  which  it  had  no  present  means  of  paying. 
The  first  inquiry  suggested  by  the  facts  stated  is,  whether  the  by- 
law ofthe  company  authorizing  a  quorum  of  five  directors,  includingA  /\ 
j-.Vip 'j^pgHppf^^~i-,ranjiaji!i7,QLdi'i^^y  business,  was  a  valid:  negotiation.!  l^ 
We  are  clearly  of  opinion  that  it  was.  The  charter  of  the  company,} 
it  is  true,  declared  that  its  powers  should  be  exercised  by  a  board  oi 
twenty-thrfiB^irectors.  and  it  may  well^be  conceded  that  in  the  absence 
of  any  different  regulation,  a  majority  of  the  whole  number  would  he 
necessary  to  constitute  a  ie^l  quorum  for  the  transaction  of  any 
business  whatever.  But  it  would  be  a  very  extraordinary  construe 
tion  of  thcT^lrarter  in  this  respect,  to  hold  that  the  board  of  twenty- 
three  directors,  or  a  majority  thereof,  must  meet  and  act  whenever 


(» 


352  HOYT   V.   THOMPSONS   EXECUTOR. 

any  corporate  power  was  to  be  exercised,  and  that  no  delegation  of 
authority  coukl  be  made  to  subordinate  agents,  to  committees,  or  to  a 
i  quorum  consisting  of  a  smaller  number.  The  board  of  directors  of  a 
corporation  do  not  stand  in  the  same  relation  to  the  corporate  body 
which  a  private  agent  holds  toward  his  principal.  In  the  strict  rela- 
tion of  principal  and  agent,  all  the  authority  of  the  latter  is  derived 
by  delegation  from  the  former,  and  if  the  power  of  substitution  is  not 
conferred  in  the  appointment,  it  cannot  exist  at  all.  But  in  corporate 
bodies  the  powers  of  the  board  of  directors  are,  in  a  very  important 
sense,  original  and  undelegated.  The  stockholders  do  not  confer, 
nor  can  they  revoke  those  powers.  They  are  derivative  only  in  the 
sense  of  being  received  from  the  State  in  the  act  of  incorporation.  The 
directors  convened  as  a  board  are  the  primary  possessors  of  all  the 
powers  which  the  charter  confers,  and  like  private  principals  they 
may  delegate  to  agents  of  their  own  appointment  the  performance  of 
any  acts  which  they  themselves  can  perform.  The_recognition  of  this 
principle  is_absoIutely^necessar;VL  in  the  affairs  of  every^^rporatioji 
whosepQwers^re  vested  in  a  board  of  directors.    Without  it  the  most 


oj-dinary  business  coifld  not  be  carried^on,  and  the  corporate j)Owers 
could  jiot^  be  executed.  ^It~is~uponThis  principle,  not  less  than  upon 
the  express  power  contained  in  the  charter  to  enact  by-laws,  that  the 
by-law  in  question,  adopted  by  the  Morris  Canal  and  Banking  Com- 
pany, rests.  It  was,  in  substance  and  effect,  a  regulation  which  con- 
Istituted  a  subordinate  agency  to  conduct  the  ordinary  business  of  the 
corporation.  The  persons  composing  the  agency  would  change  accord- 
ing as  the  quorum  of  five  or  more  directors  attending  the  meetings 
might  be  constituted  of  different  individuals.  But  if  the  board  could 
delegate  the  power  of  transacting  business  to  five  or  more  individuals 
named,  no  doubt  exists  that  the  same  authority  might  be  imparted  to 
a  shifting  quorum,  composed  of  the  same  number. 

In  the  next  place,  were  the  arrangements  made  with  the  State  of 
Michigan7"^^"or5inary  business,"  within  the  meaning  of  the  by-law  ? 
TW7)rdinary  business  of  the  corporation  had,  I  think,  nolimit~sHort 

iof  the  varied  an^  e'xterisive  a^airs  in  which  it  was~aufEoi'ized  by  its 
charter  to_engageT  It  could  construct  and  operate  a  canal,  deal  in 
stocks  and  in  trusts,  and  it  could  carry  on  the  business  of  banking  in 
all  its  departments.  If  the  due  execution  of  these  powers  did  not 
constitute  the  ordinary  business  of  the  company,  then  it  seems  to  me 
impossible  to  suggest  any  definition  of  those  terms,  and  the  by-law 
becomes  senseless  and  unmeaning ;  and  if  these  express  powers  of  the 
corporation  were  embraced  in  the  terms  of  the  by-law,  it  must  neces- 
sarily follow  that  the  quorum  designated  took  all  the  incidental  au- 
thority which  the  whole  board  would  possess  in  the  execution  of  the 
(same  powers.  In  the  operations  of  banking,  which  constituted  one 
portion  of  the  ordinary  business,  it  might  become  necessary  to  borrow 
money  and  the  power  to  do  so  existed.  (Curtis  v.  Leavitt,  15  N.  Y. 
9.)     As  debts  could  be  created,  the  incidental  power  of  paying  them 


BURKILL   V.    NAHANT   BANK. 


353 


cannot  be  doubted.  So  the  condition  of  the  company's  affairs  might 
require  a  negotiation  with  creditors  and  the  postponement  and  secur- 
ing of  their  demands.  To  secure  a  debt  and  procure  its  forbearance 
in  a  period  of  embarrassment  would  not,  by  any  means,  be  an  extraor- 
dinary act,  in  the  sense  of  the  by-law,  although  it  might  be  very 
unusual  in  the  magnitude  and  importance  of  the  transaction.  In  the 
case  before  us,  if  the  debt  due  to  the  State  of  INIichigan  had  been 
much  smaller  in  amount,  and  the  company  had  pledged  only  an  in- 
considerable portion  of  their  assets  to  secure  its  payment  at  a  future 
day,  in  order  to  avoid  the  inconvenience  of  a  present  liquidation,  no 
one  would  claim  that  such  a  transaction  was  extraordinary.  But  can 
the  validity  of  such  an  act  depend  on  the  inquiry  whether  the  debt 
and  the  security  pledged  were  a  small  or  a  large  debt  and  security  ? 
If  so,  then  at  what  sum  or  value  would  the  transaction  cease  to  belonsr 
to  the  ordinary  business  of  the  corporation,  and  become  extraordinary, 
so  as  to  exclude  the  authority  of  the  quorum  constituted  by  the  by- 
law ?  If  this  question  cannot  be  answered,  as  plainly  it  cannot  be, 
the  conclusion  would  seem  to  follow  that  the  mere  magnitude  of  the 
arrangements  with  Michigan  furnish  no  ground  for  impeaching  their 
validity.  In  adopting  this  conclusion,  it  is  assumed  that  those  arrange- 
ments were  entered  into,  not  for  the  purpose  of  arresting  the  business 
of  the  corporation,  but  as  a  means  of  avoiding  present  embarrass- 
ments, and  with  the  design  of  facilitating  the  further  and  continued 
prosecution  of  its  ordinary  business.  That  such  were  the  motives 
which  prompted  the  negotiation  seems  to  have  been  found  as  a  con- 
clusion of  fact  by  the  court  from  which  the  present  appeal  is  taken, 
and  the  evidence  certainly  tends  to  that  result. 

As  already  stated,  the  transfer  of  securities,  including  the  one  in 
question  to  Michigan,  was  made  with  the  previous  knowledge  of  the 
quorum  of  directors  constituted  by  the  by-law,  and  the  same  quorum 
subsequently,  by  a  formal  resolution,  expressly  ratified  and  approved 
the  transaction.  Upon  that  authority,  therefore,  the  transfer  rested ; 
and  for  the  reasons  which  have  been  given,  wej  think  the  authority 


was  sufiicient 

[Kemainder  of  opinion  omitted.] 


Shaw,  C.  J.,  in  BURRTLL^v.  KAHANT  BANK. 


18-iO.    2  Metcalf  (Massachusetts),  163,  pp.  160,  167. 

Shaw,  C.  J.  ...  It  was  contended  that  a  board  of  bank  directors, 
exercising  themselves  a  delegated  authority,  have  no  power  to  dele- 
gate an  authority  to  any  committee  to  alienate  or  mortgage  real  es- 
tate, and  that  if  the  authority  of  the  committee  was  to  convey,  they 
had  no  power  to  mortgage.    Jo  both  parts  of  this  objection  we  think 


>Vj*i 


^ 
-i/" 


K 


354 


HUTCHINSON  V.    GREEN. 


there  is  an  answer.  In  the  first  place,  we  think  the  exception  takes 
much  too  limited  and  strict  a  view  of  the  powers  of  bank  direc- 
tors. A  board  of  directors  of  the  banks  of  Massachusetts  is  a  body 
recoo-nized  by  law.  By  the  by-laws  of  these  corporations,  and  by  a 
usage,  so  general  and  uniform  as  to  be  regarded  as  part  of  the  law  of 
the  land,  they  have  the  general  superintendence  and  active  manage 
ment  of  all  the  concerns  of  the  bank,  and  constitute,  to  all  purposes 
of  dealing  with  others,  the  corporation.  We  think  they  do  not  exer- 
cise a  delegated  authority,  in  the  sense  in  which  the  rule  applies  to 
agents  and  attorneys,  who  exercise  the  powers  especially  conferred 
fon  them  and  no  others.  We  think,  therefore,  that  a  board  of  direc- 
jtors  may  delegate  an  authority  to  a  committee  of  their  own  number, 
[to  alienate  or  mortgage  real  estate;  that  an  authority  to  convey 
necessarily  implies  an  authority  to  execute  suitable  and  proper  instru- 
I  ments  for  that  purpose ;  and,  in  case  of  a  corporation,  to  affix  the 
[corporate  seal  to  an  instr|iment  requiring  it.^ 


IN  HUTCHINSON  v.   GREEN. 

^iF  JU      J*     /    1886.    91  Missouri,  367,  pp.  375,  376. 

Black,  J\  ...  It  is  further  insisted  that  the  board  of  directors  had 
no  power  to  make  the  assignment  without  the  consent  of  the  stock- 
holders. A  corporation  may,  like  an  individual,  make  an  assignment 
nder  the  statute  of  this  state  relating  to  voluntary  assignments. 
Shockley  v.  Fisher,  75  Mo.  498.  By  whom,  then,  is  the  power  to  be 
exercised  ?  By  the  directors,  the  stockholders,  or  by  both  ?  Where 
the  powers  of  a  corporation  are  vested  in  a  board  of  directors,  they 
inay,  unless  restricted,  d£  whatever  the  corporation  might.  Field  on 
Corp.,  sees.  146  and  152.  Now,  while,  by  express  statute,  a  vote  of 
the  stockholders  of  these  corporations  is  essential  to  enable  them  to 
increase  or  diminish  the  stock,  to  change  the  business,  to  issue  pre- 
ferred stock,  and  to  convert  bonds  into  stocks,  still,  in  general,  article 
8,  of  chapter  21,  Revised  Statutes,  contemplates  that  the  business  will 
be  con€ucted  by  a  board  of  directors.  Section  930,  among  other  things, 
provides  that  "  the  property  or  business  of  the  corporation  shall  be 
conducted  and  managed  by  directors."  Certain  it  is  there  is  nothing 
in  the  statute  under  which  this  corporation  was  created,  and  by  which 
it  is  governed,  or  in  its  articles  of  association,  or  bylaws,  which  limits 
or  restricts  the  powers  of  the  directors  in  the  disposition  of  the  pro- 
perty.    The  corporation  then  has  the  power  to  make  an  assignment, 

1  Under  a  Massachusetts  statute  of  subsequent  date,  no  conveyance  or  mortgage  of  the 
real  f»tat«  of  a  corporation,  or  lease  thereof  for  more  than  one  year,  shall  be  made  "unless 
authorized  bj'  a  vote  of  the  stockholders  at  a  meeting  called  for  the  purpose."  Pub.  Sti. 
ch.  100,  8.  23.  —  Ed. 


CHICAGO   CITY   RAILWAY   CO.  V.   ALLEKTON.  355 

and  that  power  being  vested  in  the  directors  without  restriction^t/ 
must  follow  that  they,  and  they  alone,  are  authorized  to_make_rL  Itl 
isjthe_dutyjof  the  directors  to  care  for  the  creditors,  ajid  when  thei 
corporation  becomes  crippled  and  unable  to  meet  its  obligations  in  theT/l 
usual  course  of  business,  it  is  competent  for  the  directors  to  make  an( 
assignment,  and  this  they  may  do  without  the  consent  of  the  stock! 
holders^  This  conclusion  has  the  support  of  adjudications  of  this  ana 
other  courts.  Chew  v.  Ellingxvood,  86  Mo.  260 ;  Dana  v.  The  Bank 
oj-  the  United  States,  5  W.  &  S.  (Pa.)  223  ;  DeCamp  v.  Alward,  52  Ind. 
473.  The  directors  may,  with  propriety,  consult  with  the  stockhold- 
ers, but  under  the  circumstances  just  stated,  and  in  the  exercise  of 
their  best  judgment,  they  may  make  the  assignment  even  against  the 
expressed  will  of  the  stockholders.  Of  the  cases  relied  upon  by  the 
appellants,  that  of  Abbott  v.  American  Hard  Rubber  Co.,  33  Barb.  580, 
was  not  an  assignment  for  the  benefit  of  creditors.  There  the  trus- 
tees attempted,  through  the  form  of  a  sale,  to  secure  to  themselves 
the  property  of  the  corporation  at  the  expense  of  the  other  stockhold- 
ers. The  sale  was  voidable,  as  to  the  stockholders  not  consenting, 
though  a  majority  agreed  to  the  transaction. 

— ^i^ 

CHICAGO   CITY  KAILWAY   COMPANY  v.   ALLERTONC^^  ^rt?^^  ^^^X' 

1873.    1%  Wallace  {U.  S.),  2^Z.  Kr^^         '^"It^^'^'^^t/^  [i^ 

Appeal  from  the  Circuit  Court  for  the  northern  district  pf^ 111!- ^'^  ^"  f^(^- 

nois  ;  the  case  being  thus  :  '^yi^i;'>    o^/»^  -  .'^  J^^J^    j 

The  Chicago  City  Railway  Company  was  a  corporation  owning  JT^   ^-^^    ^^^T  j 
street  railroad  in  Chicago.     The  directors  of  the  company,  without'*^*'^^tV^     i^ 
consulting  the  stockholders  or  calling  a  meeting  of  them,  resolved  tO(^ 


increase  the  capital  stock  of  the  company  from  $1,250,000  to  $1,500,- ^<?^^/^ 
000.  To  this  one  Allerton,  who  was  a  stockholder,  objected,  and  filed  ^  -^ 
a  bill  praying  for  an  injunction  to  prevent  the  increase.  His  position 
was  that  it  could  not  be  lawfully  made  without  the  concurrence  of  the 
stockholders,  and  in  support  of  this  view  he  relied  upon  the  constitu- 
tion of  Illinois,  adopted  in  July,  1870,  by  the  thirteenth  section  of  the 
eleventh  article  of  which  it  is  declared  as  follows  :  — 

"  No  railroad  corporation  shall  issue  any  stock  or  bonds,  except  for  money, 
labor,  or  property  actually  received  and  applied  to  the  purposes  for  which 
such  corporation  was  created,  and  all  stock-dividends,  and  other  fictitious  in- 
crease of  the  capital  stock,  or  indebtedness  of  any  such  corporation,  shall  be 
void.  The  capital  stock  of  no  railroad  corporation  shall  be  increased  for  any/  ^ 
purpose,  except  upon  giving  sixty  days'  public  notice  in  such  manner  as  may  '^ 
be  provided  by  law." 

He  also  relied  on  an  act  of  the  legislature  of  Illinois,  passed  March  : 
26th,  1872,  to  execute  and  carry  out  the  above  provision  of  the  consti- 


356 


CHICAGO   CITY   KAILWAY   CO.   V.  AMiERTON. 


il 


^ 


tution,  by  which,  amongst  other  things,  it  was  enacted  that  no  corpo« 
ration  should  change  its  name  or  place  of  business,  increase  or  de- 
crease its  capital  stock,  or  the  number  of  its  directors,  or  consolidate 
with  other  corporations,  without  a  vote  of  two-thirds  of  the  stock  at 
a  stockholders'  meeting. 

The  railway  company,  in  its  answer,  relied  upon  its  charter,  granted 
February  14th,  1859,  the  third  and  fourth  sections  of  which  were  as 
follows : 

"  Section  3.  The  capital  stock  of  said  corporation  shall  be  one  hundred 
thousand  dollars,  and  may  be  increased  from  time  to  time,  at  the  pleasure  of 
said  corporation. 

"  Sf.ction  4.  All  the  corporate  powers  of  said  corporation  shall  be  vested 
in  and  exercised  by  a  board  of  directors,  and  such  officers  and  agents  as  said 
board  shall  appoint. " 

The  position  of  the  company  was  that  the  third  section  conferred  an 
unrestricted  right  to  increase  the  capital  stock  at  will,  and  that  the 
fourth  vested  this  power  in  the  board  of  directors,  and  that  the  con- 
stitutional provision  and  act  above  referred'to,  if  applied  to  this  cor- 
poration, would  impair  the  validity  of  the  contract.  It  was  further 
set  up,  however,  that  the  said  provision  did  not  apply  to  railways 
worked  by  horse-power.  The  court  decreed  in  favor  of  the  complain- 
ant and  the  company  took  the  present  appeal. 

Mr.  Charles  Hitchcock,  for  the  appellant ;  Mr.  D.  A.  Storrs,  contra. 

Mr.  Justice  Bradley  delivered  the  opinion  of  the  court. 

Without  attempting  to  decide  the  constitutional  question,  or  to  give 
a  construction  to  the  act  of  the  legislature,  we  are  satisfied  that  the 
(decree  must  be  affirmed  on  the  broad  ground  that  a  change  so  organic 
and  fundamental  as  that  of  increasing  the  capital  stock  of  a  corpora- 
tion beyond  the  limit  fixed  by  the  charter  cannot  be  made  by  the  di- 
rectors alone,  unless  expressly  authorized  thereto.  The  general  power 
to  perform  all  corporate  acts  refers  to  the  ordinary  business  transac- 
tions of  the  corporation,  and  does  not  extend  to  a  reconstruction  of 
the  body  itself,  or  to  an  enlargement  of  its  capital  stock.  A  corpora- 
tion, like  a  partnership,  is  an  association  of  natural  persons  who  con- 
tribute a  joint  capital  for  a  common  purpose,  and  although  the  shares 
may  be  assigned  to  new  individuals  in  perpetual  succession,  yet  the 
)number  of  shares  and  amount  of  capital  cannot  be  increased,  except 
in  the  manner  expressly  authorized  by  the  charter  or  articles  of  asso- 
ciation. 

Authority  to  increase  the  capital  stock  of  a  corporation  may  un- 
doubtedly be  conferred  by  a  law  passed  subsequent  to  the  charter ; 
but  such  a  law  should  regularly  be  accepted  by  the  stockholders. 
Such  assent  might  he  inferred  by  subsequent  acquiescence;  but  in 
some  form  or  other  it  must  be  given  to  render  the  increase  valid  and 
binding  on  them.  Changes  in  the  purpose  and  object  of  an  associa- 
tioni_QJLin  the  extent  of  its  constituency  or  membership,  involvingJthe 
amount  of  its  capital  stock,  are  necessarily  fundamental  in  their  chat- 


CHICAGO  CITY  RAILWAY  CO.   V.  ALLERTOX.  357 

gicter,  and  cannot,  on  general  principles,  be  made  without  the  express 
or  implied  jonsent  of  _the  members.     The  reason  is  obvious. 

First,  as  it  respects  the  purpose  and  object.  This  may  be  said  to 
be  the  final  cause  of  the  association,  for  the  sake  of  which  it  was 
brought  into  existence.  To  change  this  without  the  consent  of  the 
associates,  would  be  to  commit  them  to  an  enterprise  which  they  never 
embraced,  and  would  be  manifestly  unjust. 

Secondly,  as  it  respects  the  constituency,  or  capital  and  member- 
ship.    This  is  the  next  most  important  and  fundamental  point  in  the 
constitution  of  a  body  corporate.     To  change  it  without  the  consent^ 
of  the  stockholders,  would  be  to  make  them  members  of  an  association  I 
in  which  they  never  consented  to  become  such.     It  would  change  the 
relative  influence,  control,  and  profit  of  each  member.   If  the^  directors  i 
alone  could  do  it^_they  could  always  perpetuate  their  ownjower.  /  ^ 
Their  agency  does  not  extend  to  such  an  act  unless  so  expressed  in/  r 
the  charter,  or  subsequent  enabling  actj  and  such^  subsec[u_ent_act,_as  I 
before^said,  would  net  bind  the  stockholders  without  their  acceptance! 
ofJtjOr  absent  to  it^in  some  form.    Even  when  the  additional  stock  is 
distributed  to  each  stockholder  pro  rata,  it  would  often  work  injustice, 
because  many  of  the  stockholders  might  be  unable  to  take  their  re- 
spective shares,  and  might  thus  lose  their  relative  interest  and  influ- 
ence in  the  corporate  concern. 

These  conclusions  flow  naturally  from  the  character  of  such  asso- 
ciations. Of  course,  the  associates  themselves  may  adopt  or  assent  to 
a  different  rule.  If  the  charter  provides  that  the  capital  stock  may 
be  increased,  or  that  a  new  business  may  be  adopted  by  the  corpora- 
tion, this  is  undoubtedly  an  authority  for  the  corporation  (that  is,  the 
stockholders)  to  make  such  a  change  by  a  stockholders'  vote,  in  the 
regular  way.  Perhaps  a  subsequent  ratification  or  assent  to  a  change 
already  made,  would  be  equally  effective.  It  is  unnecessary  to  decide 
that  point  at  this  time.  But  if  it  is  desired  to  confer  such  a  power  on 
the  directors,  so  as  to  make  their  acts  binding  and  final,  it  should  be 
expressly  conferred. 

Where  the  stock  expressly  allowed  by  a  charter  has  not  been  all 
subscribed,  the  power  of  the  directors  to  receive  subscriptions  for  the 
balance  may  stand  on  a  different  footing.  Such  an  act  might,  perhaps, 
be  considered  as  merely  getting  in  the  capital  already  provided  for  the 
operations  and  necessities  of  the  company,  and,  therefore,  as  belonging 
to  the  orderly  and  proper  administration  of  the  company's  affairs. 
Even  in  such  case,  however,  prudent  and  fair  directors  would  prefer 
to  have  the  sanction  of  the  stockholders  to  their  acts.  But  that  is  not 
the  present  case,  and  need  not  be  further. considered. 

Decree  affirmed. 


358 


SPER 


/ 


,#!' 

^ 


S   APPEAL. 


> 


\r^ 


f 


SECTION  II. 


/rr- 


of  C(gr^><Mi0'rom  the  Directors  to  the  Corporation} 

.  y  '  J^  y  ^jspering's  appeal. 

Sharswood,  J.  —  This  bill  was  filed  by  the  appellant  as  the  as- 
signee'o£  tlie"^  National  Safety  Insurance  and  Trust  Company,* 
against  the  defendants,  who  were  directors  of  the  corporation,  alle- 
ging fraudulent,  illegal  and  improper  management  of  its  affairs,  ex- 
tending over  a  period  of  more  than  ten  years,  from  1850  to  1861. 
The  case  upon  the  bill,  answers  and  proofs  was  referred  to  a  Master, 
who  reported  that  the  bill  should  be  dismissed  and  o,  pro  forma  decree 
4  was  entered  accordingly. 
«/>«'■   a-»^  i/^  Upon  a  careful  examination  of  the  record  and  paper-books,  which 

r  JB  ^'-IjU^       make  up  nine  hundred  and  sixty-six  printed  octavo  pages,  we  have 

'  ,      come  to  the  following  conclusions  of  fact,  which  are  supported  also 

'**^by  the  Opinion  of  the  Master.     First,  That  no  fraudulent  conduct  is 
o^*"^^  ^^  im|i»f^le  to  any  one  of  the  defendants,  at  any  period  of  time  during 
"^r'^^JJX^^eir  administration  of  the  trust.      No  pecuniary  advantage,  to  the 
^^t^     it^     -       amount  of  a  dollar,  was  ever  realized  or  sought  by  any  one  of  them. 
1/^^}    P'v^-  \        There  was  no  embezzlement  or  misappropriation  of  the  funds  by  any 
/  '  f^        ^^^^''*^\>^  officer  or  agent  of  the  corporation.     There  is  no  pretence  that  the 
^^      "fJ^ '*V^^-^ef endants  are  liable  to  account  upon  either  of  these  grounds.     "  One 
/)    1^^   [jj^    p    '  ,^act,"  says  the  Master,  "is  quite  clear  —  that  none  of  the  defendants 
P^  T ,^('^^*-^,;jU(y^^"ha.re  made  any  profit  out  of  their  transactions  which  was  not  common 
t^^^       ^         '^      to  all  the  stockholders."     Second,  That  in  regard  to  investments,  and 
^t-f^t^^  r^P^^t/^.    -/--the  mode  of  transacting  the  business — the  legality  of  which  under 
A^^  r  ♦-^^"^..A^^      ^^   charter  is  questioned  —  the  defendants  uniformly  acted  under 
fi,»^\    tA      (l^       legal  advice.     '*  It  appears  in  the  evidence,"  says  the  report,  "  that 
^/-.^       (l^         "f      ^}^g  defendants  always  acted  upon  legal  advice,  as  to  the  mode  of 
JTi.'^   (_-«-^'^^  '^''^  doing  business  and  making  investments.    No  important  step  was  ever 
ft  >  \  if^^  taken  without  first  obtaining  the  advice  of  the  solicitor."     Third, 

'^^'i  i/*'^^''^  Looking  at  the  history  of  the  institution  in  the  light  of  subsequent 

H^        J'^^'^        events,  its  direction  was  unwise  and  unfortunate.     The  money  of  the 
'  y-  \         ,    r^*  v^epositors  was  not  invested  in  first-rate  and  perfectly  safe  securities, 
-|j'    ^\^i.^      ^s  they  engaged  to  do,  and  as  the  fu«ds  of  such  a  charity  unques- 
A*      X^      ji.^     tionably  ought  to  be.     Loans  were  largely  made  upon  very  doubt- 

ijU    ^     Ijl^        ft  A' See  later  chapters  for  cases  as  to  the  right  of  stockholders  or  creditors  to  maintain 

■  ^  ""^      iWuilN,  in  their  own  names,  against  directors  for  alleged  mismanagement. 

fy       /     {\j^/^'       jbaST'  Important  questions  have  arisen  as  to  the  construction  and  operation  of  statutes  which 

rt  i^    I         L/^  L/<^   inifiose  lial)ilitiea  upon  directors.     But  the  statutory  liability  of  directors  is  not  one  of  the 

^r^  t\X>      klA^  topics  specifically  dealt  with  in  this  work.  —  Ed. 


2  Statement  omitted.  —  Ed. 


SPEEING  S   APPEAL. 


359 


ful  collaterals.  Their  investments  in  real  estate  were  injudicious. 
They  lost  from  a  failure  to  insure.  They  sought  to  realize  large  pro- 
fits at  usurious  rates  of  interest.  The  crash  came  in  1860,  just  before 
the  breaking  out  of  the  civil  war.  All  doubtful  securities  fell  in  the 
market.  Their  debtors  went  to  the  wall.  In  the  vain  attempt  to  sus- 
tain their  credit  they  sacrificed  securities  and  collaterals.  Had  they 
stopped  and  made  an  assignment  at  once,  a  large  amount  of  the  loss 
which  subsequently  fell  upon  them  would  undoubtedly  have  been 
prevented.  The  story  might  be  much  amplified  by  entering  into  a 
detail  of  particulars  :  but  the  conclusion  would  be  the  same.  Such 
is  a  brief  resume  of  the  facts.  It  is  not  the  history  of  this  institu- 
tion alone,  but  of  many  others  in  this  country. 

The  broad  question  then  is,  whether  upon  such  a  state  of  facts,  the  f 
directors  of  a  corporation  can  be  made  to  account  for  losses  arising/ 
from  mismanagement  merely. 

It  is  by  no  means  a  well-settled  point  what  is  the  precise  relation 
which  directors  sustain  to  stockholders.  They  are  undoubtedly  said 
in  many  authorities  to  be  trustees,  but  that  as  I  apprehend  is  only  in 
a  general  sense,  as  we  term  an  agent  or  any  bailee  intrusted  with  the 
care  and  management  of  the  property  of  another.  It  is  certain  that 
they  are  not  technical  trustees.  They  can  only  be  regarded  as  man- 
datories —  persons^  who  have  gratuitously  undertaken  to  perform  c_er- 
tjin  .duties,  and  who  are  thereforejbound  to  apply  ordinary  skill  and 
diligence,  but  no  more.  Indeed,  as  the  directors  are  themselves  stock- 
holders, interested  as  well  as  all  others  that  the  affairs  and  business 
of  the  corporation  should  be  successful,  when  we  ascertain  and  deter- 
mine that  tliey  have  not  sought  to  make  any  profit  not  common  to  all 
the  stockholders,  we  raise  a  strong  presumption  that  they  have  brought 
to  the  administration  their  best  judgment  and  skill.  OugM._they_to 
be  held  responsible  for  mistakes  of  judginent  or  want  of  skill  and 
knowledge  ?  They  have  been  requested  by  their  co-stockholders  to 
take  their  positions,  and  they  have  given  their  services  without  compen- 
sation. Weare  dealing  now  with  their  responsibility  to_stockholders, 
not  to  outside  parties  —  c^ditors_and  depositors.  It  is  unnecessary 
to  consider  what  the  rule  may  be  as  to  them.  Upon  a  close  examina- 
tion of  all  the  reported  cases,  although  there  are  many  dicta  not  easily 
reconcilable,  yet  I  have  found  no  judgment  or  decree  which  has  held 
directors  to  account,  except  when  they  have  themselves  been  person- 
ally guilty  of  some  fraud  on  the  corporation,  or  have  known  and  con- 
nived at  some  fraud  in  others,  or  where  such  fraud  might  have  been 
prevented  had  they  given  ordinary  attention  to  their  duties.  I  do 
not  mean  to  say  by  any  means  that  their  responsibility  is  limited  to 
these  cases,  and  that  there  might  not  exist  such  a  case  of  negligence 
or  of  acts  clearly  ultra  vires,  as  would  make  perfectly  honest  direct- 
ors personally  liable.  But  it  is^evident  that^enilemen  elected  by 
the  stockholders  from  tEelr  own  body  ought  not  to  be  judged  by  the 
same  strict  standard  as^the jgent  or  trustee^fji^gnvatejestate.    Were 


r-j 


^ 


360  spering's  appeal. 

such  a  rule  applied,  no  gentlemen  of  character  and  responsibility 
would  be  found  willing  to  accept  such  places.  The  authorities  I 
think  fully  endorse  these  views. 

The  leading  case  is  The  Charitable  Corporation  v.  Sutton,  2  Atk. 
400,  which  was  treated  by  Lord  Hardwicke  as  a  case  of  fraud  entirely. 
Five  of  the  managers  or  committee-men  entered  into  a  confederacy  to 
loan  out  money  to  their  own  storekeeper,  upon  whom  was  devolved 
the  duty  of  putting  an  estimate  upon  the  value  of  the  pledges ;  the 
others  connived  at  the  fraud.  "  It  is  such  a  notorious  fraud  or  at 
least  gross  inattention,"  said  the  Lord  Chancellor,  "to  suffer  him, 
who  was  to  set  a  value  on  all  the  pledges,  to  borrow  money  upon 
them  himself,  that  I  shall  direct  those  who  appear  to  be  guilty  of  it 
to  make  good  the  loss.  Committee-men  are  most  properly  agents  to 
those  who  employ  them  in  the  trust  and  who  empower  them  to  direct 
and  superintend  the  affairs  of  the  corporation.  If  some  persons  are 
guiltx  of  gross  non-attendance  and  leave  the  management  entirely 
to  others,  they  may  be  guilty  by  this_ means  of  the  b2eaches_of_tru^t 
tliat  are  committed  by  others."  So  accordingly  in  The  York  and 
Xorth  Midland  Railway  Company  v.  Hudson,  16  Beavan  495,  the 
chairman  of  a  railway  company  appropriated  unallotted  shares  to  the 
use  of  various  persons,  whose  names  he  did  not  mention,  in  order  to 
secure  or  reward  services  which  he  declined  to  state,  but  which  it  was 
insinuated  was  in  the  nature  of  "  secret  service  money ;  "  it  was  held 
that  if  the  defendant  had  applied  the  property  of  the  company  in  a 
manner  which  would  not  bear  the  light,  he  must  suffer  the  conse- 
quences, and  that  being  charged  with  the  receipt  of  the  money,  he 
could  not  discharge  himself  by  the  suggestion  of  such  an  application. 
In  Williams  v.  Page,  24  Beavan  661,  Sir  John  Eomilly  said,  in  treat- 
ing a  director  as  a  trustee :  "  The  trust  no  doubt  is  a  peculiar  one." 
In  Great  Luxembourg  Railway  Co.  v.  Magnay,  25  Beavan  592,  he 
held  that  if  a  director  enters  into  a  contract  for  the  company  he  can- 
not personally  derive  any  benefit  from  it.  So  also  in  Ex  parte  Ben- 
nett, 18  Beavan  339,  directors  of  a  public  company  are  trustees  for 
the  shareholders,  and  their  private  interests  must  yield  to  their  pub- 
lic duty  wherever  they  are  conflicting.  In  Turquard  v.  Marshall,  3 
Equity  (Law  Rep.)  127,  which  is  the  last  English  case  on  the  subject. 
Lord  Eomilly,  M.  R.,  held  directors  liable,  first,  for  not  calling  a 
meeting  of  the  shareholders  under  a  clause  of  the  charter  requiring 
tliem  to  do  so,  on  the  exhaustion  of  their  surplus  fund,  and  second, 
for  loaning  money  to  one  of  themselves  without  security.  He  used 
however  this  language  :  that  if  directors  have  been  guilty  of  gross 
and  palpable  breach  of  trust,  which  cannot  be  set  right  by  a  public 
meeting  of  the  company,  they  may  be  made  responsible  for  their  mis- 
conduct. On  appeal,  however,  the  decree  of  Lord  Ilomilly,  holding 
the  directors  personally  liable,  was  reversed  by  Lord  Chancellor 
Hatherley,  4  Chancery  Appeals  (Law  Rep.)  386.  He  said :  "  There 
was  no  fraud  alleged,  nor  was  it  alleged  that  the  directors  applied  the 


spering's  appeal. 


361 


funds  of  the  company  to  their  own  use,  or  in  any  way  except  in  what 
they  thought  was  for  the  benefit  of  the  company,  however  incorrect 
their  course  might  have  been."  Then  as  to  the  loan  to  Higgins  (the 
co-director)  :  "  The  statement  of  this  in  the  bill  was  only  as  part  of 
the  general  misconduct  of  the  directors,  and  the  loan  was  only  men- 
tioned as  one  of  the  losses  incurred.  There  was  no  specific  allegation 
of  any  impropriety  in  lending  the  money  to. him,  nor  was  any  specific 
relief  prayed  in  this  respect.  It  was  within  the  powers  of  the  deed 
to  lend  to  a  brother  director,  and  however  foolish  the  loan  might  have 
been,  so  long  as  it  was  within  the  powers  of  the  directors,  the  court 
could  not  interfere  and  make  them  liable.  They  were  intrusted  with 
full  powers  of  lending  the  money,  and  it  was  part  of  the  business  of 
the  concern  to  trust  people  with  money,  and  their  trusting  to  an 
undue  extent  was  not  a  matter  with  which  they  could  be  fixed,  unless 
there  was  something  more  alleged,  as,  for  instance,  that  it  was  done 
fraudulently  and  improperly  and  not  merely  by  a  default  of  judg- 
ment. "Whatever  may  have  been  the  amount  lent  to  anybody,  how- 
ever ridiculous  and  absurd  their  conduct  might  seem,  it  was  the 
misfortune  of  the  company  that  they  chose  such  unwise  directors ; 
but  as  long  as  they  kept  within  the  powers  of  their  deed,  the  court 
could  not  interfere  with  the  discretion  exercised  by  them." 

To  pass  now  from  the  English  to  the  A.merican  cases :  Koehler  v. 
The  Black  River  Falls  Iron  Co.,  2  Black  S.  C.  715,  was  a  case  of 
fraud.  Mr.  Justice  Davis  said :  "  Instead  of  honestly  endeavoring  to 
effect  a  loan  of  money  advantageously  for  the  benefit  of  the  corpora- 
tion, these  directors,  in  violation  of  their  duty  and  in  betrayal  of 
their  trust,  secured  their  own  debts  to  the  injury  of  the  stockholders 
and  creditors.  Directors  cannot  thus  deal  with  the  important  inter- 
ests intrusted  to  their  management.  They  hold  a  place  of  trust,  and 
by  accepting  the  trust  are  obliged  to  execute  it  with  fidelity,  not  for 
their  own  benefit,  but  for  the  common  benefit  of  the  stockholders  of 
the  corporation."  In  Scott  v.  Depeyster-,  1  Edw.  Ch.  Eep.  513,  the 
object  of  the  bill  was  to  make  the  directors  liable  for  money  embezzled 
by  their  secretary  on  the  ground  of  their  negligence.  So,  in  Robinson 
V.  Smith,  3  Paige  222,  the  bill  alleged  that  the  directors  had  engaged  in 
a  gambling  speculation  in  stocks,  wholly  unauthorized  by  the  charter, 
which  was  carried  on  to  subserve  their  own  individual  interests  and 
purposes.  On  demurrer  to  the  bill,  it  was  of  course  held  that  the 
directors  of  a  corporation,  who  wilfully  abiise  their  trust  or  misapply 
the  funds  of  the  company  by  which  a  loss  is  sustained,  are  personally 
liable  as  trustees  to  make  good  that  loss,  and  they  are  also  liable  if 
they  suffer  the  corporate  funds  to  be  lost  or  wasted  by  gross  negli- 
gence and  inattention  to  the  duties  of  their  trust.  In  the  same  cate- 
gory is  Taylor  v.  Miami  Exporting  Company,  5  Hammond  (Ohio)  162 ; 
Verplanck  v.  Mercantile  Insurance  Co.,  1  Edw.  Ch.  Eep.  84  ;  Bank  of 
St.  Mary  v.  St.  John,  25  Alab.  N.  S.  566 ;  Butts  v.  Wood,  38  Barb. 
181 :  s.  c.  37  New  York  317.     In  The  Franklin  Fire  Insurance  Co.  v. 


4^ 


362  speking's  appeal. 

Jenkins  3  Wend.  130,  which  was  an  action  on  the  case  in  which  the 
declaration  alleged  against  directors  "  want  of  cave  and  attention," 
and  also  ''corrupt  and  wilful  mismanagement,"  a  demurrer  was  sus- 
tained Sutherland,  J.,  remarking  :  "  These  are  very  different  allega- 
tions and  require  distinct  and  different  answers."  Lexington  &  Ohio 
Railroad  Co.  v.  Bridge,  7  B.  Monroe  556,  was  a  bill  by  creditors  against 
directors  for  making  a  dividend  when  no  profits  existed.  "  We  are 
satisfied,"  say  the  court,  "  that  if  they  were  guilty  of  negligence  to 
any  extent  it  is  not  of  that  gross  and  palpable  character  that  would 
render  their  conduct  so  reprehensible  as  to  subject  them  to  the  impu- 
tation of  a  personal  or  even  a  legal  fraud."  In  Godbold  v.  Branch 
Bank  at  Mohile,  11  Alab.  191,  it  was  decided  that  the  directors  of  a 
bank  are  not  responsible  for  an  injury  to  the  bank  caused  by  their  act, 
originating  in  an  error  of  judgment,  unless  the  act  be  so  grossly 
wrong  as  to  warrant  the  imputation  of  fraud  or  the  want  of  the  ne- 
cessary knowledge  for  the  performance  of  the  duty  assumed  by  them 
on  accepting  the  agency.  In  Hodges  v.  Neiv  England  Screw  Co.,  1 
Ehode  Island  312,  in  dismissing  the  bill,  Greene,  C.  J.,  observed :  "  It 
does  not  appear  that  the  directors  sought  or  secured  to  themselves 
any  benefit  or  advantage  which  was  not  common  to  all  the  other 
stockholders  of  the  Screw  Company."  See  also  Neall  v.  Hill,  16  Cali- 
fornia 145. 

It  seems  unnecessary  to  pursue  this  investigation  any  further. 
These  citations,  which  might  be  multiplied,  establish,  as  it  seems  to 
me,  that  while  directors  are  personally  responsible  to  the  stockholders 
for  any  losses  resulting  from  fraud,  embezzlement  or  wilful  miscon- 
duct or  breach  of  trust  for  their  own  benefit  and  not  for  the  benefit  of 
the  stockholders,  for  gross  inattention  and  negligence  by  which  such 
fraud  or  misconduct  has  been  perpetrated  by  agents,  officers  or  co- 
directors,  yet  they  are  not  liable  for  mistakes  of  judgment,  even 
though  they  may  be  so  gross  as  to  appear  to  us  absurd  and  ridiculous, 
provided  they  are  honest  and  provided  they  are  fairly  within  the 
scope  of  the  powers  and  discretion  confided  to  the  managing  body. 
"■  In  regard  to  the  question  last  adverted  to,  whether  the  defendants 
should  be  held  responsible  for  any  of  their  acts  and  investments  as 
ultra  vires,  it  might  be  sufficient  to  notice  the  fact  that  the  charter  of 
this  corporation  was  a  very  complicated  one,  made  up  by  comparing 
together  no  less  than  sixteen  different  acts  of  incorporation  or  supple- 
ments. The  ingenuity  of  the  young  gentlemen  of  counsel  for  the 
defendants  has  been  exercised  in  presenting  to  the  court  a  genealogi- 
cal map  or  pedigree,  tracing  tlie  Acts  of  Assembly,  from  one  to  an- 
other. To  have  mistaken  the  extent  of  their  powers  under  such  cir- 
cumstances would  not  have  been  matter  of  surprise  even  in  the  most 
timid  and  cautious.  We  may  adopt  upon  this  point  the  language  of 
C.  J.  Greene  in  Hodges  v.  Neiv  England  Screw  Co.,  1  llhode  Island 
312.  "  In  considering  tho  question  of  the  personal  responsibility  of 
the  directors  we  shall  assume  that  they  violated  the  charter  of  the 


HUN  V.   CAEY. 


863 


Screw  Company.  The  question  then  will  be,  was  such  violation  the 
result  of  mistake  as  to  their  powers,  and  if  so  did  they  fall  into 
the  mistake  from  want  of  proper  care,  such  care  as  a  man  of  ordi 
nary  prudence  practises  in  his  own  affairs.  For,  if  the  mistake  be 
such  as  with  proper  care  might  have  been  avoided,  they  ought  to  be 
liable.  If,  on  the  other  hand,  the  mistake  be  such  as  the  direc 
ors  might  well  make,  notwithstanding  the  exercise  of  proper  care 
and  if  they  acted  in  good  faith  and  for  the  benefit  of  the  Screw  Com 
pany,  they  ought  not  to  be  liable."  We  may  say  in  this  case,  con- 
ceding that  the  directors  did  violate  the  charter,  it  was  a  question 
upon  which  with  all  due  care  they  might  have  made  an  honest  mis- 
take ;  and  moreover,  it  appears  by  the  evidence,  and  is  so  reported, 
that  they  acted  throughout  by  the  advice  of  their  counsel.  It  is  well 
nettled  that  trustees  will  be  protected  from  responsibility  under  such  / 
circumstances  :  Lewin  on  Trusts  595 ;  Vez  v.  Emery,  5  Ves.  141 
Calhoun's  Estate,  6  Watts  189. 


a^ 


i\ 


VM. 


{iDecfi,^hwrv(ied.  V 


caey: 


Earl,  J.     This  action  was  brought  "'by  the  receiver  of  the  Cen 


V  //• 


,V  rf' 


tral  Savings  Bank  of  the  city  of  New  York,  against  the  defendants,  I  'X'" 
who  were  trustees  of  the  bank,  to  recover  damages  which,  it  is  al-  1  \ 
leged,  they  caused  the  bank  by  their  misconduct  as  such  trustees.         '  O^ 

The^Jiigt  question  to  be  considered  is  the  measure  of  fidelity,  [jT^ 
care  and  diligence  which  such  trustees  owe  to  such  a  bank  ami_ 
its  depositors.  The  relation  existing  between  the  corporation  and 
its  trustees  is  mainly  that  of  principal  and  agent,  and  the  relation 
between  the  trustees  and  the  depositors  is  similar  to  that  of  trus- 
tee and  cestui  que  trust.  The  trustees  are  bound  to  observe  the 
limits  placed  upon  their  powers  in  the  charter,  and  if  they  tran- 
scend such  limits  and  cause  damage,  they  incur  liability.  If  they 
act  fraudulently  or  do  a  willful  wrong,  it  is  not  doubted  that  they 
may  be  held  for  all  the  damage  they  cause  to  the  bank  or  its  de- 
positors. /But  if  they  act  in  good  faith  within  the  limits  of  powers 
conferred,  ustrtg  proper  prudence  and  diligence,  they  are  not  re- 
sponsible for  mere  mistakes  or  errors  of  j^uclgment.)  That  the 
trustees  of  such  corporations  are  bound  to  use  some  diligence  in  iftie 
discharge  of  their  duties  cannot  be  disputed.  All  the  authorities 
hold  so.  What  degree  of  care  and  diligence  are  they  bound  to  exer- 
cise ?  Not  the  highest  degree,  not  such  as  a  very-  vigilant  or  ex- 
tremely careful  person  would  exercise.  If  such  were  required,  it 
1  Statement  and  arguments  omitted.  —  Ed. 


364  HUN  V.  CART. 

would  be  difficult  to  find  trustees  who  would  incur  the  responsibil- 
ity of  such  trust  positions.  It  would  not  be  proper  to  answer  the 
question  by  saying  the  lowest  degree.  Few  persons  would  be  will- 
in  f^  to  deposit  money  in  savings  banks,  or  to  take  stock  in  cor- 
porations, with  the  understanding  that  the  trustees  or  directors  were 
bound  only  to  exercise  slight  care,  such  as  inattentive  persons  would 
give  to  their  own  business,  in  the  management  of  the  large  and  im- 
portant interests  committed  to  their  hands.  When  one^depogjis 
money  in  a  savings  bank,  or  takes  stock  in  a  corporation,  thus  di- 
vesting himself  of  the  immediate  control  of  his  property,  he  expects, 
and  has  the  right  to  expect,  that  the  trustees  or  dii-ectors,  who  are 
cliosen  to  take  his_^a_ce_in  the  mana,gement  and  control  of  hisjpro- 
pei-ty,  will  exercise  ordinary  care  and  prudence  in  the  trusj;s  com- 
.mitted  t^  them  —  the  same  degree  of  care  and  prudence  that  men 
prompted  by  self-interest  generally  exercise  in  their  own^affairs. 
When  one  voluntarily  takes  the  position  of  trustee  or  director  of  a 
corporation,  good  faith,  exact  justice,  and  public  policy  unite  in  re- 
quiring of  him  such  a  degree  of  care  and  prudence,  and  it  is  a  gross 
breach  of  duty  —  crassa  negligentia  —  not  to  bestow  them. 

It  is  impossible  to  give  the  measure  of  culpable  negligence  for 
all  cases,  as  the  degree  of  care  required  depends  upon  the  subjects  to 
which  it  is  to  be  applied.  (First  Nat.  Bank  v.  Ocean  Nat.  Bank,  60 
N.  Y,  278.)  What  would  be  slight  neglect  in  the  care  of  a  quantity 
of  iron  might  be  gross  neglect  in  the  care  of  a  jewel.  What  would  be 
slight  neglect  in  the  care  exercised  in  the  affairs  of  a  turnpike  cor- 
poration, or  even  of  a  manufactviring  corporation,  might  be  gross 
neglect  in  the  care  exercised  in  the  management  of  a  savings  bank 
intrusted  with  the  savings  of  a  multitude  of  poor  people,  depend- 
ing for  its  life  upon  credit  and  liable  to  be  wrecked  by  the  breath  of 
suspicion.  There  is  a  classification  of  negligence  to  be  found  in 
the  books,  not  always  of  practical  value  and  yet  sometimes  service- 
able, into  slight  negligence,  gross  negligence,  and  that  degree  of  neg- 
ligence intermediate  the  two,  attributed  to  the  absence  of  ordinary 
care  ;  and  the  claim  on  behalf  of  these  trustees  is  that  they  can  only 
be  held  responsible  in  this  action  in  consequence  of  gross  negligence, 
according  to  this  classification.  If  gross  negligence  be  taken  accord- 
ing to  its  ordinary  meaning  —  as  something  nearly  approaching  fraud 
or  bad  faith  —  I  cannot  yield  to  this  claim;  and  if  there  are  any 
authorities  upholding  the  claim,  I  emphatically  dissent  from  them. 

It  seems  to  me  that  it  would  be  a  monstrous  proposition  to  hold 
that  trustees,  intrusted  with  the  management  of  the  property,  inter- 
ests and  business  of  other  people,  who  divest  themselves  of  the  man- 
agement and  confide  in  thorn,  are  bound  to  give  only  slight  care  to 
the  duties  of  their  trust,  and  are  liable  only  in  case  of  gross  inatten- 
tion and  negligence ;  and  I  have  found  no  authority  fully  upholding 
such  a  proposition.  It  is  true  that  authorities  are  found  which  hold 
that  trustees  are  liable  only  for  crassa  negligentia,  which  literally 


HUN  V.  GABY.  365 

means  gross  negligence ;  but  that  phrase  has  been  defined  to  mean 
the  absence  of  ordinary  care  and  diligence  adequate  to  the  particular 
case. 

[The  learned  Judge  here  quoted  from  various  authorities.] 

In  Sperinr/s  Appeal,  Judge  Siiarswood  said  that  directors  ''are 
not  liable  for  mistakes  of  judgment,  even  though  they  may  be  so 
gross  as  to  appear  to  us  absurd  and  ridiculous,  provided  they  were 
honest,  and  provided  they  are  fairly  within  the  scope  of  the  powers 
and  discretion  confided  to  the  managing  body."  As  I  understand 
this  language,  I  cannot  assent  to  it  as  properly  defining  to  any  ex- 
tent the  nature  of  a  director's  responsibility.  Like  a  mandatary^  to_ 
whom  he  has  been  likened,  he  is  bound  not  only  to  exercise  proper 
caje_anil_dili^encejJjutJordinary  skill  and  judgment.  As  he  is  bound 
to  exercise  ordinary_skill  and  judgment,  he  cannot  set  up  that~he  did 
not  possess  them.  When  damage  is  caused  by  his  want  of  judgment, 
he  cannot  excuse  himself  by^alleging  his  gross  ignoranc^.  One  wlio^ 
voluntarily  takes  the  position  of  director,  and  invites  confidence  in 
that  relationTlindertakes,  like  a  mandatary,  with  those  whom  he  re- 
presents or  ^or  whom  he  acts,  that  he  possesses  at  least  ordinary 
knowleclg^_and  skilly  and  that  he  will  bring  them  to  bear  in  the  dis- 
charge  of Jiisjduties.  (Story  on  Bailments,  §  182.)  Such  is  the  rule 
applicable  to  public  ofiicers,  to  professional  men  and  to  mechanics, 
and  such  is  the  rule  which  must  be  applicable  to  every  person  who 
undertakes  to  act  for  another  in  a  situation  or  employment  requiring 
skill  and  knowledge ;  and  it  matters  not  that  the  service  is  to  be 
rendered  gratuitously.  These  defendants  voluntarily  took  the  posi- 
tion of  trustees  of  the  bank.  They  invited  depositors  to  confide  to 
them  their  savings,  and  to  intrust  the  safe-keeping  and  management 
of  them  to  their  skill  and  prudence.  They  undertook  not  only  that 
they  would  discharge  their  duties  with  proper  care,  but  that  they 
would  exercise  the  ordinary  skill  and  judgment  requisite  for  the  dis- 
charge of  their  delicate  trust. 

Enough  has  now  been  said  to  show  what  measure  of  diligence, 
skill  and  prudence  the  law  exacts  from  managers  and  directors  of 
corporations ;  and  we  are  now  prepared  to  examine  the  facts  of  this  i  ^^  *y/ 

case,  for  the  purpose  of   seeing  if  these  trustees  fell  short  of  this         r      , J^  iJiry' 
measure  in  the  matters  alleged  in  the  complaint,  /J^    \^  ,  jA* 

[The  bank  was  incorporated  in  1867,  and  did  business  until  1875,  hjh    ^a  <«■  ^i^^ 
when  a  receiver  was  appointed.     Daring  this  time  the  deposits  aver-  y    ^^    P'  ^  r^    '^ 
aged  about  $70,000.     From  1867  to  1873  the  total  expenses,  including  ^  >^  ^f{^*>^' 
interest  paid  to  depositors,  exceeded  the  income.     In  1873  the  trustees ;>/^o°    iX\^  'V^  | 
of  the  bank,  which  had  hitherto  occupied  hired  premises,  purchased,  v,.  ^    ^J' 
in  behalf  of  the  institution,  four  lots  of  land,  with  a  view  to  erecting  f5l^  ^^P   i^,i^ 
a  bank  building  upon  one  of  the  lots.     The  greater  part  of  the  pur-^'l  //•^^'^iv^:^^ 
chase  price  was  secured  by  mortgages  on  the  lots.     At  the  time  of  ^  a.  '^^-^ 
purchase  the  bank  became  obligated  to  erect  upon  the  corner  lot  a^'\^ 
five  story  building.     Such  a  building  was  thereafter  erected  at  an  ''' 


.xs- 


^ 


> 


^^y^ 


.    |/*V^     /--IC^       366  HUN  V.    GARY. 

•J-  ^^  J^  '^  expense  of  about  $27,000.  The  other  lots  were  disposed  of  without 
IJ^  J  ^  'P^  loss.  The  coruer  lot  had  cost  the  bank  $29,250  (presumably  its  fair 
^yyi^ r^'s^ "^ .^^^j^  value),  exclusive  of  the  building.  It  was  mortgaged  for  $30,500. 
r  ^1^^^  t^^'^ fiy^  Vrhen  the  receiver  was  appointed,  that  lot  and  building,  and  other 
u      -t>^  "T      •     assets  which  produced  less  than  $1000,  constituted  the  Avhole  pro- 

K/^'  ifj>/^  ijJ^^  pert}^  of  the  bank,  and  subsequently  the  lot  and  building  were  swept 
--5^  ■>  e^ — ojih^  away  by  a  mortgage  foreclosure.  The  present  action  was  brought  to 
*>/'-'n7,rW9^      ^  recover  the  damages  caused  to  the  bank  by  the  alleged  improper  in- 

^^*^_4^zr^         vestment  of  its  funds,  as  above  stated.^] 
>"**      ^      ^      ,  At  the  time  of  the  purchase  of  the  lot,  the  bank  was  substantially 

i^^  Uf^'^'^l^  ^ii^olvent.  If  it  had  gone  into  liquidation,  its  assets  would  have 
^i'  ^^*-*^(-'-^  fallen  several  thousand  dollars  short  of  discharging  its  liabilities, 
(/L-^'  ,     ^^^  and  this  state  of  things  was  known  to  the  trustees.     It  had  been  in 

{y**^ ,  yT^  ^  existence  about  six  years,  doing  a  losing  business.     The  amount  of 

'f^  '^    -fji^  its  deposits,  which  its  managers  had  not  been  able  to  increase,  shows 

M^V^      jh       /jA^that  the  enterprise  was  an  abortion  from  the  beginning,  either  be- 
'      A^  t^"^        cause  it  lacked  public  confidence,  or  was  not  needed  in  the  place 
(/^    ')*^ ^,  T'      where  it  was  located.     It  had  changed  its  location  once  without  any 
(\/^  J^y^    ""*    benefit.     It  had  on  hand  but  about  $13,000  in  cash,  of  which  $10,000 
^      -Jij^      Li/^  w eve  taken  to  make  the  first  payments.     The  balance  of  its  assets 
i*jC^^^  ^  was  mostly  in  mortgages  not  readily  convertible.     One  was  a  mort- 

,xy^  JL>^  gage  for  $40,000,  which  had  been  purchased  at  a  large  discount,  and 

^        w^     tf  $         we  may  infer  that  it  was  not  very  salable,  as  the  trustees  resolved  to 
(■^qX  '^'•^  sell  it  as  early  as  May,  1873,  and  in  August,  1873,  authorized  it  to  be 

'  sold  at  a  discount  of  not  more  than  $2500,  and  yet  it  was  not  sokl 

until  1874.  In  this  condition  of  things  the  trustees  made  the  pur- 
chase complained  of,  under  an  obligation  to  place  on  the  lot  an  expen- 
sive banking-house.  Whether,  under  the  circumstances,  the  purchase 
was  such  as  the  trustees,  in  the  exercise  of  ordinary  prudence,  skill 
and  care,  could  make  ;  or  whether  the  act  of  purchase  was  reckless, 
rash,  extravagant,  showing  a  want  of  ordinary  prudence,  skill  and 
care,  were  questions  for  the  jury.  It  is  not  disputed  that,  under 
the  charter  of  this  bank,  as  amended  m  1868  (chap.  294),  it  had  the 
power  to  purchase  a  lot  for  a  banking-house  "  requisite  for  the  trans- 
action of  its  business."  That  was  a  power,  like  every  other  pos- 
sessed by  the  bank,  to  be  exercised  with  prudence  and  care.  Situated 
as  this  moribund  institution  was,  was  it  a  prudent  and  reasonable 
thing  to  do,  to  invest  nearly  half  of  all  the  trust  funds  in  this  ex- 
pensive lot,  with  an  obligation  to  take  most  of  the  balance  to  erect 
thereon  an  extravagant  building  ?  The  trustees  were  urged  on  by 
no  real  necessity.  They  had  hired  rooms  where  they  could  have  re- 
mained ;  or  if  those  rooms  were  not  adequate  for  their  small  business, 
we  may  assume  that  others  could  liave  been  hired.  They  put  for- 
ward the  claim  upon  the  trial  that  the  rooms  tliey  tlieu  occupied 
were  not  safe.     That  may  have  been  a  good  reason  fur  making  them 

1  The  passapes  enclosed  in  brackets  [  ]  are  an  abridgment  of  the  recitals  of  fact  in  the 
•pinion  of  the  court.  — Ed. 


HUN  V.    CAEY.  867 

more  secure,  or  for  getting  other  rooms,  but  not  for  the  extravagance 
in  which  they  indulged.  It  is  inferable,  however,  that  the  principal 
motive  which  influenced  the  trustees  to  make  the  change  of  location 
was  to  improve  the  financial  condition  of  the  bank  by  increasing  its 
deposits.  Their  project  was  to  buy  this  corner  lot  and  erect  thereon 
an  imposing  edifice,  to  inspire  confidence,  attract  attention,  and  thus 
draw  deposits.  It  was  intended  as  a  sort  of  advertisement  of  the 
bank,  a  very  expensive  one  indeed.  Savings  banks  are  not  organized 
as  business  enterprises.  They  have  no  stockholders,  and  are  not  to 
engage  in  speculations  or  money-making  in  a  business  sense.  They 
are  simply  to  take  the  deposits,  usually  small,  which  are  offered,  ag- 
gregate them,  and  keep  and  invest  them  safely,  paying  such  interest 
to  the  depositors  as  is  thus  made,  after  deducting  expenses,  and  pay- 
ing the  principal  upon  demand.  It  is  not  legitimate  for  the  trustees 
of  such  a  bank  to  seek  deposits  at  the  expense  of  present  depositors. 
It  is  their  business  to  take  deposits  when  offered.  It  was  not  proper 
for  these  trustees  —  or  at  least  the  jury  may  have  found  that  it  was 
not  —  to  take  the  money  then  on  deposit  and  invest  it  in  a  banking- 
house,  merely  for  the  purpose  of  drawing  other  deposits.  In  making 
this  investment,  the  interests  of  the  depositors,  whose  money  was 
taken,  can  scarcely  be  said  to  have  been  consulted. 

It  matters  not  that  the  trustees  purchased  this  lot  for  no  more  than 
a  fair  value,  and  that  the  loss  was  occasioned  by  the  subsequent  gen- 
eral decline  in  the  value  of  real  estate.  They  had  no  right  to  expose 
their  bank  to  the  hazard  of  such  a  decline.  If  the  purchase  was  an 
improper  one  when  made,  it  matters  not  that  the  loss  came  from  the 
unavoidable  fall  in  the  value  of  the  real  estate  purchased.  The  jury 
may  have  found  that  it  was  grossly  careless  for  the  trustees  to  lock 
up  the  funds  in  their  charge  in  such  an  investment,  where  they  could 
not  be  reached  in  any  emergency  which  was  likely  to  arise  in  the 
affairs  of  the  crippled  bank. 

We  conclude,  therefore,  that  the  evidence  justified  a  finding  by  the 
jury  that  this  was  not  a  case  of  mere  error  or  mistake  of  judgment  oUj 
the  part  of  the  trustees,  but  that  it  was  a  case  of  improvidence,  o 
reckless,  unreasonable  extravagance,  in  which  the  trustees  failed  in 
that  measure  of  reasonable  prudence,  care  and  skill-  which  the  law 
requires. 

[Omitting  remainder  of  opinion.] 

Judgment  [on  verdict  for  plaintiff]  affirmed. 


868 

,1^ 


■A 


SWENTZEL  V.   PENN  BANK« 


SWENTZEL  V.  PENN  BANK. 

1892.  147  Pa.  State,  140.1 


^L  in  Equity,  praying  that  directors  of  the  Penn  Bank  be  de- 
creed to  pay  all  moneys  lost  by  their  carelessness,  negligence  and 
]  y  ^^ ..J^  i    Af I'audulent  management.     Facts  found  by  a  master,  who  recommended 
^    ^^'*'*^   0     •f^^X'  the  bill  be  dismissed  as  to  most  of  the  defendants.     The  assignee 
jh*       Av-       ^^^^ii  the  Bank  filed   exceptions    to   the  report,  and  alleged   error  in 
^^'"'^ ^  various  rulings  and  decrees  made  in  the  court  below. 

H.  A.  Miller,  D.  F.  Patterson,  and  A.  M.  Brotvn,  for  the  assignee. 
S.  Schoyer,  Jr.,  D.  T.  Watson,  and  others,  for  various  defendants. 
Paxson,  J.  .  .  .  Briefly  stated,  the  bill  was  filed  for  the  purpose 
of  holding  the  officers  and  directors  of  the  bank  responsible  for  the 
losses  resulting  from  its  failure.     It^  is  claimed  that  the  officers  and 
directors  were  negligent  in  their  management  of  the  bank's  affaii'S, 
arid  that_by^ason  of  such  negligence  the  losses  occurred. 
'Z^!^^'^^^  jfi^-^  It  is  conceded  on  all  sides  that  the  losses  and  the  disastrous  failure 
^  *     z^-'"""^***/***^^^    of  the  bank  were  directly  traceable  to  Mr.  Kiddle,  its  late  president, 
''"*^     ^    /        ..^'now  deceased.     He  practically  emptied  the  vaults  of  the  bank  in 
carrying  on  a  gigantic  speculation  in  oil.     This  was  done  with  the 
knowledge  of  the  cashier,  and  the  cooperation  of  one  or  more  clerks 
or  subordinates.     It  would  have  been  extremely  difficult,  if  not  prac- 
tically impossible,  for  any  person  to  have  committed  such  a  swindle 
without  the  cooperation  of  some  one  inside.     The  question  is  whether 
the  directors  ought  to  have  known  of  these  transactions,  and  whether 
their  failure  to  know  what  the  real  plunderer  was  doing,  was  such 
negligence  on  their  part  as  to  render  them  liable  to  the  creditors  of 
the  bank. 

The  Penn  Bank  closed  its  doors  in  May,  1884.  It  is  not  too  much 
to  say  that  its  failure  was  a  great  shock  to  the  business  interests  of 
Pittsburgh.  It  was  the  cause  of  much  excitement ;  led  to  a  large 
amount  of  litigation,  much  of  it  directed  against  the  board  of  direc- 
tors. As  usual,  in  such  cases,  the  current  of  public  opinion  was  turned 
against  them,  and  up  to  the  present  time  they  have  been  defending 
themselves  against  hostile  litigation.  The  time  has  now  arrived 
when  the  rights  of  the  parties  can  be  considered  calmly,  and  disposed 
of  in  disregard  of  prejudice  or  popular  clamor. 

[     The  first  question  that  naturally  suggests  itself  for  our  considera- 
tion is,  the««xtent  of  the  duty  which  the  directors  of  a  bank  owe  to 
Ithe  stockholders,  whom  they  represent   directly,  and  the  creditors, ■ 
Whom  they  represent  indirectly. 

Upon  this  point  there  is  a  general  misapprehension  in  the  popular 
mind.  This  finds  ex])ression,  after  bank  failures,  in  severe  condem- 
nation of  directors,  and  a  general  assertion  of  the  doctrine  that  their 

1  Statement  abridged.     Arguments  and  part  of  opinion  omitted.  —  Ed. 


,1^ 


->^^      Lj^ 


^ 


SWENTZEL  V.   PENN   BANK. 


369 


duty  requires  them  to  be  familiar  with  all  the  details  of  the  manage- 
ment. In  the  popular  mind  they  are  held  to  the  rule  that  they  ought 
to  take  the  same  care  of  the  affairs  of  the  bank  that  they  do  of  their 
own  private  business.  Even  the  learned  judge  below  evidently 
adopted  this  view,  when  he  said  in  his  opinion:  "If  we  were  to 
decide  this  case  on  first  impressions,  as  to  the  conclusions  of  fact  to 
be  drawn,  and  under  the  decisions  cited  and  rules  laid  down  in  the 
minority  opinion  in  Briggs  v.  Spalding,  we  would  say  there  was  gross 
negligence,  or  want  of  the  ordinary  care  that  a  man  of  fair  intelli- 
gence would  take  of  his  own  affairs." 

It  cannot  be  the  rule  that  the  director  of  a  bank  is  to  be  held  to 
the  same  ordinary  care  that  be  takes  of  his  own  affairs.     He  receives 
no  compensation  for  his  services.      He  is  a  gratuitous  mandatory. 
His  principal  business  at  the  bank  is  to  assist  in  discounting  paper, 
and  for  that  purpose  he  attends  at  the  bank  at  stated  periods  —  gen- 
erally once  or  twice  a  week  —  for  an  hour  or  two.     The  condition  of 
the  bank  is  then  laid  before  him,  in  order  that  he  may  know  how 
much  money  there  is  to  loan.     Once  or  twice  a  year  there  is  an 
examination  of  the  condition  of  the  bank,  in  which  he  participates. 
The  cash  on  hand  is  counted,  the  bills  receivable  and  sureties  ex- 
amined,  to   see   whether    they   correspond   with    the    statement   as 
furnished  by  the  officers.     Beyond  this  he  has  little  to  do  with  either 
the  cash  or  the  books  of  the  bank.     They  are  in  the  care  of  salaried 
officials  who  are  paid   for  such  services,  and  selected  by  reason  of 
their  supposed  integrity  and  fitness.    To  expect  a  director,  under  suchj  -j 
circumstances,  to  give  the  affairs  of  the  bank  the  same  care  that  hej  -- 
takes  of  his  own  business,  is  unreasonable,  and  few  responsible  men/ T^^t^^ 
would  be  willing  to  serve  upon  such  terms.     In  the  case  of  a  cit; 
bank,  doing  a  large  business,  he  would  be  obliged  to  abandon  his  ow 
affairs  entirely.     A  business  man  generally  understands  the  details  o 
his  own  business,  but  a  bank  director  cannot  grasp  the  details  of  a' 
large  bank  without  devoting  all  his  time  to  it,  to  the  utter  neglect  of, 
his  own  affairs. 

A  vast  amount  of  authority  has  been  cited  upon  this  question, 
which  we  do  not  think  it  necessary  to  review.  It  is  sufficient  to  refer 
to  a  few  cases  only.  In  Spering's  Ap.,  71  Pa.  11,  the  subject  is  very 
fully  discussed  by  the  late  Justice  Sharswgod.  and  the  rule  of  ordi- 
nary care  is  laid  down.  Not,  however,  the  ordinary  care  which  a  man 
takes  of  his  own  business,  but  the  ordinary  care  of  a  bank  director  in 
the  business  of  a  bank.  Negligence  is  the  want  of  care  according  to 
the  circumstances,  and  the  circumstances  are  everything  in  consider- 
ing this  question.  The  ordinary  care  of  a  business  man  in  his  own 
affairs  means  one  thing  ;  the  ordinary  care  of  a  gratuitous  mandatory  i 
is  quite  another  matter.  The  one  implies  an  oversight  and  know- 
ledge of  every  detail  of  his  business  ;  the  other  suggests  such  care 
only  as  a  man  can  give  in  a  short  space  of  time  to  the  business  of 
other  persons,  from  wham  he  receives  no  compensation. 


370  SWENTZEL   V.    PENN   BANK. 

The  same  learned  judge,  in  Maisch  v.  Saving  Fund,  5  Phila.  30, 
laid  down  the  rule  as  follows  :  "  As  to  the  directors,  however,  receiv- 
\i\<y  no  benefit  or  advantage,  they  can  be  considered  only  as  gratuitous 
mandatories,  liable  only  for  fraud  or  such  gross  negligence  as  amounts 
to  fraud."  Again,  in  Spering's  Ap.,  supra,  he  said  :  "  Indeed,  as  the 
directors  are  themselves  stockholders,  interested,  as  well  as  all  others, 
that  the  affairs  and  business  of  the  corporation  should  be  successful, 
when  we  ascertain  and  determine  that  they  have  not  sought  to  make 
any  profit  not  common  to  all  the  stockholders,  we  raise  a  strong  pre- 
sumption that  they  have  brought  to  the  administration  their  best 
judgment  and  skill." 

We  may  also  refer  to  Brir/gs,  Receiver,  v.  Spaulding  141  U.  S.  132, 
which  goes  even  further  than  our  own  cases  upon  this  point.  It  does 
not  relieve  a  director  from  the  consequence  of  gross  negligence  in  the 
performance  of  his  duty,  but  it  holds  that  he  is  not  responsible  where 
he  has  used  the  ordinary  care  which  bank  directors  usually  exercise. 
It  is  true  this  was  the  case  of  a  national  bank,  but  we  apprehend  that 
what  is  negligence  on  the  part  of  a  director  of  a  national  bank,  would, 
as  a  general  rule,  be  negligence  by  a  director  of  a  state  bank,  and  sub- 
ject to  the  same  liability. 

In  regard  to  what  is  ordinary  care,  regard  must  be  had  to  the  usages 
of  the  particular  business.  Thus,  if  the  director  of  a  bank  performed 
his  duties,  as  such,  in  the  same  manner  as  they  were  performed  by 
all  other  directors  of  all  other  banks  in  the  same  city,  it  could  not 
fairly  be  said  that  he  was  guilty  of  gross  negligence.  And  care  must 
be  taken  that  we  do  not  hold  mere  gratuitous  mandatories  to  such  a 
severe  rule  as  to  drive  all  honest  men  out  of  such  positions.  This 
thought  is  so  well  expressed  by  Sir  George  Jessel,  M.  R.,  in  his 
opinion  in  In  re  Penn  Coal  Mining  Co.,  10  Ch.  Div.  450,  that  I  give 
his  remarks  in  full :  "One  must  be  very  careful  in  administering  the 
law  of  joint-stock  companies,  not  to  press  so  hard  on  honest  directors 
as  to  make  them  liable  for  these  constructive  defaults,  the  only  effect 
of  which  would  be  to  deter  all  men  of  any  property,  and,  perhaps,  all 
men  who  have  any  character  to  lose,  from  becoming  directors  of  com- 
panies at  all.  On  the  one  hand,  I  think  the  court  should  do  its 
utmost  to  bring  fraudulent  directors  to  account ;  and,  on  the  other  hand, 
should  also  do  its  best  to  allow  honest  men  to  act  reasonably  as  direc- 
tors. Willful  default  no  doubt  includes  the  case  of  a  neglecting  to 
sue,  though  he  might,  by  suing  earlier,  have  recovered  a  trust  fund ; 
in  that  case  he  is  made  liable  for  want  of  due  diligence  in  his  trust. 
iJut  I  think  directors  are  not  liable  on  the  same  principle." 

Holding,  then,  the  rule  to  be  that  directors,  who  are  gratuitous 
mandatories,  are  only  liable  for  fraud,  or  for  such  gross  negligence  as 
amounts  to  fraud,  it  remains  but  to  apply  this  principle  to  the  facts  of 
this  case. 

It  is  not  alleged — it  has  never  been  alleged — that  the  hands  of 
these  directors  are  stained  by  fraud.     The^Jiaids^vas,  wrecked_bj^ 


SWENTZEL   V.    PENN   BANK. 


371 


•-3^' 


president^with  the  cashier  and  some  of  the  clerks  aiding  and  abetting.  ' 
It  was  adroitly  done,  so  far  as  the  means  were  concerned,  and  it  wa§  \ 
conceale^wholly  from  the  directors.    False  entries  were  made  in  the_ 
books,,  and  false  accounts,  or  accounts  withTSctitious  persons^  were 
opened  so  as  to  hide  thejtheft.     The  reports  of  the  bank's  condition^ 
made  by  the  president  to  the  directors,  from  time  to  time,  showed  it  < 
to  bejn__good_condition,  while  in  point  of  fact  it  was  honeycombed, 
with  fraud^aiid  its  assets  squandered  in  wild  speculations.     It  mayi* 
be  a^ked,  why  did  not  the  directors  discover  this  by  an  examination 
of  the  books  ?     Tlie^ answer  is,  that,  if  they  had  examined  every  book  "/Ir.  ^  '^f/P^  \^, 
iji  the^ bank,  with  a  single  excei^tion,  they  would  not  have  found  the;'  lJ\K'^  ijj  J^ 
fi:aud.     ThaJL£xceptionJ_s  the  individual  ledger.     All  the  frauds  were',-     ^^  v^'4^  )}p 
dumped  into  this  book,  and  appeared  nowhere  else.     The  individual   y*  /  ^r'*'''*^  ,^ 
ledger  contains  the  accounts  of   the  individual  depositors,  and  this ^*°^  ^ -^^^  ■'. 
book,  by  the  rules  of  a  large  majority  of  the  Pittsburgh  banks,  thei^/j^*" 
directors  are  not  allowed  to  see.     This  is  a  rule  of  policy  on  the  part  ^   ^/^ 
of  most  city  banks,  and  the  reason  for  it  is,  at  least,  plausible.     AV 
director,  largely  engaged  in  business,  may  have  a  number  of  rivals  in  , 
the  same  business  who  are  depositors  in  the  bank.     If  he  is  permitted  \  ^ 
to  examine  their  accounts  it  gives  him  an  advantage  and  an  insight, 
into  a  rival's  affairs  that  few  business  men  would  tolerate.     Hence,  it? 
is  a  question  with  many  banks  whether  to  adopt  this  rule  or  lose 
valuable  customers,  and  they  generally  prefer  the  former.     We  are 
not  speaking  of  the  wisdom  of  the  rule,  only  of  its  existence,  as  bear- 
ing upon  the  question  of  the  directors'  negligence.     Are  they  to  be 
held  to  be  guilty  of  gross  negligence  in  not  examining  a  book,  which, 
by  the  rules  of  their  own  bank,  and  of  four  fifths  of  the  other  banks 
in  Pittsburgh,  the  directors  were  not  permitted  to  see  ? 

Nor  do  we  think  the  directors  were  bound  to  regard  the  statements 
sxibmitted  to  them  as  false,  and  the  president,  cashier  and  clerks  as 
thieves.  They  had  nothing  to  arouse  suspicion.  All  of  these  gentle- 
men stood  high  ;  they  were  the  trusted  agents  of  the  corporation ; 
paid  for  their  services,  and  regarded  in  the  community  in  which  they 
lived  as  honest  men. 

Aside  from  this,  the  directors  were  among  the  heaviest  stockholders 
of  the  bank.  They  collectively  owned  a  large  proportion  of  it.  And 
so  thoroughly  were  they  deceived  by  the  president  as  to  its  condition  ' 
that,  when  the  first  stoppage  occurred,  they  not  only  believed  the  sus- 
pension was  temporary,  but  they  showed  their  faith  by  their  works, 
and  upon  their  individual  credit  raised  the  sum  of  $289,000  to  enable 
it  to  resume.  They  did  not  desert  the  ship  like  a  parcel  of  drowning 
rats,  but  imperiled  their  private  fortunes  in  an  effort  to  keep  it  afloat. 
Under  such  circumstances  it  would  be^ji^act  of  gross  injustice  to^ 
hold  them  liable  for  the  frauds  of  others,  in  which  they  had  not  par-  ( 
ticipate^T — of  whjch  they  had  no  knowledge -^_  and  which  have  only  1 
beenJ)rought  to  light  with  the  aid  of  experts^  We  must  measure  this 
transaction  by  the  light  which  these  directors  had  at  the  time  the 


9- 


GIBBONS   V.    ANDERSON. 


transaction  occurred.  It  would  be  unfair  to  judge  them  by  the  cal- 
cium  light  which  has  been  turned  on  for  six  years,  and  which  has 
enabled  us  to  trace  at  last  the  sinuous  path  of  Riddle  and  his  con- 
federates in  crime,  and  the  means  by  which  this  bank  has  been  robbed 
and  plundered.  We  are  of  opinion  that  the  master  and  the  court  be- 
low were  right  in  their  conclusion,  and  the  decree  is  affirmed  upon  the 
appeal  of  the  assignee,  and  the  appeal  dismissed  at  his  costs. 


i^ 


ii^"": 


^ 


[Omitting  opinion  on  other  assignments  of  error.] 


^ 


c 


{b 


^ 


^^^' 


^ 


GIBBONS  V. 


ANDEESOK.y  /  /  f^ 


1897.  80  Federal  Reporter,  345?\ 


Z^,^/^  'f^^t^In  U.  S.  Circuit  Court,  Western  District  of  Michigan.' 


/^^      f^  Severen^  District  Judge.     The  bill  in  this  ease  was  filed  by  the^ /  J 

•-f      -J,  (complainant,  as  receiver  of  the  City  National  Bank  of  Greenville,  to/  ■ 

^jy^^^^^^^lj/^  ^^        establish  the  liability  of  the  defendants,  Foster  and  Anderson,  who'Xy 
M<y<5*'    <    6      hX'    were  directors  of  the  bank,  for  negligence  in  the  performance  of  their^To 
w^^^^^  <},•        ^x^'^duties  as  such,  which  it  is  alleged  has  resulted  in  a  heavy  loss  to  the 
^  y,']^      ^'''''-jJHoank  and  its  creditors.     The  bank  was  organized  April  28,  1884,  with 
'  ^  ^y^/^ '  <!i^  ^  a  capital  stock  of  $50,000.     It  suspended  on  the  22d  day  of  June, 

*j'  ^^  'fi^  j^r'''^S93.  The  complainant  was  appointed  receiver  thereof  by  the  comp- 
rJ>  ^^ijb  *^  troller  of  the  currency  five  days  later,  and  on  July  1,  1893,  entered 
vC^.Vfij    a3  y  upon  the  discharge  of  his  duties.     The  total  liability  of  the  bank  to 

'""^irlv^'^ '^  ^-''"n  ^*^  creditors  at  the  time  of  its  failure  was  $237,733.  The  nominal 
j-*^  .<y-''^  A  ^/^^  value  of  its  assets  was  about  $326,000,  but  the  total  net  amount  which 
yy-r^  ^  ^  ®^  (j-^  the  receiver  has  been  able  to  realize  from  the  assets  is  only  about 
^^ff-^  $40,000.     This  result  is  certainly  a  very  startling  one,  and  the  enor- 

mous loss  in  the  liquidation  of  the  bank's  assets  calls  for  an  inquiry 
for  its  causes.  And  they  are  not  far  to  seek.  The  defendants  were 
members  of  the  board  of  directors  from  its  organization  to  the  date  of 
its  suspension.  Le  Roy  Moore  was  another  director,  and,  either  in 
-7  the  capacity  of  cashier  or  president,  was  its  managing  officer  during 
the  whole  of  the  bank's  operations.  If  during  part  of  the  time  another 
i/<  '  (^/xr""^  »J^  person  was  cashier,  he  was  only  nominally  such.  Moore  dominated 
'i^  l^J^^^^^'^  the  bank,  and  exercised  the  functions  of  cashier.  Upon  investiga- 
]k»^  f}-'^^^'''^'^  tion  it  turns  out  that  substantially  from  the  beginning  Moore  em- 
1%  ^^'•^tyt^'*^\\  ployed  the  bank  for  the  promotion  of  his  own  business  enterprises, 
iy.  ^  J^^  ^^""^  ^"^>  t^  ^  steadily  increasing  amount,  has  in  one  way  and  another  di- 
^^V^\,t/^  y^ verted  its  funds  to  his  own  use,  to  the  extent  that  at  the  date  of  the 
rjl^,r  ^  ^^^'''"''^ suspension  of  the  bank  he  was  indebted  to  the  bank  u])on  paper  of 
-^.-'^'"^  i/A-^  which  he  was  the  maker  in  the  sum  of  $3(),2G3.(»3,  and  as  indorser 
\[A^  ^jL^i  ^  iJ'^  ^'is  own  name  in  the  sum  of  $44,819.59.  lie  was  also  liable  as 
.  ^<^]'\>.t/t'^  indorser  under  the  name  of  Le  Roy  Moore  &  Co.  in  the  sum  of 
■        rn/^*^;  //^    $17,419.97.    No  other  person  than  Le  Roy  Moore  was  liable  for  these 


•^  ) 


^' 


\^'-^ p^^  A^./py^// 


GIBBONS  V.   ANDERSON.  373 

Indorsements  of  Le  Roy  Moore  &  Co.;  the  other  member  having  long 
since  been  discharged  by  the  renewal  of  paper  and  the  extension  of 
credit  without  his  knowledge,  —  that  firm  having  been  dissolved  in 
1887,  and  the  liabilities  thereof  assumed  by  Moore.  There  was  also 
in  the  bank  at  the  time  of  its  suspension,  representing  part  of  its 
assets,  paper  upon  which  the  Stanwood  Manufacturing  Company  was 
maker  to  the  amount  of  $8,750,  and  upon  which  it  was  indorser,  $G7,- 
748.54,  amounting  in  all  to  $76,498.54.  This  Stanwood  Manufactur- 
ing Company  was  a  business  concern  of  which  Moore  was  the  owner, 
with  a  trifling  exception.  He  owned  2,400  of  the  2,500  shares  of  $10 
each,  and,  so  far  as  appears,  only  20  other  shares  were  taken.  The 
books  of  the  company  show  that  $15,000  only  of  its  capital  stock 
were  paid  in,  and  this  by  Le  Roy  Moore's  individual  promissory  notes, 
upon  which  he  never  made  any  payment.  The  bank  had  a  chattel 
mortgage  on  all  its  property,  and  the  sum  of  $3,500  was  the  sum 
realized  out  of  the  sale  of  that  property  under  tliis  mortgage.  Over 
$63,000  of  paper  held  by  the  bank,  upon  which  the  Stanwood  Manu- 
facturing Company  was  indorser,  consisted  of  accommodation  notes 
made  by  the  employes  about  the  factory  of  the  Stanwood  Manufactur- 
ing Company,  and  was  worthless.  This  paper  was  all  unloaded  upon 
the  bank  by  Moore  in  the  prosecution  of  his  own  enterprises,  and 
operated  practically  as  a  credit  to  himself.  For  a  number  of  years 
prior  to  the  suspension  of  the  bank  he  was  a  borrower  from  it,  either 
upon  his  own  name,  or  under  a  guise  so  thin  as  to  be  transparent,  to 
an  amount  grossly  in  excess  of  the  legal  limit.  The  comptroller  in 
his  letter  of  October  14,  1892,  states  that  at  the  last  examination  he 
was  directly  indebted  to  the  bank  in  the  sum  of  $29,565.  In  all  these 
ways,  direct  and  indirect,  Moore  converted  the  assets_of_the  bankjD 
his  ownjise,  and  in  the  end  it  appears  that  for  all  these  large_sums 
which  Moore  had  obtained,  and  which_were_ represented  by^papgi. 
which  he  had  employed  for  that  purj)osej_amounting._to  $172,768.88, 
on]X-gi-  vf^ry  little  can  Jje  realized,^  Moore  made  a  trust  deed  of  all  his 
property  to  secure  the  debts  he  owed  to  the  bank,  out  of  which  not 
more  than  $12,000  to  $15,000  can  be  realized.  This  is  the  result,  not 
of  a  single  fraud,  nor  of  a  group  of  contemporaneous  frauds,  practiced 
by  Moore,  but,  as  already  stated,  it  is  the  consequence  of  malversa- 
tion of  the  funds  of  the  bank  from  about  the  beginning  of  its  history. 
It  is  needless  to  go  into  detail.  The  books  of  the  bank  show  that  he 
was  going  deeper  and  deeper  into  the  funds  of  the  bank,  and,  under 
one  cover  or  another,  converted  of  its  assets  more  than  three  times 
the  amount  of  its  capital  stock.  The  defendants,  who  were  directors 
all  this  time,  say  that  they  were  ignorant  of  anything  wrong  in  tlie 
affairs  of  the  bank  until  their  eyes  were  opened  to  the  facts  by  its 
failure.  Greenville  is  a  small  place,  of  only  about  3,000  inhabitants, 
and  the  defendants  resided  there.  The  volume  of  the  business  of  the 
bank  was  comparatively  small,  —  certainly  not  so  large  but  that  the 
most  cursory  examination  of  the  general  features  of  its  business  by 


374 


GIBBONS   V.   ANDERSON. 


^ 


&^ 


any  one  having  ordinary  business  intelligence  -would  have  disclosed 
the  truth.  It  is  contended  by  the  directors  that  they  did  not  in  fact 
know  how  Moore  was  carrying  the  substance  out  of  it,  and  it  is  the 
more  charitable  view  to  take  of  their  conduct  to  the  extent  that  supine 
neo'ligence  is  more  easily  excused  than  active  fraud.  There  is  in  the 
record  the  testimony  of  witnesses  stating  that  atjbhejj^nie  of  the  fail- 
ul-e  of  theljank  these  defendants  declared^liatjhey  trusted  all  to^JJie 
president,  and  tjiatjthey  knew  but  little  of  the  bank^s  affa.irs,.rely^ing 
as^hey  did  upon  their  confidence  in  the  management.  Biit  what  else 
can  be  said  than  that,  if  they  had  notice  of  the  facts,  they  were  cul- 
pable, or  that,  if  they  did  not  know  them,  they  were  grossly  negligent 
and  inattentive  to  their  duties  ?  The  testimony  convinces  me  that 
the  latter  is  the  fact,  and  that  their  negligence  and  lack  of  interest 
was  so  profound  that  not  even  the  disclosures  and  the  warning  con- 
tained in  the  letter  of  the  comptroller  of  October  14,  1892,  and 
which,  pursuant  to  his  request,  was  brought  to  their  attention,  aroused 
them  from  the  stupor  which  beset  them  ;  for  the  situation  was  in  no 
wise  redeemed,  and  grew  steadily  worse  without  the  moving  of  a  hand 
by  the  directors  to  save  it.  From  thej;ime  of  their  election  theJ:ioard 
of  directors  seems  to  have  slumbered  over  the  affai£S_of  the  bank 
w^ile  iWmanaging  officer  was  plundering  it  of  all  that  it  ojwned,  and 
nJTTeir that~belonged  toTpthers.  Once  in  a  while  there  seems  to  have 
been  some  faint  consciousness,  but  nothing  which  indicates  any  ac- 
tivity. But  they  say,  and  have  called  witnesses  to  prove,  that  acting 
in  accord  with  the  usage  and  custom  of  national  banks,  and  having 
called  into  the  management  a  person  in  whom  they  had  entire  confi- 
dence, which  was  justified  by  his  reputation,  and  committed  the  affairs 
of  the  bank  to  him,  they  were  not  bound  to  have  doubt  and  distrust 
of  his  correct  dealing  until  something  occurred  which  should  arouse 
suspicion.  And  this  is  their  defense.  The  learned  counsel  for  the 
defendants  puts  the  question  thus  : 

"  Whether  a  director  in  a  national  bank  is  individually  liable  for 
loss  to  the  bank  accruing  through  another  director,  viz.  its  president, 
when  such  mismanagement  was  not  known  to  or  participated  in  by 
the  directors  sought  to  be  charged." 

Or,  in  another  form  : 

"  Whether  an  individual  director  in  a  national  bank  is  liable  in  his 
individual  capacity  for  all  losses  occasioned  by  the  mismanagement 
of  the  bank's  affairs  by  a  trusted  officer  through  the  neglect  of  the 
board  of  directors  to  meet  and  examine  into  the  affairs  of  the  bank." 

These  questions  present  in  the  most  favorable  light  for  the  defend- 
ants what  is  undoubtedly  the  substance  of  the  inquiry  upon  the  facts 
which  existed  in  this  case,  and  which  is,  in  short,  this :  Whether  the 
duty  of  the  board  of  directors  is  discharged  by  the  selection  of  officers 
of  good  reputation  for  ability  and  integrity,  and  then  leaving  the 
affairs  of  the  bank  without  any  other  supervision  or  examination  than 
mere  inquiry  of  tlie  officer,  and  relying  upon  his  statements  until  some 


GIBBONS  V.   ANDERSON.  375 

cause  for  suspicion  attracts  their  attention.  Section  9  of  the  national 
banking  act,  being  section  5147  of  the  Eevised  Statutes,  provides 
that : 

'^  Each  director,  when  appointed  or  elected,  shall  take  an  oath  that 
he  will,  so  far  as  the  duty  devolves  on  him,  diligently  and  honestly 
administer  the  affairs  of  such  association." 

And  by  section  5145  it  is  declared  that  the  affairs  of  such  associa- 
tion shall  be  managed  by  not  less  _than  fivedirectors.    The  oath  which 
the  director  is  required  to  take,  that  he  wiTrd"iligently  and  honestly 
administer  the  affairs  of  such  association,  indicates  the  scope  of  his 
obligation.     The  management  of  the  bank  is  cast  upon  the  board  of 
directors.     The  duty  of  managing  and  administering  the  affairs  of  the 
bank  by  the  board  of  directors  has  been  differently  construed  in  de- 
cisions bearing  upon  this  subject,  but  it  is  not  necessary  for  me  to 
analyze  the  cases,  or  to  reconcile  their  apparent  differences.     Some  of 
them  have  gone  to  a  length  which  in  my  opinion  is  extremely  danger- 
ous to  the  public  safety,  and,  if  generally  applied,  would  make  these  /^ 
banking  associations,  which  were  designed  to  supply  the  people  of  the                       jT^ 
country  with  financial  institutions   hedged   about   with  security  on                   <v^ 
which  their  confidence  might  securely  rest,  the  objects  of  doubt  and             ^  jr 
disti-ust.     The  rule  of  decision  by  which  my  judgment  in  the  present    ",  j^  ^jt/ 
case  must  be  guided  is  laid  down  in  the  case  of  BAggs^^_S]iauldAn<i^  -    ^  Ki  J^ 
141_IL.S^j32JlSup.  Ct.  924.     Much  of  the  discussion  in  that  cas&V>^ 
was  devotecPfco  the~consideration  of  the  special  circumstances  upon     r 
which  rested  the  charges  made  against  the  several  directors.     Those 
circumstances  have  little  or  no  resemblance  to  those  of  the  present 
case,  and  not  much  aid  is  afforded  by  that  part  of  the  discussion ;  for, 
as  the  court  in  that  case  observed,  each  case  must  stand  upon  its  own 
facts.    The  directors  in  that  case  were  held  to  be  excusable.    One  very 
important  and  noticeable  difference  between  that  case  and  this  is  in 
the  fact  that  the  question  there  was  narrowed  down  to  one  of  fact,  as 
to  whether  the  defendants  were  fairly  liable  for  not  preventing  loss 
by  putting  the  bank  into  liquidation  within  90  days  after  they  became 
directors,  the  previous  condition  of  the  bank  being  admitted  to  have 
been  good,  whereas  in  the  present  case  the  defendants'  neglect  runs 
through  quite  a  number  of  years.    But  the  court  laid  down  certain  gen- 
eral rules  by  which  the  obligation  of  directors  of  national  banks  is  to 
be  tested ;  that  is  to  say,  they  declare  what  is  the  minimum  of  that 
obligation.     Chief  Justice  Fuller,  delivering  the  opinion  of  the  court,             t/ 
said :  -             ^        [                                                                                                    (WN>\  \ 

""We  hold  that  directors  must  exercise  ordinary  care  and  prudence*  *^  ^'r^ 
in  the  administration  of  the  affairs  of  a  bank,  and  that  this  includes 
something  more  than  officiating  as  figureheads.  They  are  entitled, 
under  the  law,  to  commit  the  banking  business,  as  defined,  to  their 
duly-authorized  officers,  but  this  does  not  absolve  them  from  the  duty 
of  reasonable  supervision  ;  nor  ought  they  to  be  permitted  to  be 
shielded  from  liability  because  of  want  of  knowledge  of  wrongdoing, 
if  that  ignorance  is  the  result  of  gross  inattention." 


876 


GIBBONS  V.   ANDEKSON. 


l^ 


i^'^ 


-y 


In  my  opinion,  it  does  not  meet  tlie  requirements  of  this  statement 
of  the  law  that  directors  may  confide  the  management  of  the  opera- 
Q^  (tions  of  the  bank  to  a  trusted  officer,  and  then  repose  upon  their  con- 
^'  'fidence  in  his  right  conduct,  without  making  examinations  themselves, 
or  relying  upon  his  answers  to  general  questions  put  to  him  with 
regard  to  the  status  of  the  affairs  of  the  bank.  To  begin  with,  it  is 
to  be  assumed  in  every  case  that  the  directors  have  not  selected  any 
other  than  a  man  of  good  reputation  for  capacity  and  integrity.  Any 
other  idea  assumes  that  they  have  been  guilty  at  the  outset  of  a  glar- 
ing fault.  Further,  it  is  a  well-known  fact  that  a  large  proportion  of 
the  disasters  which  befall  banking  institutions  come  from  the  malfea- 
sance of  just  such  men,  and  it  would  be  manifest  to  everybody  that 
only  a  satisfactory  and  quieting  reply  would  be  made  by  the  official 
who  has  any  reason  for  concealment.  Again,  what  are  the  duties  of 
management  that  are  committed  to  the  cashier,  or  the  officer  standing 
in  his  place  ?  They  are  those  which  relate  to  the  details  of  the  busi- 
ness, to  the  conduct  of  particular  transactions.  Even  in  respect  of 
those,  his  duties  are  conjoint  with  those  of  the  board  of  directors.  In 
large  affairs  it  is  his  duty  to  confer  with  the  board.  In  questions  of 
doubt  and  difficulty,  and  where  there  is  time  for  consultation,  it  is  his 
duty  to  seek  their  advice  and  direction.  It  is  his  duty  to  look  after  the 
details  of  the  office  business,  and  generally  to  conduct  its  ordinary 
Si)J  /operations.    It  is  the  right  and  duty  of  the  board  to  maintain  a  super- 

I  vision  of  the  affairs  of  the  bank ;  to  have  a  general  knowledge  of  the 
i  manner  in  which  its  business  is  conducted,  and  of  the  character  of 
^  \  that  business  ;  and  to  have  at  least  such  a  degree  of  intimacy  with 
its  affairs  as  to  know  to  whom,  and  upon  what  security,  its  large  lines 
of  credit  are  given ;  and  generally  to  know  of,  and  give  direction  with 
regard  to,  the  important  and  general  affairs  of  the  bank,  of  which 
'^the  cashier  executes  the  details.  They  are  not  expected  to  watch  the 
routine  of  every  day's  business,  or  observe  the  particular  state  of  the 
accounts,  unless  there  is  special  reason;  nor  are  they  to  be  held 
responsible  for  any  sudden  and  unforeseen  dereliction  of  executive 
officers,  or  other  accidents  which  there  was  no  reason  to  apprehend. 
The  duties  of  the  board  and  of  the  cashier  are  correlative.  One  side 
are  those  of  an  executive  nature,  which  relate  mainly  to  the  details. 
On  the  other  are  those  of  an  administrative  character,  which  relate 
to  direction  and  supervision ;  and  supervision  is  as  necessarily  in- 
cumbent upon  the  board  as  direction,  unless  the  affairs  of  banks 
are  to  be  left  entirely  to  the  trustworthiness  of  cashiers.  Doubtless 
there  are  many  matters  which  stand  on  middle  ground,  and  where  it 
may  be  difficult  to  fix  the  responsibility,  but  I  think  there  is  no  such 
difficulty  here.  The  idea  which  seems  to  prevail  in  some  quarters, 
that  a  director  is  choseii  because  he  is  a  man  of  good  standing  and 
character,  and  on  that  account  will  give  reputation  to  the  bank,  and 
that  his  only  office  is  to  delegate  to  some  other  person  the  manage* 
ment  of  its  affairs,  and  rest  on  that  until  his  suspicion  is  aroused, 


GIBBONS   V.   ANDERSON.  377 

■whicli  generally  does  not  happen  until  the  mischief  is  done,  cannot 
be  accepted  as  sound.  It  is  sometimes  suggested,  in  effect,  that,  if 
larger  responsibilities  are  devolved  upon  directors,  few  men  would 
be  willing  to  risk  their  character  and  means  by  taking  such  an 
office ;  but  congress  had  some  substantial  purpose  when,  in  addition 
to  the  provision  for  executive  officers,  it  further  provided  for  a  board 
of  directors  to  manage  the  bank  and  administer  its  affairs.  The  stock- 
holders might  elect  a  cashier,  and  a  president  as  well.  The  banks 
themselves  are  prone  to  state,  and  hold  out  to  the  public,  who  compose 
their  boards  of  directors.  The  idea  is  not  to  be  tolerated  that  theyl 
serve  as  merely  gilded  ornaments  of  the  institution,  to  enhance  its 
attractiveness,  or  that  their  reputations  should  be  used  as  a  lure  to, 
customers.  What  the  public  suppose,  and  have  the  right  to  suppose,  i 
is  that  those  men  have  been  selected  by  reason  of  their  high  character 
for  integrity,  their  sound  judgment,  and  their  capacity  for  conducting) 
the  affairs  of  the  bank  safely  and  securely.  The  public  act  on  this)  rt. 
Ijresumption,  and  trust  their  property  with  the  bank  in  the  confidencei 
that  the  directors  will  discharge  a  substantial  duty.  How  long  would 
any  national  bank  have  the  confidence  of  depositors  or  other  creditors 
if  it  were  given  out  that  these  directors  whose  names  so  often  stand 
at  the  head  of  its  business  cards  and  advertisements,  and  who  are  al- 
ways used  as  makeweights  in  its  solicitations  for  business,  would  only 
select  a  cashier,  and  surrender  the  management  to  him  ?  It  is  safe 
to  say  such  an  institution  would  be  shunned  and  could  not  endure.  It 
is  inconsistent  with  the  purpose  and  policy  of  the  banking  act  that  its 
vital  interests  should  be  committed  to  one  man,  without  oversight  and 
control. 

Eecurring  to  the  present  case,  it  is  clear  that  unless  the  board  of 
directors  is  to  be  absolved  upon  the  theory  that  they  were  justified  in 
committing  the  affairs  of  the  bank  to  Moore,  and  .relying  upon  his 
good  conduct,  and  his  answers  to  the  perfunctory  questions  which 
were  occasionally  put  to  him,  until  they  were  brought  to  the  facts  by 
the  collapse  of  the  bank  upon  the  first  prick  of  a  financial  stringency; 
such  as  came  upon  the  country  in  the  summer  of  1893,  they  must  be( 
held  liable.  It  is  with  sincere  commiseration  and  regret  that  the 
court  feels  compelled  to  reach  this  conclusion,  in  view  of  the  conse- 
quence which  must  follow  to  these  directors.  But  there  is  another 
side  to  this  matter.  The  court  cannot  ignore  the  rights  and  interests 
of  the  depositors  and  others  who  have  trustfully  confided  their  money 
to  the  bank,  and  who  now  find  that  it  was  run  through  a  shell  into  the 
hands  of  Moore,  while  the  defendants  turned  their  heads  away,  and 
failed  to  give  them  the  protection  which  a  proper  discharge  of  their 
duties  would  have  afforded.  The  records  of  the  board  of  directors 
make  a  sorry  showing,  when  put  in  contrast  with  the  financial  history 
of  the  bank.  The  entries  are  few,  at  long  intervals,  and  are  almost 
wholly  limited  to  the  election  of  directors  and  the  declaration  of  divi- 
dends.    They  are  feebly  supplemented  by  the  oral  testimony  "■f  the 


378  DOVEY   V.   CORY. 

defendants,  which  tends  only  to  show  that  individual  inquiries  were 
occasionally  made  by  them,  of  a  comparatively  superficial  character. 
There  was  no  examination  of  the  books ;  at  least,  none  of  any 
value.  If  there  had  been  such  examination  by  a  fairly  intelligent 
man,  such  as  a  director  promises  he  is,  the  condition  of  things 
would  have  been  seen.  It  is  not  irreconcilable  with  what  they  de- 
clared, when  the  bank  failed,  with  respect  to  their  knowledge  of  its 
affairs,  and  with  what  I  must  believe  was  substantially  the  truth  of 
the  matter.  It  may  be  conceded  that  the  members  of  the  board  were 
not  responsible  for  the  malfeasance  or  nonfeasance  of  their  associates, 
where  the  fault  of  the  others  was  not  known  to  them,  and  they  were 
helpless  to  prevent  the  consequences  ;  but  in  the  present  case  the 
charge  of  negligence  rests  upon  the  whole  board,  and  there  is  nothing 
to  show  that  the  defendants  took  any  steps  to  retrieve  the  conse- 
quences of  the  joint  negligence.  If  the  defendants  had  been  able  to 
show  that  they  themselves  had  done  what  they  could  to  induce  the 
board  to  attend  to  its  duty,  a  different  case  would  be  presented.  I  do 
not  understand  why  the  comptroller  did  not  more  energetically  inter- 
fere, but  I  have  no  duty  to  criticise  his  action. 

[The  learned  Judge  then  held,  that  the  date  from  which  the  directors 

should  be  charged  with  losses  was  July  1,  1892  ;  when  the  fact  that  a 

year  had  elapsed  without  the  declaration  of  a  dividend  should  havevi 

m^uced  the  directors  to  institute  an  examination.]  ^'  « 

/    [d  '^■^^^  Decree  to  he  entered  in  conformity  with  the  above  o'^inipn. ,  ^ 

%oP   ^  ^(\1^  1^   oA       l^r  House  of  Lords,  Aug.  1,  1901.     17  Times^IidvM?e;fts  732A^  /  ^f/ /y 


y  ^C\'^  i   itA       ImT  ^ousi,  of  Lords,  Aug.  1,  1901.     17  Tmes^ZJliwl^fce/fo  73^.1  ^  /.?///, 

9^%^i^    /y^r  — -^^^  Kr/x^^  t^iJ"^"^^'^ 

(p'^^^l     ^         This  was  an  appeal  from  the  decision  of  %he  Court  of  Appeal  (the 

Of^ .    z^^    r^  Master  of  the  Rolls,  now  Lord  Lindley,  Sir  F.  H.  Jeune,  and  Lord 

Jj^'^    f^  *'m^     Justice  Romer),  which  reversed  a  judgment  of  Mr.  Justice  Weight. 

^    A>l'^^,/r^'^^jr>^  *The  hearing  before  the  Court  of  Appeal  {suh  nomine  "In  re  National 

^'O^       iS^  \Jk^ank  of  Wales  ")  is  reported  in  15  The  Times  L.  R.  517  ;  L.  R.  (1899) 

'     0/f^  ^  -^     '^^^^  appellant  is  the  liquidator  of  the  National  Bank  of  Wales,  and 

Ay       fj"       ^         the  Metropolitan  I>ank  (of  England  and  Wales)  have  purchased  and 
'^        ^  •      /L        taken  over  its  assets  and  liabilities.     The  respondent,  John  Cory,  was 
»^  ^  A  0*^  for  some  years  a  director  of  the  National  Bank.     In  the  liquidation 

^  ,^c^^    A       ■)    of  the  latter  a  summons  was  taken  out  to  render  the  respondent  liable 
AN'    J^^'^^   A*^. '~;— not  to  creditors,  all  of  whose  claims  had  been  satisfied  —  but  to  the 
^'- -^^ '■''^^ -^^  '     contributories,  in  respect  to  alleged  misfeasance  (1)  in  paying  divi- 
dends out  of  capital ;  (2)  in  making  improper  advances  to  directors  ; 


'"  1< 


1  Portions  of  the  opinions  are  omitted.     The  case  will  be  officially  reported  in  Law  Re- 


ijJ\    ^pj-\     •    .^^  P'Jrts  (1901),  Appeal  (Jases.  —  Ed. 


t  < 


'^^!;^^ 


DOVEY   V.   CORY.  379 

and  (3)  in  making  improper  advances  to  customers  who  •were,  or  were 
reputed  to  be,  insolvent,  and  the  summons  asked  that  the  respondent 
should  be  ordered  to  repay  the  full  amount  of  all  losses  caused  by- 
such  acts  of  alleged  misfeasance  with  interest  and  costs.  Mr.  Cory 
became  a  director  on  November  23,  1883,  and  resigned  on  December 
18,  1890.  The  summons  asked  that  the  respondent  should  be  de- 
prived of  the  benefit  of  the  Trustee  Act,  1888,  and  of  the  Statutes  of; 
Limitation,  on  the  ground  that  the  losses  arose  from  the  respondent's 
wrongful  acts  and  fraudulent  concealment  of  the  true  state  of  affairs. 
The  appellant's  counsel,  however,  disclaimed  the  imputation  of  any 
moral  obliquity  on  the  part  of  the  respondent,  but  argued  the  ques- 
tion on  the  basis  of  negligence  and  failure  to  discharge  the  duties  of 
a  fiduciary  position.  The  transactions  complained  of  were  voluminous 
and  ranged  over  a  series  of  years  and  related  to  the  affairs  not  only 
of  the  head  office,  but  of  the  branches,  which  in  1890  were  33.  It 
was,  however,  found  possible  by  the  parties  to  condense  the  story 
within  the  limits  of  four  volumes  and  about  1500  pages.  In  February, 
1893,  an  agreement  was  entered  into  between  the  Kational  Bank  of 
Wales  and  the  Metropolitan,  Birmingham,  and  South  Wales  Bank, 
now  the  Metropolitan  Bank  (of  England  and  Wales)  (Limited)  whereby 
the  latter  bought  the  assets  and  goodwill  and  undertook  the  liabili- 
ties and  contracts  of  the  former,  the  value  of  the  assets  and  goodwill 
being  taken  at  not  less  than  £110,000.  Voluntary  resolutions  were 
passed  for  winding  up  the  National  Bank,  and  Thomas  Cory,  its  former 
chairman,  and  the  appellant  were  appointed  liquidators.  Mr.  Thomas, 
Cory  subsequently  resigned  and  the  appellant  became  sole  liquidator. 
The  alleged  gmount  of  improper  payments  of  dividends  was  £52,986  ; 
of  loss  on  advances  and  credits  to  directors  to  December  31,  1890, 
£37,731,  and  of  loss  on  improper  advances  to  customers,  £43,087. 
The  whole  of  the  assets  were  realized  or  valued,  and  the  appellant 
Dovey  alleged  that  after  discharging  the  liabilities  of  the  National 
Bank  and  crediting  it  with  the  value  of  its  assets  and  £110,000  as 
its  goodwill,  there  remained  a  deficiency  of  assets  amounting  to 
£84,392.  Calls  were  made  of  £2  10s.  per  share  each  in  July,  1896, 
and  September,  1899.  Mr.  Justice  Wright  ordered  the  respondent 
to  pay  £54,787,  being  £37.000,  the  aggregate  amount  of  dividends 
paid  to  the  shareholders  in  1887,  1888,  1889,  and  1890  (except  a  part 
of  the  last  dividend),  and  as  to  the  balance,  interest  at  5  per  cent,  on 
each  of  the  dividends.  The  learned  Judge  held  that  all  these  divi- 
dends were  in  fact  paid  out  of  capital ;  but  he  declined  to  make  the 
respondent  liable  for  improper  advances  to  directors  or  customers. 
The  Court  of  Appeal,  in  an  elaborate  judgment  delivered  by  the  Mas- 
ter of  the  Rolls,  exonerated  the  respondent  from  liability.  This  de- 
cision was  affirmed  by  the  noble  and  learned  Lords. 

Sir  E.  T.  Reid,  K.  C,  Ingpen,  K.  C,  and  S.  T.  Evans,  for  appellant. 

Swinfen  Eady,  K.  C,  Rufus  Isaacs,  K.  C,  G.  F.  Hart  and  E.  A. 
Nepean,  for  respondent. 


-B 


S80  DOVEY   V.   CORY. 

Sheldon,  for  Metropolitan  Bank  of  England  and  Wales,  which  was 
originally  a  respondent,  but  subsequently  made  an  appellant. 

The  Lord  Chancellor,  [Lord  Halsbury].  —  In  this  case  the 
liquidator  of  the  National  Bank  of  Wales  (Limited)  appeals  against  a 
judgment  of  the  Court  of  Appeal,  whereby  Mr.  John  Cory,  the  respond- 
ent, was  discharged  from  the  liability  which  Mr.  Justice  Wright's 
judgment  had  imposed  upon  him  to  pay  £37,000  for  the  benefit  of 
the  shareholders  of  the  company,  in  respect  of  dividends  already 
distributed,  and  a  further  sum  for  interest.  Mr.  John  Cory  was  a 
director  of  the  company,  and  it  is  for  his  supposed  misconduct  in 
the  management  of  the  affairs  of  the  company  that  this  liability 
was  imposed  upon  him.  It  is  alleged  and  proved  that  certain  losses 
have  been  sustained  by  the  company,  and  the  ground  upon  which  Mr. 
John  Cory  is  sought  to  be  made  liable  is  the  very  short  and  intelligi- 
ble~ground  that  he  was  a  party  to  false  and  fraudulent  statements  as 
to  the  position  of  the  company  and  had  had  a  share  in  causing  these 
losses.  The  Court  of  Appeal  have  acquitted  him  of  any  knowledge 
of  what  was  falsely  stated,  and  Sir  Robert  Reid,  in  opening  this  ap- 
peal, stated  to  your  Lordships  that  he  did  not  intend,  in  arguing  for 
Mr.  John  Cory's  liability,  to  impute  to  him  any  moral  obliquity. 
Now  there  is  no  doubt  that  there  were  balance-sheets  laid  before 
meetings  of  the  shareholders  which,  to  use  the  language  of  the  arti- 
cles of  the  association,  were  not  proper  and  which  did  not  truly  report 
as  to  the  state  and  condition  of  the  company,  and  did  not  comply 
with  the  requirements  of  the  articles  in  question  in  respect  of  the 

/particular  sum  which  the  directors  recommended  as  dividend,  that  it 

I  should  be  paid  out  of  the  profits,  but  a  greater  sum  was  paid  out  as 
dividend  than  Avould  have  been  paid  if  certain  things  had  been  taken 

(  into  consideration,  and  therefore  larger  than  should  have  been  paid. 
A  great  part  of  the  judgment,  both  of  Mr.  Justice  Wright  and  of  the 
Court  of  Appeal,  is  occupied  by  discussing  matters  which  are  not  now 
before  your  Lordships  as  matters  in  debate.  It  is  now  admitted  that 
]\[r.  John  Cory  ceased  to  be  a  director  in  December,  1890.  My  Lords,  I 
am  clearly  of  the  opinion  that  the  judgment  of  the  Court  of  Appeal  is 
right  and  ought  to  be  affirmed ;  but  my  opinion  is  entirely  based  upon 
the  question  of  fact  that  he  was  guilty  of  no  breach  of  duty  whatever, 
and  for  reasons  which  I  will  refer  to  hereafter  I  am  very  anxious 
not  to  deal  with  some  reasons  given  for  their  judgment  by  the 
Court  of  Appeal,  which,  in  view  of  the  facts  that  I  take,  do  not 
arise  here ;  and  in  what  I   say  I    desire   to  be  understood  as  only 

^dealing  with  the  facts  of  this  particular  case.  Now,  in  the  first 
instance,  I  will  assume  that  the  company  has  sustained  loss  by  the 
issue  of  fraudulent  balance-sheets,  by  the  improper  advance  of 
money  to  the  customers  of  the  bank,  and  that  it  has  also  sustained 

,  loss  by  the  lending  of  money  to  directors  without  security.  With 
respect  to  the  default  involving  liability,  if  Mr.  John  Cory  was 
conscious  of  the  falsehood  it  is  not  necessary  to  go  any  further.    Like 


DOVEY   V.   CORY.  381 

any  one  else  who  is  a  party  to  a  false  statement  acted  upon  to  the 
prejudice  of  the  person  to  whom  it  is  made,  he  would  be  liable  to  the 
extent  to  which  his  falsehood  has  inflicted  loss  on  his  victims,  but 
after  the  admission  that  has  been  made  it  is  unnecessary  to  pursue 
this  head  of  inquiry ;  he  certainly  could  not  be  acquitted  of  moral 
obliquity  if  party  to  a  fraudulent  statement ;  but  it  is  said  he  has  so 
grossly  neglected  his  duty  as  a  director  that,  though  he  may  not  have 
known  the  true  state  of  the  facts,  he  ought  to  have  known  them,  and 
his  breach  of  duty  in  that  respect  renders  him  liable.  In  order  to 
see  how  far  this  obligation  is  made  out  it  is  necessary  to  consider 
what  the  business  of  the  company  was,  and  what  was  the  position 
of  Mr.  John  Cory  in  relation  to  it.  My  Lords,  I  think  it  is  idle  to 
talk  in  general  terms  of  the  duty  of  a  director  to  look  after  the  con- 
cerns of  the  company  of  which  he  is  one  of  the  managers  without 
seeing  what  in  the  ordinary  course  of  business  he  ought  to  do  or  to 
have  done.  Now  there  are  some  things  which,  of  course,  must  be,  or 
at  all  events  ought  to  be,  apparent  to  any  one  responsible  for  the  con- 
duct of  a  commercial  business,  and  we  must  apply  that  observation 
to  the  business  of  which  we  are  speaking  —  namely,  a  banking  busi- 
ness ;  but  I  do  not  understand  that  any  one  has  suggested  that  there 
was  neglect  or  default  by  reason  of  the  absence  of  some  system  under 
which,  if  honestly  carried  out,  the  interests  of  the  bank  would  have 
been  in  that  respect  secured.  It  is  admitted  that  (extract  from  jucTg^ 
ment  of  the  Court  of  Appeal)  the  company's  principal  bank  and  its 
head  office  were  at  Cardiff,  where  the  directors  met  and  the  general 
manager  was  in  daily  attendance.  The  company  had  also  many 
branch  banks  each  with  its  own  manager.  The  course  of  business 
was  this.  Each  branch  manager  sent  weekly  to  the  head  office  what 
is  called  a  weekly  state  —  i.  e.,  an  account  showing  how  the  assets  and 
liabilities  of  the  branch  stood,  what  advances  or  overdrafts  had  been 
made  or  allowed  and  to  whom,  what  securities  the  bank  held,  and 
other  matters.  Every  quarter  each  branch  manager  made  a  more 
formal  return  to  the  head  office  showing  the  position  of  the  branch 
and  the  business  done  during  the  past  quarter.  It  was  the  duty  of 
the  general  manager  to  examine  these  documents  and  to  report  to 
the  board  anything  disclosed  by  them  which  required  their  attention. 
The  weekly  states  or  quarterly  returns  were  in  the  board  rooms  for 
reference  in  case  of  need,  but  unless  attention  was  called  to  them  the 
directors  did  not  think  it  necessary  to  examine  them.  The  chairman 
of  the  directors  was  Mr.  Thomas  Cory,  a  brother  of  Mr.  John  Cory. 
The  chairman  and  general  manager  (Mr.  Collins)  visited  each  branch 
bank  every  year ;  and,  in  addition,  two  skilled  inspectors  frequently 
went  round  and  inspected  the  accounts  and  reported  to  the  general 
manager.  The  accounts  of  the  branch  bank,  appear,  however,  not  to 
have  been  separately  audited  by  professional  accountants.  The  audi- 
tors employed  to  examine  the  company's  accounts  and  to  certify  the 
annual  balance-sheets  and  accounts  laid  before  the  shareholders  only 


"e 


382  DOVEY   V.   COKY. 

,  I  saw  the  head  office  books  and  the  returns  from  the  branch  offices  certi^ 
'    fied  by  their  respective  managers  to  the  head  office.     These  certified 
'    returns  formed  part  of  the  weekly  states,  but  omitted  much  that  they 
\   contained.     The  minutes  of  the  directors'  meetings  show  that,  speak- 
ino-  generally,  they  attended  with  reasonable  regularity  and  transacted 
,   a  large  amount  of  business.     No  director,  vinless  it  was  the  chairman, 
'   attended  to  any  details  not  brought  before  the  board  either  by  the  chair- 
Wan  or  by  the  general  manager.     Mr.  John  Cory  stated  in  his  affidavit 
the  general  course  of  business  at  board  meetings,  and  his  cross-exami- 
nation does  not  substantially  differ  from  the  account  he  there  gives. 
But  it  is  suggested  that  Mr.  Cory  is  responsible  because  this  and  other 
portions  of  the  system  were  not  faithfully  adhered  to.     And,  indeed, 
what  is  really  made  the  test  of  his  responsibility  is  that  he  did  not 
'  find  out  what  was  fraudulently  withheld  from  his  knowledge.     So 
''  *■  the  warning  letters  of  the  auditor,  which  were  never  suffered  to  reach 
him,  are  suggested  as  warnings  to  him  which  he  ought  not  to  have 
neglected.     Again,  there  was  the  insufficient  striking  out  of  bad  and 
doubtful  debts,  by  which  it  is  alleged  that  the  amounts  paid  in  divi- 
dends to  himself  and  other  directors,  as  well  as  shareholders,  are  by 
a  process  of  reasoning  and  calculation  assumed  to  be  payments  out  of 
capital.     These  things  are  all  assumed  to  have  been  done  as  though 
done  with  knowledge  and  intention,  while  at  the  same  time  the  ad- 
mission is  made  that  there  was  no  evil   mind  or  conscious  fraud. 
Kow  I  think  such  things,  if  done  with  evil  mind  and  intention,  would 
be  fraud,  and  it  comes  back  again  to  the  proposition  that  the  respon- 
sibility must  be  based  upon  the  assumption  that  Mr.  Cory  is  respon- 
sible because  he  did  not  fipd  out  the  fraudulent  knaves  by  whom  he 
was  surrounded.     One  was  his  own  brother,  another  was  the  general 
manager,  and,  once  I  arrive  at  the  conclusion  that  there  were  those 
about  him  whose  interest  and  object  it  was  to  deceive  him,  I  certainly 
do  not  think  that  the  things  which  were  designedly  concealed  from 
him  are  things  which  ought  to  be  relied  upon  as  matters  for  which 
he  was  responsible.     In  the  view  I  take  the  whole  of  the  evidence  — 
which  is  relevant  and  important  to  the  question,  did  Mr.  Cory  know- 
ingly permit  the  things  to  be  done  which  were  done  —  becomes  to 
my  mind  entirely  immaterial  if  one  is  to  start  with  the  assumption 
that  he  knew  nothing  about  them.    Dealing  with  the  several  heads  of 
charge  as  they  have  been  fo^iulated  in  the  judgment  of  Mr.  Justice 
Wright  —  viz., ^negligence,  breaches  of  trust  in  respect  of  advances 
made  contrary  to  said  articles  of  association,^and  payment  of  divi- 
dends out  of  capital.     I  think  each  and  all  of  them  may  be  disposed 
jj  ^          j  of  by  the  proposition  that  Mr.  Cory  was  not  himself  conscious  of  any 
'  '  one  of  these  things  being  done,  and  that  unless  he  can  be  made  re- 

sponsible for  not  knowing  these  things,  as  Mr.  Justice  Wright  put  it, 
unless  he  is  shown  to  have  exhibited  a  conij)lete  neglect  of  the  duties 
_he  had  undertaken,  the  charges  are  not  made   out.     The  charge  of 
neglect  appears  to  rest  on  the  assertion  that  Mr.  Cory,  like  the  other 


DOVEY  V.   CORY.  383 

directors,  did  not  attend  to  any  details  of  business  not  brought  be- 
fore them  by  the  general  manager  or  the  chairman,  and  the  argument 
raises  a  serious  question  as  to  the  responsibility  of  all  persons  hold- 
ing positions  like  that  of  directors  — how  far  they  are  called  upon  to 
distrust  and  be  on  their  guard  against  the  possibility  of  fraud  being 
committed  by  their  subordinates  of  every  degree.     It  is  obvious  that 
if  there  is  such  a  duty  it  must  render  anything  like  an  intelligent 
devolution  of  labor  impossible.    Was  Mr.  Cory  to  turn  himself  into  an 
auditor,  a  managing  director,  a  chairman,  and  find  out  whether  audi- 
tors, managing  directors,  and  chairman  were  all  alike  deceiving  him  ? 
That  the  letters  of  the  auditors  were  kept  from  him  is  clear.     That 
he  was  assured  that  provision  had  been  made  for  debts  and  that  he 
believed  such  assurances  is   involved  in  the  admission  that  he  was 
guilty  of  no  moral  fraud ;  so  that  it  comes  to  this  —  that  he  ought  to 
have  discovered  a  network  of  conspiracy  and  fraud  by  which  he  was 
surrounded  and  found  out  that  his    own  brother  and  the  managing 
director  (who  have  since  been  made  criminally  responsible  for  frauds 
connected  with  their  respective  offices)  were  inducing  him  to  make 
representations  as  to  the  prospects  of  the  concern  and  the  dividends 
properly  payable  which  have  turned  out  to  be  improper  and  false.     I 
cannot  think  that  it  can  be  expected  of  a  director  that  he  should  be 
watching  either  the  inferior  officers  of  the  bank  or  verifying  the 
calculations  of  the  auditors  themselves.     The  business  of  life  could 
not  go  on  if  people  could  not  trust  those  who  are  put  into  a  posi- 
tion of  trust  for  the  express  purpose  of  attending  to  details  of  man- 
agement.    If  Mr.  Cory  was  deceived  by  his  own  officers  —  and  the 
theory  of  his  being  free  from  all  fraud  assumes  under  the  circum- 
stances  that   he   was  —  there  appears  to  me  to  be  no  case  against 
him  at  all.     The  provisions  made  for  bad  debts,  it  is  well  said,  was 
inadequate,  but  those  who  assured  him  that  it  was  adequate  were  the 
very  persons  who  were  to  attend  to  that  part  of  the  business —and 
so  of  the  rest.     If  the  state  and  condition  of  the  bank  were  what 
were  represented,  then  no  one  will  say  that  the  sum  paid  in  dividends 
was  excessive.     If  I  assume,  as  I  do,  that  Mr.  Cory  acted  upon  repre- 
sentations made  to  him  which  he  believed  and  which  came  from  the 
officers  of  the  bank  to  whom  he  was,  in  my  judgment,  justified  in  giv- 
ing credit,  the  discussion  of  whether  the  dividends  actually  paid  were 
or  were  not  properly  divisible,  has  no  bearing  on  :Mr.  Cory's  liability, 
and  I  am  very  reluctant  to  give  any  opinion  upon  it,  inasmuch  as  the 
question  may  arise  when  it  may  be  necessary  to  decide  it.     I  depre- 
cate my  premature  judgment.     My  Lords,  I  am,  as  I  have  said,  very 
reluctant  to  enter  into  a  question  which  for  the  reasons  I  have  given 
does  not  arise  here,  and  into  which  the  Court  of  Appeal  has  entered 
at  some  length.     The  only  reason  why  I  refer  to  it  at  all  is  lest  by 
silence  I  should  be  supposed  to  adopt  a  course  of  reasoning  as  to 
which  I  am  not  satisfied   that  it  is  correct.     I   doubt  very   much 
whether  such  questions  can  ever  be  treated  in  the  abstract  at  all 


^ 


6|. 


I 


334:  DOVEY   V.   CORY. 

The  mode  and  manner  in  which  a  business  is  carried  on,  and  what 
is  usual  or  the  reverse,  may  have  a  considerable  influence  in  deter- 
mining the  question  what  may  be  treated  as  profits  and  what  as  capi- 
tal. Even  the  distinction  between  fixed  and  floating  capital  which 
in  an  abstract  treatise  like  Adam  Smith's  *'  Wealth  of  Nations  "  is 
appropriate  enough,  may  with  reference  to  a  concrete  case  be  quite 
inappropriate.  It  is  easy  to  lay  down  as  an  abstract  proposition  that 
you  must  not  pay  dividends  out  of  capital,  but  the  application  of  that 
very  plain  proposition  may  raise  questions  of  the  utmost  difficulty  in 
their  solution.  I  desire,  as  I  have  said,  not  to  express  any  opinion, 
but  as  an  illustration  of  what  difficulties  may  arise  the  example  given 
by  the  learned  counsel  of  one  ship  being  lost  out  of  a  considerable 
number,  and  the  question  whether  all  dividends  must  be  stopped 
until  the  value  of  that  lost  ship  is  made  good  out  of  the  further  earn- 
ings of  the  company  or  partnerships,  is  one  which  one  would  have  to 
deal  with.  On  the  one  haiid,  people  put  their  money  into  a  trading 
concern  to  give  them  an  income,  and  the  sudden  stoppage  of  all  divi- 
dends would  send  down  the  value  of  their  shares  to  zero  and  possibly 
involve  its  ruin.  On  the  other  hand,  companies  cannot  at  their  will 
and  without  the  precaution  enforced  by  the  statute  reduce  their  capi- 
tal ;  but  what  are  profits  and  what  is  capital  may  be  a  difficult  and 
sometimes  an  almost  impossible  problem  to  solve.  When  the  time 
comes  that  these  questions  come  before  us  in  a  concrete  case  we  must 
deal  with  them,  but  until  they  do  I,  for  one,  decline  to  express  any 
opinion  not  called  for  by  the  particular  facts  before  us,  and  I  am  the 
more  adverse  to  doing  so  because  I  foresee  that  many  matters  will 
have  to  be  considered  by  men  of  business  which  are  not  altogether 
familiar  to  a  Court  of  law.  I  move  that  this  judgment  be  affirmed 
and  this  appeal  dismissed  with  costs. 

[Lord  Macnaghten  delivered  a  short  concurring  opinion.] 
Lord  Davey.  ,  .  .  The  respondent,  in  his  affidavit,  states  generally 
that  he  was  from  first  to  last  under  the  honest  and  genuine  belief  that 
the  affairs  of  the  company  were  in  a  sound  and  solvent  condition,  and 
that  its  business  was  being  carried  on  at  a  profit,  and  that  its  net  pro- 
fits for  the  time  being  were  amply  sufficient  to  justify  the  dividends 
which  were  from  time  to  time  during  his  directorship  paid  to  the  share- 
holders. And  he  adds  that  the  general  manager  and  branch  managers 
were,  so  far  as  he  knew,  men  of  unquestioned  confidence  and  integrity, 
and  that  he  and  his  co-directors  were  compelled  by  the  magnitude 
of  the  business  and  the  exigencies  of  the  case  generally  to  rely  upon 
(and  he  did  rely  upon)  these  officials  in  all  ordinary  matters  relating 
to  the  accounts  of  customers  and  other  questions  of  detail.  And  he 
deals  specifically  with  the  various  matters  alleged  in  the  liquidator's 
evidence  on  the  same  lines.  The  respondent  was  cross-examined  on 
his  affidavit  at  great,  but  not  unnecessary,  length.  I  am  not,  I  think, 
doing  injustice  to  the  appellant's  case  when  I  say  that  reliance  was 
chiefly  placed  on  the  "  weekly  states  "  and  "  quarterly  returns  "  made 


DOVEY  V.    CORY.  385 

by  the  brancli  managers,  or  that,  if  he  cannot  succeed  in  fixing  the 
respondent  with  liability  on  these  documents,  his  case  fails.  These 
returns  were  laid  on  the  table  in  the  board  room  at  each  meeting  of 
the  directors.  A  comparative  analysis  of  them,  made  by  the  skilled 
accountant  who  advises  the  appellant,  does,  I  think,  show  that  certain 
accounts  which  were  treated  as  good  by  the  general  manager  in  the 
preparation  of  the  balance-sheets  submitted  by  him  to  the  directors 
were,  in  fact,  irretrievably  bad,  and  it  is  difficult  to  acquit  the  general 
manager  of  improper  conduct  in  including  them  as  assets.  The  re- 
spondent says  in  his  affidavit  that  the  "  weekly  states  "  consisted  each 
week  of  a  very  large  and  voluminous  pile  of  sheets,  which  it  would 
have  taken  the  directors  a  couple  of  days  to  go  through,  and  that  it 
was  the  duty  of  the  general  manager  to  go  through  the  weekly  states, 
with  the  letters  of  the  branch  managers  accompanying  them,  and  to 
place  upon  the  agenda  any  points  arising  upon  them  which  he  consid- 
ered ought  to  be  brought  to  the  attention  of  the  directors  ;  and  upon 
the  discussion  of  such  points  the  documents  were,  when  necessary, 
referred  to  ;  but,  except  in  such  cases,  the  weekly  states  were  not  con- 
sulted by  the  directors,  but  they  relied  on  the  general  manager  going 
carefully  through  them  and  drawing  their  attention  to  any  matter 
requiring  their  consideration.  On  cross-examination  he  adhered  to 
this  statement.  He  added  that  the  chairman  also  went  through  them 
often  individually,  and  he  did  so  for  the  board.  He  admitted  that 
before  recommending  a  dividend  he  did  not  look  at  all  the  accounts 
or  look  at  the  books  themselves,  but  he  said  that  the  directors  looked 
at  the  documents  which  were  put  before  them  by  the  manager  —  the 
amount  which  he  considered  was  doubtful  and  bad  —  and  they  made 
a  reserve  for  it.  He  also  said  that  it  was  never  brought  before  him 
that  amounts  cfne  from  bankrupt  debtors  were  included  in  the  balance- 
sheets  of  each  year,  and  he  never  heard  of  any  single  case  of  that  kind. 
It  further  appeared  from  the  evidence  of  other  witnesses  that  the 
branches  of  the  bank  were  regularly  visited  and  their  books  examined  , 
by  the  chairman  and  two  inspectors.  In  this  state  of  the  evidence,  I '  , 
ask  whether  the  course  of  business  at  the  board  meetings  as  described 
by  the  respondent  was  a  reasonable  course  to  be  pursued  by  the  re- 
^spondent  and  other  directors,  or  whether  the  knowledge  that  might  \ 
have  been  derived  from  a  careful  and  comparative  examination  of  the 
weekly  states  and  quarterly  returns  from  the  different  branches  of  the  i 
bank  ought  to  be  imputed  to  the  respondent,  or  alternatively,  whether  \  \ 
he  was  guilty  of  such  neglect  of  his  duty  as  a  director  as  would  render  _^ 
him  liable  to  damages  ?   I  do  not  think  that  it  is  made  out  that  either  \ 

of  the  two  latter  questions  should  be  answered  in  the  affirmative.  I 
think  the  respondent  was  bound  to  give  his  attention  to  and  exercise 
his  judgment  as  a  man  of  business  on  the  matters  which  were  brought 
before  the  board  at  the  meetings  which  he  attended,  and  it  is  not 
proved  that  he  did  not  do  so.  But  I  think  he  was  entitled  to  rely 
upon  the  judgment,  information,  and  advice  of  the  chairman  and  gen- 


386  ABEKDEEN   RAILWAY   CO.   V.  BLAIKIE. 

eral  manager,  as  to  whose  integrity,  skill,  and  competence  he  had  no 
reason  for  suspicion.  I  agree  with  what  was  said  by  Sir  George  Jes- 
sel  in  ''Hallmark's  Case''  (9  Ch.  D.,  329),  and  by  Mr.  Justice  Chitty 
in  "  In  re  Denham  &  Co."  (25  Ch.  D.,  752),  that  directors  are  not 
bound  to  examine  entries  in  the  company's  book.  It  was  the  duty 
of  the  general  manager  and,  possibly,  the  chairman  to  go  carefully 
througli  the  returns  from  the  branches,  and  to  bring  before  the  board 
any  matter  requiring  their  consideration,  but  the  respondent  was  not, 
in  my  opinion,  guilty  in  negligence  in  not  examining  them  for  him- 
self, notwithstanding  that  they  were  laid  on  the  table  of  the  board 
for  reference.  The  case  is  no  doubt  one  of  some  difficulty,  but  the 
appellant  has  not  made  out  to  my  satisfaction  that  the  respondent 
wilfully  (as  that  term  is  explained  in  the  cases  I  have  referred  to) 
misappropriated  the  company's  funds  in  payment  of  dividends. 

[Lord  Bkampton  concurred.] 

Judgment  affirmed.     Appeal  dismissed. 


^''jJ^    ^  ii  SECTION  III. 


^.  ^yT    jy^jf^  Special  Interest^  of  Director.  - —  How  affecting  Action  taken  bv  ^an 
•fV    il)J     lr,(J     '  T)ealings  between  Director  and  Corporation.^    ./  ./ 

iJ^^'l^l/^  -rh-     ^^E^^EE^  EAILWAY   CO.   V.  ^JJ'^'^^'^'' 

y^~^        \   -y^^    r  IJSi*    1  Macqueen,  461.2 . 

^y'o/^  J"^  ^^  ^^  House  of  Lords,  on  appeal  from  the  Scotch  Court  of  Session. 

'Jf  'ni  ^    ^^  ^^^   action  was   by   Messrs.  Blaikie,   iron-founders  in  Aberdeen, 

^y  ^^^gainst  the  Railway  Company  for  performance  of  a  contract  whereby 

Zy*^  '     t/f     f^         the  Company  had  agreed  to  purchase  and  accept  from  Messrs.  Blaikie 
t^fyjf\^  ^,    ^    certain  iron  chains,  which  they  were  to  manufacture  for  the  Company 
JP^^y^     i^  ^  at  the  rate  of  8^.  10s.  per  ton.     The  summons  concluded  for  imple- 
^■tK  "    r     ^    ^^  ment  of  the  contract  or  for  damages. 

>  r./^ ^1  /y:^  ^  The  principal  defence  was,  that  Mr.  Thomas  Blaikie,  the  managing 
a^  J^b^\^-  copartner  of  the  Pursuers,  was  at  the  time  of  the  contract  a  Director, 
^4/^  \^  ^  "^  and  indeed  Chairman,  of  the  Railway  Company,  and  so  incapacitated 
Oi^-^  '  \-'^'  ^  ^^^  dealing  in  the  character  with  his  own  firm. 

^IV^.^  '      >)  '^  The  Court  of  Sessions  held  that  the  Companies'  Clauses  Consoli- 

C/^"^.    ^^  ■?  dated  Act   (8  Vict.   c.   17,  s.  88  &  89,)  did  not  nullify  the  contract, 

^!^  ^   '^         ^    although  under  it  the  contractor  ceased  to  be  a  Director.    They  there- 
f^w^  [,^      A/tf^^  fore  decide  in  favor  of  the  Pursuers.     Hence  this  api)eal. 

'\J^     (r        c/**^*'^    ^  ^*"^  ti\90,  post,   chapter  on   Power  of  an  insolvent  Corporation  to  prefer  particular 
J    ,^       J^        i_    Creditors.  —  Ed. 
J^j}'        {\A^''*^A        «,      2  Arguments  and  part  of  opinions  omitted.  — Ed. 


ABERDEEN   RAILWAY   CO.   V.    BLAIKIE.  387 

The  Solicitor  General  (Sir  H.  Bethell)  and  Mr.  Gordon,  for  appellants. 

Mr.  Bolt,  and  Mr.  Macfarlane,  for  respondents. 

The  Lord  Chancellor  (Lord  Cranwortii).  .  .  .  This,  therefore, 
brings  us  to  the  general  question,  whether  a  Director  of  a  Railway 
Company  is  or  is  not  precluded  from  dealing  on  behalf  of  the  Com- 
pany with  himself,  or  with  a  firm  in  which  he  is  a  partner. 

The  Directors  are  a  body  to  whom  is  delegated  the  duty  of  manag- 
ing the  general  affairs  of  the  Company. 

A  corporate  body  can  only  act  by  agents,  and  it  is  of  course  the  duty 
of  those  agents  so  to  act  as  best  to  promote  the  interests  of  the  corpo- 
ration whose  affairs  they  are  conducting.  Such  agents  have  duties  to 
discharge  of  a  fiduciary  nature  towards  their  principal.  (See  Mr.  Hud- 
son's Case,  16  Beav.  485.)  And  it  is  a  rule  of  universal  application, 
thatno  one^having  sucli^uties  to  d^charge,  shallbe  allowed  to  enter 
into  engagements  in  which  he  has,  or  can  have,  a  personal  interest 
conflicting,  or  which  possibly  may  conflict,  with  the  interestsof  those 
whom  he  is  bound  to  protect 

So  strictly  is  this  principle  adhered  to,  that  no  question  is  allowed 
to  be  raised  as  to  the  fairness  or  unfairness  of  a  contract  so  entered 
into. 

It  obviously  is,  or  may  be,  impossible  to  demonstrate  how  far  in 
any  particular  case  the  terms  of  such  a  contract  have  been  the  best 
for  the  interest  of  the  cestui  que  trust,  which  it  was  possible  to 
obtain. 

It  may  sometimes  happen  that  the  terms  on  which  a  trustee  has 
dealt  or  attempted  to  deal  with  the  estate  or  interests  of  those  for 
whom  he  is  a  trustee,  have  been  as  good  as  could  have  been  obtained 
from  any  other  person,  —  they  may  even  at  the  time  have  been 
better. 

But  still  so  inflexible^  is^the,rule__ that  no  enquiry  on  that  subject  is 
^e^aitted^  The  English  authorities  on  this~Fead  are  numerous  and 
uniform. 

The  principle  was  acted  on  by  Lord  King  in  Keech  v.  Sandford, 
Select  Cases,  temp.  King,  p.  61,  and  by  Lord  Hardwick  in  Whelj^dale 
V.  Cookson,  1  Ves.  Sen.  8,  and  the  whole  subject  was  considered  by 
Lord  Eldon  on  a  great  variety  of  occasions.  It  is  sufficient  to  refer  to 
what  fell  from  that  very  learned  and  able  judge  in  Ex  parte  James. 

It  is  true  that  the  questions  have  generally  arisen  on  agreements 
for  purchases  or  leases  of  land,  and  not,  as  here,  on  a  contract  of  a 
mercantile  character.  But  ^his  can  make  no  difference  in  principle. 
The  inability  to  contract  "depends  not  oiTthe  subject  matter  of  the 
agreement,  but  on  the  fiduciary  character  of  the  contracting  party, 
and  I  can  not  entertain  a  doubt  of  its  being  applicable  to  a  party  who 
is  acting  as  manager  of  a  mercantile  or  trading  business  for  the  bene- 
fit of  others,  no  less  than  to  that  of  an  agent  or  trustee  employed  in 
selling  or  letting  land. 

Was  then  Mr.  Blaikie  so  acting  in  the  case  now  before  us?  —  if  he 


/i 


383  ABERDEEN   RAILWAY   CO.   V.   BLAIKIE. 

was,  did  he  while  so  acting,  contract  on  behalf  of  those  for  whom  he 
was  acting  with  himself  ? 

Both  these  questions  must  obviously  be  answered  in  the  affirmative. 
Mr.  Blaikie  was  not  only  a  Director,  but  (if  that  was  necessary)  the 
Chairman  of  the  Directors.  In  that  character  it  was  his  bounden  duty 
to  make  the  best  bargains  he  could  for  the  benefit  of  the  Company. 

While  he  filled  that  character,  namely,  on  the  6th  of  February,  1846, 
he  entered  into  a  contract  on  behalf  of  the  Company  with  his  own 
firm,  for  the  purchase  of  a  large  quantity  of  iron  chairs  at  a  certain 
stipulated  price.  His  duty  to  the  Company  imposed  on  him  the  obli- 
gation of  obtaining  these  chairs  at  the  lowest  possible  price. 

!His  personal  interest  would  lead  him  in  an  entirely  opposite  direc- 
tion, would  induce  him  to  fix  the  price  as  high  as  possible.  This  is 
the  very  evil  against  which  the  rule  in  question  is  directed,  and  I  here 
see  nothing  whatever  to  prevent  its  application. 

I  observe  that  Lord  Fullerton  seemed  to  doubt  whether  the  rule 
would  apply  where  the  party  whose  act  or  contract  was  called  in  ques- 
tion is  only  one  of  a  body  of  Directors,  not  a  sole  trustee  or  manager. 

But,  with  all  deference,  this  appears  to  me  to  make  no  difference.  It 
Avas  Mr.  Blaikie's  duty  to  give  to  his  co-Directors,  and  through  them  to 
the  Company,  the  full  benefit  of  all  the  knowledge  and  skill  which  he 
could  bring  to  bear  on  the  subject.  He  was  bound  to  assist  them  in 
getting  the  articles  contracted  for  at  the  cheapest  possible  rate.  As 
far  as  related  to  the  advice  he  should  give  them,  he  put  his  interest 
in  conflict  with  his  duty,  and  whether  he  was  the  sole  Director  or  only 
^one  of  many,  can  make  no  difference  in  principle. 

The  same  observation  applies  to  the  fact  that  he  was  not  the  sole 
person  contracting  with  the  Company ;  he  was  one  of  the  firm  of 
Blaikie,  Brothers,  with  whom  the  contract  was  made,  and  so  inter- 
ested in  driving  as  hard  a  bargain  with  the  Company  as  he  could 
induce  them  to  make. 

It  cannot  be  contended  that  the  rule  to  which  I  have  referred  is 
one  confined  to  the  English  law,  and  that  it  does  not  apply  to  Scot- 
land. 

It  so  happens  that  one  of  the  leading  authorities  on  the  subject 
is  a  decision  of  this  House  on  an  appeal  from  Scotland.  I  refer  to 
the  case  of  The  York  Buildings  Company  v.  Mackenzie,  decided  by 
your  Lordships  in  1795. 

The  principle,  it  may  be  added,  is  found  in,  if  not  adopted  from,  the 
civil  law.  In  the  Digest  is  the  following  passage  :  "  Tutor  rem  pupilli 
em  ere  non  potest :  idemque  porrigendum  est  ad  similia ;  id  est  ad 
curatores,  procuratores,  et  quinegotia  aliena  gerunt."  (Dig.,  Lib.  xviii., 
t.  1,  c.  34,  s.  7.) 

In  truth,  the  doctrine  rests  on  such  obvious  principles  of  good  sense 
that  it  is  difficult  to  suppose  there  can  be  any  system  of  law  in  which 
it  would  not  be  found. 


ABERDEEN  RAILWAY   CO.   V.    BLAIKIE.  389 

It  was  further  contended  that  whatever  may  be  the  general  prin-l       r. 
ciple  applicable  to  questions  of  this  nature  the  Legislature  has  in  casesl 
of  corporate  bodies  like  this  Company  modified  the  rule.  ' 

The  statute,  i.  e.  the  Companies'  Clauses  Act,  it  was  argued,  has 
impliedly,  if  not  expressly  recognized  the  validity  of  the  contract,  by 
enacting  that  its  effect  shall  be  to  remove  the  Director  from  his  office ; 
indicating  thereby  that  a  binding  obligation  would  have  been  created, 
which  would  render  the  longer  tenure  of  the  office  of  Director  inexpe- 
dient ;  and  your  Lordships  were  referred  to  the  case  of  Foster  v.  The 
Oxford,  Worcester,  and  Wolverhampton  Railway  Company.  That  was 
an  action  for  breach  of  a  contract  under  seal,  whereby  the  defendants 
covenanted  with  the  plaintiffs  (as  in  the  case  now  before  your  Lord- 
ships) to  purchase  from  them  a  quantity  of  iron.  The  defendants 
pleaded  that,  at  the  time  of  the  contract  one  of  the  plaintiffs  was 
a  Director  of  their  Company,  and  to  this  plea  there  was  a  general 
demurrer. 

That  such  a  contract  would  in  this  country  be  good  at  common  law 
is  certain.     The  rule  which  we  have  been  discussing  is  a  mere  equi- 
table rule,  and  therefore  all  the  Court  of  Common  Pleas  had  to  consider 
was  how  far  the  contract  was  affected  by  the  statute.     The  decision 
was  that  the  statute  left  the  contract  untouched,  and  that  its  opera- 
tion was  only  to  remove  the  Director  from  his  office.     The  85th  and 
86th  sections  of  the  English  statute  8th  and  9th  Vict.,  c.  16,  on  which 
the  Court  proceeded,  are  in  the  same  words  as  the  88th  and  89th  sec- 
tions of  the  Scotch  statute,  and  the  Counsel  of  your  Lordships'  bar 
relied  on  this  decision  as  being  strictly  applicable  to  the  case  now 
under  appeal.     But  there  is  a  clear  distinction  between  them.     In 
Scotland  there  is  no  technical  division  of  law  and  equity.    The  whole 
question,  equitable  as  well  as  legal,  was  before  the  Court  of  Session. 
All  that  the  Court  of  Common  Pleas  decided  was  that  a  contract 
clearly  good  at  law  was  not  made  void  by  an  enactment  that  its  effect 
should  be  to  deprive  one  of  the  contracting  parties  of  an  office.     This] 
decision  will  not  help  the  Eespondents  unless  they  can  go  further  and; 
show  that  the  statute  has  had  the  effect  of  making  valid  a  contiacti        c 
which  is  bad  on  general  principles,  that  is  to  say,  principles  enforce-] 
able  here  only  in  equity,  but  not  recognized  in  our  Courts  of  common  | 
law. 

I  can  discover  no  ground  whatever  for  attributing  to  the  statute  any 
such  effect. 

Its  provisions,  however,  will  still  be  applicable  to  the  case  of 
Directors  who  become  interested  in  contracts,  as  representatives  or 
otherwise,  and  not  by  virtue  of  contracts  made  by  themselves. 

I  have  therefore  satisfied  myself  that  the  Court  of  Session  came  to 
a  wrong  conclusion. 

I  therefore  move  your  Lordships  that  this  Interlocutor  be  reversed. 

[Lord  Brougham  delivered  a  concurring  opinion.] 

Interlocutor  reversed. 


390  BENT  V.   PRIEST.  ^^        ,v    ^ 


BENT  V.  HRlkS^.  '^ 


1881.    10  Missouri  Appeals,  5i3  J- 

Action  by  the  receiver  of  the  St.  Louis  Mutual  Insurance  Company 
'to  recover  securities  alleged  to  have  been  paid  to  defendant  to  induce 
him,  as  a  director  of  said  company,  to  consent  to  a  proposed  transfer  of 
'  the  assets  of  the  company  to  the  Mound  City  Life  Insurance  Company. 

It  appeared  that  the  Mound  City  Life  Insurance  Company  agreed 
![>  '  to  pay  a  large  sum  to  Peck,  a  stockholder  in  the  St.  Louis  Co.,  for 
\l^  ihis  services  in  procuring  a  reinsurance  of  the  St.  Louis  Co.  risks  in 
the  Mound  City  Co.  Before  the  contract  of  reinsurance  was  effected, 
Peck  promised  to  pay  the  firm  of  Priest  &  Wyman  a  certain  sum  in 
case  the  proposed  reinsurance  should  be  effected.  Thereafter,  Priest, 
in  his  capacity  of  director  of  the  St.  Louis  Company,  advocated  and 
voted  for  the  proposed  measure,  without  disclosing  the  agreement 
between  his  firm  and  Peck.  The  firm  of  Priest  and  Wyman  subse- 
quently received  valuable  securities  from  Peck  in  satisfaction  of  his 
promise. 

Upon  the  evidence,  the  court  held,  that  this  contract  of  reinsur- 
ance "  must  be  taken  to  have  been  a  valid  one,  beneficial  alike  to  the 
selling  and  purchasing  company,  and  to  those  beneficially  interested 
therein." 

Judgment  below  for  plaintiff.     Defendant  appealed. 

A.  J.  P.  Garesche,  and  John  M.  Holmes,  for  appellant. 

Thomas  T.  Gantt,  and  John  M.  Glover,  for  respondent. 

Thompson,  J.  .  .  .  The  principles  of  law  applicable  to  this  transac- 
tion are  very  familiar  and  very  well  settled.  Directors  of  a  corpora- 
tion are  regarded  by  courts  of  equity  as  trustees  for  the  corporation 
and  for  its  members.  Great  Luxembourg  R.  Co.  v.  Magnay,  25  Beav. 
686 ;  Gaskell  v.  Chambers,  26  Beav.  360 ;  Hodges  v.  Screiv  Co.,  1  R.  I. 
/312.  A  court  of  equity  will  never  permit  a  trustee,  without  the  know- 
ledge and  consent  of  his  cestui  que  trust,  to  speculate  out  of  his  trust, 
y  or  to  retain  any  gain  which  may  have  accrued  to  him  personally  there- 
^/  I  from,  but  will  subject  his  conduct  to  a  rigid  scrutiny,  and  will  compel 
him  to  account  to  his  cestui  que  trust  for  all  profits  which  he  may 
make  out  of  the  trust  relation.  Ex  parte  James,  8  Ves.  Jr.  337  ;  Faw- 
cett  V.  Whitehouse,  1  Russ.  &  M.  132  ;  Hichens  v.  Congreve,  1  Russ.  & 
M.  150,  note ;  Kiniber  v.  Barber,  L.  R.  8  Ch.  56  ;  Bentley  v.  Craven, 
18  Beav.  75 ;  Gillett  v.  Peppercorne,  3  Beav.  78 ;  Michand  v.  Girod,  4 
How.  503 ;  Hamilton  v.  Wright,  9  CI.  &  Fin.  Ill ;  BUsset  v.  Daniel, 

10  Hare,  493 ;   Tennant  v.  Trenchard,  L.  R.  4  Ch.  537 ;  Bowes  v.  City, 

11  Moo.  P.  C.  463  ;  Tyrrell  v.  Bank,  10  H.  L.  Cas.  26  (affirming  s.  c. 
27  Beav.  273).     This  rule  is  applied  with_full_forfig__to_directors_  of 

1  Statement  abridged  from  opinion.  Arguments  omitted;  also  the  greater  part  of  the 
opinion.  —  Ed. 


CUMBERLAND  COAL  CO.  V.    SHERMAN. 


391 


corpQratioQS.  Great  Luxembourg  R.  Co.  v.  Magnay,  25  Beav.  586  ; 
Imperial,  etc.,  Assn.  v.  Coleman,  L.  R.  6  H.  L.  189  (reversing  s.  c.  L. 
R.  6  Ch.  558)  ;  York  v.  Hudson,  16  Beav.  485 ;  Parker  v.  McKenna, 
L.  R.  10  Ch.  96  ;  Parker  v.  Nickerson,  112  Mass.  195  ;  Poor  v.  Rail- 
road Co.,  59  Me.  277  ;  Redmond  v.  Dickerson,  9  N.  J.  Eq.  509  ;  Pick- 
ering's Case,  L.  E.  6  Ch.  525 ;  Madrid  Bank  v.  Pelly,  L.  R.  7  Eq.  442  ; 
Ex  parte  Bennet,  18  Beav.  339 ;  Cumberland  Coal  Co.  v.  Sherman,  30 
Barb.  553  ;  Butts  v.  Wood,  37  N.  Y.  317  ;  Blake  v.  Railroad  Co.,  56 
N.  Y.  485.  It  may,  we  think,  be  stated  as  a  universal  application  of 
this  rule,  that  whenever  a  director  of  a  corporation  proposes  to  its 
shareholders,  or  to  his  co-directors,  a  contract,  or,  acting  as  such 
director,  makes,  assents  to,  or  ratifies  a  contract  for  the  corporation, 
from  which  he  himself  is  to  derive  a  secret  profit,  that  profit  belongs 
to  the  company,  and  he  will  be  compelled,  in  a  court  of  equit}-,  to 
account  for  it  and  to  surrender  it  up  to  the  company.  It  is  not  essen- 
tial to  the  liability  of  the  director  that  the  company  has  suffered  a  loss 
from  what  he  has  done ;  it  is  sufficient  that  he  has  gained  a  profit 
through  it.  Whether  the  contract  which  he  has  made,  or  in  the 
making  or  ratification  of  which  he  has  concurred,  was  in  point  of 
fact  beneficial  or  injurious  to  the  company,  is  wholly  an  immaterial 
inquiry.  Thejaroad^principle  is,  that  whatever  he  acquires  by  virtue 
of  his  fiduciary  relation,  excepFm  open  dealings  with  the  company, 
such  as  a  director  in  common  with  strangers  may  sometimes  have, 
belongs  not  to  him,  but  to  the  company.  Nothing  else  than  this 
satisfies  the  demands  of  the  law. 
[Remainder  of  opinion  omitted.] 

Judgment  affirmed. 


p^ 


C^ 


p^^ 


Davies,   J.,   IN   CUMBERLAND  COAL   CO.   v.   SHERMAN. 

1859.     30  Barbour  [N.  Y.  Supreme  Court),  553,  pp.  572,  573. 

Davies,  J.  .  .  .  There  can  be  no  question,  I  think,  at  the  present 
time,  that  a  director  of  a  corporation  is  the  agent  or  trustee  of  the 
stockholders,  and  as  such  has  duties  to  discharge  of  a  fiduciary  nature, 
towards  his  principal,  and  is  subject  to  the  obligations  and  disabilities 
incidental  to  that  relation.  .  .  . 

Neither  are  the  duties  or  obligations  of  a  director  or  trustee  altered 
from  the  circumstance  that  he  is  one  of  a  number  of  directors  or 
trustees,  and  that  this  circumstance  diminishes  his  responsibility,  or 
relieves  him  from  any  incapacity  to  deal  with  the  property  of  his 
cestui  que  trust.  The  same  principles  apply  to  hiin^s  one  of  a  num- 
ber,  as  if  he  was  acting  as  a  sole  trustee.  It  is  not  doubted  that  it 
has  been  shown,  that  the  relation  of  the  director  to  the  stockholders 
is  the  same  as  that  of  the  agent  to  his  principal,  the  trustee  to  his 


392  JESUP  V.    ILLINOIS   CENTRAL   R.   CO. 

cestui  que  trust ;  and  out  of  the  identity  ol  these  relations  necessa- 
rily spring  the  same  duties,  the  same  danger,  and  the  same  policy  of 
the  law. 

In  the  language  of  the  plaintiffs'  counsel,  it  is  justly  said  :  "  Whe- 
ther it  be  a  director  dealing  with  the  board  of  which  he  is  a  member, 
or  a  trustee  dealing  with  his  co-trustees  and  himself,  the  real  party  in 
interest,  the  principal  is  absent  —  the  watchful  and  effective  self  inter- 
est of  the  director  or  trustee  seeking  a  bargain,  is  not  counteracted 
by  the  equally  watchful  and  effective  self  interest  of  the  other  party, 
who  is  there  only  by  his  representatives,  and  the  wise  policy  of  the 
law  treats  all  such  cases  as  that  of  a  trustee  dealing  with  himself." 

(''  The  number  of  directors  or  trustees  does  not  lessen  the  danger  or 
insure  security,  that  the  interests  of  the  cestui  que  trust  will  be  pro- 
|;ected.  The  moment  the  directors  permit  one  or  more  of  their  num- 
ber to  deal  with  the  property  of  the  stockholders,  they  surrender 
their  own  independence  and  self  control.  If  five  directors  permit  the 
sixth  to  purchase  the  property  intrusted  to  their  care,  the  same  thing 
must  be  done  with  the  others  if  they  desire  it.  Increase_of_the  num- 
ber of  the  agents  in  no  degree  diminialie§_tlie-J!^giL.gf_unfai^^ 
ness.  WJiichcote  v.  Lawrence  (3  Vesey,  740)  was  a  case  of  several 
trustees.  In  this  case  Lord  Loughborough  says  :  "  There  was  more 
opportunity  for  that  species  of  management,  which  does  not  betray 
itself  much  in  the  conduct  and  language  of  the  party,  when  several 
trustees  are  acting  together.  I  am  sorry  to  say  there  is  greater  negli- 
gence where  there  is  a  number  of  trustees."  V       / 


rastees. '  V       /    ^ 

4  /  ;,     Harlan,  J.,  in  JESUpVieL5N!M£KGEN;TE-AE  E.  CO. 

^  ,  >^        -/'- '  ^  .       "^  ^  : '  V  " ./  "^■ 

*      2  <^^ a/^*i>  '^  Harlan,  J.  .  .  .  A  contract,  in  the  narher*^bf  \|.ji£iiqx)ration,  by  its 

'A{^        *^'o'^  board  of  directors,  is  not  void,  if  othervvise  mmssailabl^^simply  be- 

\\r^jj^  i''^  causesome  of  the  directors,  constituting  a  minority,  used  their  position 

\(^^y*^'^      '^  with  "the  effect,  or  even  for  the  purpose^^of  advancing  their  personal 

njSAf'^  ^yi/^ .  interests__  to  _±h^  injury  of  the  comjmny  they  .assumed_tQ_rfi])resent. 

r\y_  ^        )b  The  lease  here  in  question,  as  we  have  seen,  was  approved  by  the  nine 

^  \     P^   O^    t^  directors  of  the  Dubuque  Company,  five  of  whom  had  no  personal  ends 

/^,    '        u^  t.  to  subserve  by  imposing  upon  the  company  a  lease  that  was  unreason- 


0 

/!<i 


\,   -^  ^       '.     aVjle  or  harsh  in  its  terras.     On  the  contrary,  as  already  stated,  at  least 


^ 


1^ 


J^ 


ffmr  of  that  five  were  holders  of  the  stock  of  the  Dubuque  Company, 


and  therefore  interested  to  guard  it  against  unnecessary  or  improper 

^-iA/-^  burdens.     We  need  not  inquii'e  as  to  the  extent  of  their  information 

touching  the  facts  bearing  upon  the  question  of  tlie  proposed  lease. 

It  is  sufficient  to  say  that  they  approved  it,  and  tliat  their  approval 

//*was  not,  so  far  as  the  record. shows,  obtained  througli  misrepresenta- 


'%^^ 


JESUP   V.    ILLINOIS   CEXTEAL   K.    CO, 


393 


tion  or  concealment  by  their  co-directors,  who,  in  view  of  their  per- 
sonal interest  in  the  Cedar  Falls  Company,  ought  not  to  have  par- 
ticipated in  deciding  the  question  of  lease  or  in  the  making  of  the 
lease.  An  instructive  case  upon  this  point  is  U.  S.  Rolling  Stock  Co. 
V.  Atlantic  &  G.  W.  R.  Co.,  34  Ohio,  450,  465.  That  was  a  suit  upon  a 
contract  by  a  railroad  company  for  rolling  stock.  The  contract  was 
approved  by  eight  directors  of  the  former  company  (the  whole  number  A 
of  directors  being  thirteen,  but  only  eight  acted),  two  of  the  number 
acting  being  also  directors  of  and  interested  in  the  rolling-stock  com- 
pany. The  defense  was  that  the  rent  was  not  fair,  nor  the  contract 
binding,  because  of  the  interest  which  some  of  the  directors  had  in 
Uie  rolling-stock  company.     The  court  said  :  — 

"  If  it  be  granted  that  the  confirmation  of  the  contract  by  the 
defendant's  board  of  directors,  at  the  meeting  of  August  2,  1872,  was 
voidable  in  equity  at  the  election  of  the  company,  for  want  of  the 
presence  at  that  meeting  of  the  board  of  a  quorum  of  directors  who 
were  not  directors  of  the  plaintiff,  it  nevertheless  appears  that  the 
board  was  composed  of  thirteen  persons,  a  clear  majority  of  whom  were 
affected  with  no  incapacity  to  act  for  the  best  interests  of  the  com- 
pany, and  who  sustained  no  fiduciary  relation  to  the  plaintiff  what^ 
ever.  This  majority  possessed  ample  power  to  restrain  and  control 
the  action  of  the  minority,  and,  if  the  contract  was  voidable  at  the 
option  of  the  company,  it  had  full  power  to  express  the  company's 
election  if  it  saw  fit  to  avoid  the  contract.  The  fact  that  some  of  the 
persons  composing  this  majority  might  vote  with  those  who  Avere  mem- 
bers of  both  boards,  and  thereby  create  a  majority  in  favor  of  the  con- 
tract, would  in  no  wise  affect  the  validity  of  the  transaction,  nor  relieve 
the  board  from  the  duty  to  move  in  the  matter  if  they  desired  the 
company's  escape  from  liability.  We  have  not,  upon  the  most  dili-l 
gent  research,  been  able  to  find  a  case  holding  a  contract  made  be-i 
tween  two  corporations  b}-  their  respective  boards  of  directors  invalid,  I A 
or  voidable  at  the  election  of  one  of  the  parties  thereto,  from  the  mere 
circumstance  that  a  minority  of  its  board  of  directors  are  also  direct- 
ors of  the  other  comjiany.  Nor  do  we  think  such  a  rule  ought  to  be 
adopted.  There  is  no  just  reason,  where  a  quorum  of  directors  sus- 
taining no  relation  of  trust  or  duty  to  the  other  corporation  are  pre- 
sent, participating  in  the  action  of  the  board,  why  such  action  should 
not  be  binding  upon  the  company,  in  the  absence  of  such  fraud  as 
would  lead  a  court  of  equity  to  undo  or  set  aside  the  transaction.  If 
the  mere  fact  that  the  minority  of  one  board  are  members  of  the  otlier 
gives  the  company  an  opportunity  to  avoid  the  contract  without  re- 
spect to  its  fairness,  the  same  result  would  follow  where  such  minority 
consisted  of  but  one  person,  and  notwithstanding  the  board  might  con- 
sist of  twenty  or  more.  In  our  judgment,  where  a  majority  of  thet,^' 
board  are  not  adversely  interested,  and  have  no  adverse  employment,  I  [^ 
the  right  to  avoid  the  contract  or  transaction  does  not  exist  without  • 
proof  of  fraud  or  unfairness."  .  .  . 


t^*^      394    .' ^ 


CURTIN 


C--J 
er^ 


i9oo; 


v.  salmI^n, 


*iA 


-iJtv* 


^ 


C^'M 


0^ 


u 


% 


Appeal  from  Superior  Court,  SiskiyoujCounty. 

This  action  was  brought  for  the  foreclosure  of  a  mortgage  upon 
certain  mining  property,  executed  to  the  plaintiff's  assignor  by  the 
president  and  secretary  of  the  defendant.  The  defendant  denied  its 
execution  of  the  note  and  mortgage,  and  upon  this  issue  the  court 
found  in  favor  of  the  plaintiff  and  rendered  judgment  accordingly. 
The  defendant  moved  for  a  new  trial  upon  the  ground  that  the  de- 
cision was  not  sustained  by  the  evidence.     Motion  denied.     Appeal. 

The  defendant  is  a  mining  corporation  organized  under  the  laws  of 
California,  and  is  controlled  and  managed  by  a  board  of  five  directors. 
The  mortgage  upon  which  the  action  was  brought  was  executed,  July 
■]^  .  Qy^  jJL' '  24,  1897,  to  Wells,  the  assignor  of  the  plaintiff,  to  secure  a  note  of 
Qj^^^'^'^^o^  *'^  even  date  for  money  advanced-^.  Wells.  The  note  and  mortgage 
'    '"^  were  executed  in  pursuance  of  a 'resolution  which  had  been  adopted 

on  the  previous  day  at  a  special  meeting  of  the  board  of  directors. 
There  were  present  at  this  meeting  only  three  of  the  directors,  of 
whom  AVells  was  one. 

J.  P.  O^Brien,  for  appellant. 

J.  B.  Curtin,  for  respondent. 

Harrison,  J.  [After  stating  the  case,  and  considering  the  objec- 
tion that  no  sufficient  notice  of  the  directors'  meeting  was  given.] 
The  respondent  does  not,  in  his  brief,  present  any  argument  in  sup- 
port of  the  regularity  of  this  meeting,  but  contends  that,  notwith- 
standing this  infirmity,  the  note  and  mortgage  created  an  obligation 
on  the  defendant,  by  reason  of  having  been  authorized  at  a  meeting 
at  which  a  majority  of  the  directors  were  present,  and  the  subsequent 
ratification  thereof  by  two-thirds  of  the  stockholders. 

The  respondent  relies  upon  the  following  provision  of  section  308 
vof  the  Civil  Code  :  "A  majority  of  the  directors  is  a  sufficient  num- 
ber to  form  a  board  for  the  transaction  of  business,  and  every  deci- 
sion of  a  majority  of  the  directors  forming  such  board,  made  when 
duly  assembled,  is  valid  as  a  corporate  act."  Under  his  construction 
of  this  provision  it  is  immaterial  whether  Wells  abstained  from  vot- 
ing, or  even  voted  against  the  resolution.  Such  construction  would, 
however,  enable  an  interested  director  to  accomplish  by  indirection 
what  the  policy  of  the  law  forbids  him  from  doing.  It  does  not  ap- 
X)ear,  either  from  the  minutes  of  the  board  or  by  any  testimony  in 
the  case,  whether  Wells  voted  for  the  resolution  or  not.  Although  he 
was  director  of  the  corporation,  yet  he  was  disqualified  from  voting, 
or  in  any  mode  acting  in  his  official  capacity  as  a  director,  for  the 
purpose  of  creating  an  obligation  of  the  defendant  in  his  own  favor. 

1  Statement  abridged  from  opinion.  —  Eu. 


CURTIN  V.  SALMON  RIVER,  &c.,  CO. 


395 


(Wkkersham  v.  Crittenden,  93  Cal.  17.)  As  was  said  in  this  case: 
"  So  strictly  is  this  principle  adhered  to  that  no  question  is  allowed  to 
be  raised  as  to  the  fairness  or  unfairness  of  the  contract  so  entered 
into  " ;  and  in  ^hakespear  v.  Smith,  77  Cal.  640/  this  court  said :  "  In 
such  cases  the  court  will  not  pause  to  inquire  whether  a  trustee  has 
acted  fairly  or  unfairly ;  being  interested  in  the  subject-matter,  he 
may  not  as  a  trustee  deal  with  himself  and  thus  be  subjected  to  the 
temptation  to  advance  his  own  interests." 

The  same  rules  which  preclude  an  interested  director  from  uniting 
with  other  directors  in  the  creation  of  an  obligation  in  favor  of  hira- 
self  by  his  vote  forbid  him  from  uniting  with  them  in  creating  such 
obligation  by  any  act  or  exercise  of  his  official  position,  and  a  meeting 
at  which  there  is  not  a  majority  of  the  directors,  exclusive  of  such 
interested  director,  is  not  a  competent  board  for  the  transaction  of  an}' 
corporate  business.  Section  305  of  the  Civil  Code  declares  :  "  Unless 
a  quorum  is  present  and  acting,  no  business  performed  or  act  done  is 
valid  as  against  the  corporation."  The  above  provision  of  section  308 
must  be  read  in  connection  with  this  provision  of  section  305,  and 
both  are  limited  by  the  principle  that  a  director  shall » not  participate 
in  any  act  in  which  his  personal  interest  is  antagonistic  to  that  of  the 
corporation.  By  reason  of  the  disqualification  of  Wells  from  taking 
any  part  in  passing  the  resolution  for  executing  the  note  and  mort- 
gage to  himself,  he  could  neither  vote  in  favor  of  the  resolution,  nor 
by  his  presence  help  to  create  a  quorum  by  which  the  other  two 
directors  could  adopt  it.  For  the  purpose  of  any  action  upon  this  reso- 
lution he 'was  as  much  a  stranger  to  the  board  as  if  he  had  never  been 
elected  a  director,  and,  although  he  may  have  been  physically  present' 
in  the  room  with  the  other  two  directors,  he  was  not  for  that  purpose 
a  component  part  of  the  board,  any  more  than  would  have  been  any, 
other  bystander,  and  there  was  not,  therefore,  a  quorum  of  the  board 
"  present  and  acting  "  at  the  time  the  resolution  was  adopted. 

In  Jones  v.  Morrison,  31  Minn.  140,  it  was  held  that  a  director  of  a 
corporation  "  cannot  properly  act  on  or  form  part  of  a  quorum  to  act " 
on  a  proposition  to  increase  his  compensation.  In  Van  Hook  v. 
Somerville  Mfg.  Co.,  5  N.  J.  Eq.  137,  169,  the  chancellor  said  that  a ' 
member  of  a  corporation  contracting  with  it  is  regarded,  as  to  that 
contract,  as  a  stranger ;  and  held  that,  as  the  corporation  was  man- 
aged by  five  directors,  one  director  could  not,  with  two  others,  consti- 
tute a  board  to  vote  a  mortgage  from  the  company  to  himself.  This 
case  was  afterward  reversed  upon  other  grounds,  but  no  dissent  from 
this  rule  was  expressed.  In  Copeland  v.  Johnson  Mfg.  Co.,  47  Hun, 
2.35,  where  the  corporation  was  governed  by  a  board  of  five  trustees, 
it  was  held  that  an  agreement  made  by  it  in  favor  of  its  president, 
under  the  authority  of  a  vote  of  himself  and  two  other  trustees,  was 
invalid.  Under  a  similar  state  of  facts  in  Bntts  v.  Wood,  37  X.  Y. 
317,  the  court  held  that  the  board  as  thus  constituted  had  no  authority 

1  11  Am.  SI.  Rep.  327 


13 


c 


p^. 


^ 


a 


lo 


396  CURTIN  V.    SALMON   EIVEK,   &c.,   CO. 

to  entertain  a  bill  in  favor  of  one  of  its  members,  or  to  do  anything  in 
relation  to  it;  that  the  claimant  was  disqualified,  from  acting  because 
he  could  not  deal  with  himself,  "and  without  him  there  was  no 
quorum  of  the  directors  and  they  had  no  authority  to  transact  busi- 
ness." In  United  States  Ice  Co.  v.  Reed,  2  How.  Pr.  253,  the  court 
said :  "  A  trustee  whose  attendance  is  necessary  to  make  a  quorum 
cannot  act  upon  a  claim  in  his  own  favor  to  bind  the  corporation,  and 
by  his  presence  he  thus  acted."  The  reasoning  of  the  court  in  its 
opinion  in  Buell  v.  Buckingham,  16  Iowa,  284,^  cited  on  behalf  of  the 
respondent,  does  not  commend  itself  to  our  judgment.  In  New  York 
it  has  been  held  that,  where  an  interested  director  takes  part  in  the 
passage  of  the  resolution,  the  corporate  act  is  vitiated  whether  his 
vote  was  essential  to  its  adoption  or  not.  {Anderton  v.  Aronson,  3 
How.  Pr.  216 ;  Ashley  v.  Kinnan,  2  N.  Y.  Supp.  574 ;  Metropolitan 
Elevated  Ry.  Co.  v.  Manhattan  Ry.  Co.,  14  Abb.  N.  C.  103.)  A  con- 
trary rule  seems  to  prevail  in  Missouri.  {Foster  v.  Mullanphy  Planing 
Mill  Co.,  92  Mo.  79.)  It  is  unnecessary,  however,  in  this  case  to 
decide  which  of  these  rules  is  correct,  inasmuch  as,  if  Wells  was  not 
j)roperly  a  member  of  the  board  at  this  meeting,  there  was  no  quorum 
to  act  upon  the  resolution. 

After  the  president  and  secretary  of  the  corporation  had  executed 
the  note  and  mortgage  an  instrument  was  signed  by  the  holders  and 
owners  of  more  than  two-thirds  of  the  capital  stock  of  the  defendant, 
by  which  they  purported  to  ratify  and  approve  the  said  mortgage,  and 
it  is  contended  by  the  plaintiff  that  under  the  provisions  of  the  act  of 
April  23,  1880  (Stats.  1880,  p.  131),  the  mortgage  thereby  became 
valid  and  binding  upon  the  defendant. 

Section  1  of  that  act  is  as  follows  :  "  It  shall  not  be  lawful  for  the 
directors  of  any  mining  corporation  to  sell,  lease,  mortgage,  or  other- 
wise dispose  of  the  whole  or  any  part  of  the  mining  ground  owned  oi 
held  by  such  corporation,  nor  to  purchase  or  obtain  in  any  way  any 
additional  mining  ground,  unless  such  act  be  ratified  by  the  holders  of 
at  least  two-thirds  of  the  capital  stock  of  such  corporation."  This 
section  does  not  confer  upon  the  stockholders  any  power  to  mortgage 
the  property  of  the  corporation,  or  to  authorize  the  directors  to  mort- 
gage it,  and  it  is  a  familiar  rule  that  ratification  cannot  give  effect  to 
an  unauthorized  or  invalid  act,  unless  the  person  or  body  making  the 
ratification  could  in  the  first  instance  have  authorized  the  act.  The 
corporate  power  and  business  of  the  corporation  must  be  exercised  by 
the  board  of  directors  (Civ.  Code,  sec.  305),  and  the  stockholders  can- 
not, by  their  own  act,  mortgage  its  property.  (Gashwiler  v.  Willis,  33 
Cal.  11.2)  j^j^y  mortgage,  to  be  effective,  must  be  made  by  the  board 
of  directors,  'blunder  the  provisions  of  the  above  act  of  1880lh£iiDn- 
sent  of  two-thirds  of  the  stockholders  is  requisite  to  its  vaMity.  The 
stockholders  are  thus  made  a  componenj;  part  oFthe  power  to_make  a 
mortgage  effective,"but  cannot,  by  any  act  of  their  own,  make  a^ort- 

1  85  Am.  Dec.  516.  ^  91  Am.  Dec.  607. 


STEWART  V.   LEHIGH   VALLEY   R.    CO.  397 

gage,  orjvalidate  one  that  has  not  been  jg^re  vious]y  authorizedan^jexe^ 
cuted  By  the  board  of  directors. 

Whether  the  defendant  would  be  estopped  from  contesting  the  claim 
of  the  plaintiff  to  recover  the  moneys  advanced  to  it  by  him  is  not 
involved  herein.  The  plaintiff  seeks  by  this  action  the  sale  of  the 
defendant's  property  in  payment  of  the  note  held  by  him,  but,  unless 
the  defendant  has  created  a  lien  upon  the  property,  the  plaintiff  can- 
not maintain  the  present  action  for  compelling  its  sale. 

The  judgment  and  order  denying  a  new  trial  are  reversed.  -, 

Van  Dyke,  J.,  and  Garoutte,  J.,  concurred.  v^ )^  ^ ^ 

Hearing  in  Bank  denied.  ^ y   iT  )^  '^ 


t>'V^ 


■^'%T 


1875.     38  New  Jersey  Law,  505 

In  the  Court  of  Errors  and  Appeals,  upon  error  to  the  Supreme 
Court. 

The  Lehigh  Valley  Railroad  Company  sued  Cornelius  Stewart  and 
Joseph  C.  Stewart,  in  assumpsit,  for  tolls  upon  the  passage  of  boats  with 
merchandise  over  the  Morris  Canal.  The  defendants,  in  1868,  made 
a  contract  under  seal  with  the  Morris  Canal  and  Banking  Company,  /i/,  U 
whereby  it  was  stipulated  {inter  alia)  that,  for  a  term  of  five  years,  the 
defendants  should  be  allowed  a  drawback  of  one  half  the  tolls  payable 
according  to  the  printed  rates  for  certain  classes  of  freight.  At  the 
date  of  this  contract  one  of  the  defendants  was  a  director  of  the 
Morris  Canal  and  Banking  Company.  In  1871  the  Morris  Canal  and 
Banking  Company  leased  its  canal,  appurtenances  and  franchises  to 
the  Lehigh  Company,  and  also  assigned  to  the  Lehigh  Company  its  con- 
tract with  the  defendants.  If  the  defendants  are  allowed  the  stipu- 
lated drawback,  nothing  is  due  from  them  for  transportation. 

Vanatta,  Attorney  General,  and  B.  Williamson,  for  plaintiff. 

Thos.  N.  McCaHer,  for  defendants. 

Dixox,  J.  .  .  .  The  plaintiff  raises  another  and  a  most  important 
question  touching  the  validity  of  this  contract,  by  a  second  replication 
to  the  second  plea  before  mentioned,  upon  which  no  issue  was  joined, 
because  of  the  judgment  of  the  Supreme  Court  holding  that  plea  bad. 
The  main  fact  averred  in  the  replication  also  appeared  in  evidence 
at  the  trial,  and  testimony  as  to  some  of  the  outljing  circumstances 
was  offered  by  the  defendants,  excluded  and  exception  taken.  On 
the  argument  before  this  court,  the  counsel  for  the  plaintiff  urged 
this  main  fact  as  necessarily  invalidating  the  contract  relied  on  by  the 
defendants.  This  fact  is,  that  at  the  time  of  the  negotiations  for,  and  I 
the  execution  of,  the  contract  in  question,  one  of  the  defendants  was 
a  director  of  The  Morris  Canal  and  Banking  Company  —  a  trustee  | 
^  Only  so  much  of  the  report  is  given  as  relates  to  a  single  question.  —  Ed. 


398  STEWART  V.  LEHIGH   VALLEY   R.    CO. 

for  it,  to  manage  its  affairs  —  and  it  is  insisted  that  his  relation  to  the 
company  was,  therefore,  such  that  he  was  prohibited  from  entering 
into  this  contract  with  it,  and  that  the  contract  is,  ipso  facto,  void. 

The  position  thvis  assumed  by  the  plaintiff  rests  upon  the  broad 
principle  that  it  was  the  duty  of  the  director  to  so  deal  with  the  pro- 
perty and  franchises  of  the  corporation  —  to  so  manage  its  affairs  as 
would  most  conduce  to  the  corporate  interest,  and  that  he  could  not 
perform  that  duty  while  contracting  with  it  in  his  own  behalf,  or  if 
by  possibility  his  own  interest  was  consistent  with  the  best  interest 
of  the  company  in  so  contracting,  yet,  so  insidious  are  the  promptings 
of  selfishness  and  so  great  is  the  danger  that  it  will  over-ride  duty 
when  brought  into  conflict  with  it,  that  sound  policy  requires  that 
such  contracts  should  not  be  enforced  or  regarded.  After  an  exam- 
ination of  all  the  cases  cited,  and  such  others  as  I  have  found,  and  a 
careful  consideration  of  the  principle  and  the  results  of  regarding  and 
of  disregarding  it,  I  have  come  to  the  conviction  that  the  true  legal 
rule  is,  that  such  a  contract  is  not  void,  but  voidable,  to  be  avoided  at 
the  option  of  the  cestui  que  trust,  exercised  within  a  reasonable  time. 
I  can  see  no  further  safe  modification  or  relaxation  of  the  principle 
than  this.  A  director  of  a  corporation  may  have  rights  not  arising 
out  of  express  contract  —  such  as  the  right  to  pass  over  its  railroad, 
or  transport  his  goods  over  its  canal,  on  paying  reasonable  tolls,  or  to 
have  money  which  he  has  loaned  it  repaid  to  him ;  but  where  the 
right  is  one  which  must  stand,  if  at  all,  upon  an  express  contract,  and 
which  does  not  arise  by  operation  or  implication  of  law,  then  he  shall 
not  hold  it  against  the  will  of  his  cestui  que  trust ;  for  in  the  very 
bargain  which  gave  rise  to  it,  in  which  he  should  have  kept  in  view 
the  interest  of  that  cestui  que  trust,  there  intervened  before  his  eyes 
the  opposing  interest  of  himself.  The  vice  which  inheres  in  the 
judgm^nt^jjijudge  in  his  own  cause,  contaminates  the  contract ;  the 
mind  of  the  director  or  trustee  Ts~theTorum  in  which  he  and  his  cestui 
que  trust  are  urging  their  rival  claims,  and  when  his  opposing  litigant 
appeals  from  the  judgment  there  pronounced,  that  judgment  must 
fall.  It  matters  not  that  the  contract  seems  a  fair  one.  Fraud  is  too 
cunning  and  evasive  for  courts  to  establish  a  rule  that  invites  its 
presence.  There  may  be  isolated  cases  in  which  the  trustee  is  willing 
to  make  a  contract  on  more  favorable  terms  for  the  cestui  que  trust 
tlian  any  one  else,  but  the  opportunities  for  self-advancement,  at  the 
expense  of  those  whose  concerns  he  has  in  charge,  and  under  circum- 
stances where  concealment  is  easy,  are  so  much  more  numerous  than 
these  isolated  cases,  that  in  declaring  a  rule  the  latter  are  not  worthy 
of  consideration.  Nor  is  it  proper  for  one  of  a  board  of  directors  to 
support  his  contract  with  his  company,  upon  the  ground  thatjhe 
abstained  from  participating  as  director  in  the  negotiations^  for  and 
final  adoption  of  the  bargains  by  his  co-directors  ;  the  very  words 
in  which  he  asserts  his  right  declare  his  wrong;  he  ought  to  have 
participated,  and  in  the  interest  of  the  stockholders,  and  if  he  did 


STEWAET  V.  LEHIGH  VALLEY  R.   CO.  399 

not,  and  they^have  thereby  suffered  loss,^Qf-igJiicli^t]iey_sIiall  be  the 
J^g6A^6_^^st  restore  the  rights  he  has  obtained  —  he  must  hold 
against  them  no  advantage  that  he  has^ot  through  neglect  of  his  dut^^ 
tfiwardsJthem.  Many  authorities  exemplifying  the  rule  may  be  found. 
I  cite  a  few  only  :  — 

York  Buildimj  Ass.  v.  Mackenzie,  8  Bro.  P.  C,  42  of  Appendix  —  4 
Cr.  &  Stew.  378  ;  Aberdeen  Railwaij  Co.  v.  Blaikle,  1  Macq.  461 ;  The 
York  &  M.  N.  R.  Co.  v.  Hudson,  16  Beav.  485  ;  Mulford  v.  Minch,  3 
Stockt.  16  ;  Davoue  v.  Fanning,  2  Johns.  Ch.  252 ;  Cumberland  Coal  & 
Iron  Co.  V.  Sherman  et  al.,  30  Barb.  553  ;  Gardner  v.  Oyden  et  al.,  22 
N.  Y.  327 ;  Butts  v.  Wood,  37  N.  F.  317  ;  Michoud  et  al.  v.  Girod  et 
al,  4  Hoiv.  503. 

The  application  of  the  rule  is  most  frequent  in  the  relations  between 
vendor  and  purchaser,  but  its  reason  and  force  extend  to  all  agents 
and  trustees,  public  and  private.  It  has  not  always  presented  itself 
to  the  minds  of  judges  in  its  full  scope.  At  times  they  have  been 
seduced  into  listening  to  suggestions  that  the  circumstances  of  the 
special  case  showed  the  absence  of  fraud  and  over-reaching.  At  other 
times,  they  have  intimated  that  the  cestui  que  trust  must  seek  his  re- 
lief in  equity ;  but  the  strongest  intellects  have  enunciated  the  rule 
with  its  utmost  vigor,  and  in  its  broadest  extent. 

The  qualification,  however,  which  the  rule  undoubtedly  has,  saves 
the  case  before  us  from  its  operation.  The  cestui  que  trust  of  the 
defendant  director  was  not  the  plaintiff,  but  the  Morris  Canal  and 
Banking  Company.  The  right  of  avoidance  was  one  which  belonged 
to  that  company  and  its  stockholders,  and  not  to  the  plaintiff.  The 
act  of  1871,  empowering  the  canal  company  to  lease,  only  authorized 
it  to  lease  the  canal,  with  its  boats,  property,  works,  appurtenances, 
and  franchises  ;  and  under  this  power,  it  could  scarcely  transfer  so 
peculiarly  personal  a  privilege  as  this  option  to  avoid  a  contract.  Xor 
would  a  transfer  of  the  contract,  and  all  of  the  canal  company's  rights 
under  it,  carry  this  right  of  choice  ;  for  that  does  not  spring  out  of 
the  contract,  but  out  of  the  fiduciary  relation  existing  between  the 
parties  at  the  time  the  contract  was  made.  And,  moreover,  the  case 
shows  that,  after  the  lease  to  the  i)laintiff,  and  during  all  the  time  in 
which  it  is  claimed  the  tolls  sued  for  were  accruing,  the  plaintiff  dealt 
with  the  defendants  on  the  basis  of  the  binding  efficacy  of  the  con- 
tract. 

I  conclude,  therefore,  that  there  appears  before  us  no  reason  for  re- 
fusing to  give  to  this  contract  that  force  to  which  our  construction  of 
its  terms  entitles  it,  and  that,  upon  the  case  before  us,  judgment 
should  be  rendered  for  the  defendants  below,  the  plaintiffs  in  error. 

For  affirmance  —  Keed,  Woodhull  —  2. 

For  reversal — The  Chancellor,  Dixon,  Knapp,  Clement,  Dodd, 
Green,  Lathrop,  Wales  —  8.^ 

1  Compare  Dillon,  J.,  in  Buell  v.  Buckingham,  a.  d.  1864,  16  Iowa,  284,  pp.  293-296. 
In  Burden  v.  Burden,  a.  d.  1896,  8  New  York  Appsllate  Division,  160,  pp.  171-174,  it  ig 


400 


JUNKINS  V.  UNIONS' 


JUNKINS   V.   U 

1855. 


STRICT. 


LJBOeOOL  DISTRICT. 

Maine,  220.1 


Assumpsit  on  account  annexed.  At  a  meeting  of  the  school  dis- 
trict it  was  voted  to  erect  a  school-house  and  to  raise  money  for  that 
purpose.  At  the  same  meeting  the  plaintiff  and  two  other  persons 
were  chosen  a  committee  to  superintend  the  erection  of  the  school- 
house  and  the  laying  out  and  expending  the  money  raised  by  the  dis- 
trict. The  committee  employed  the  plaintiff  to  do  certain  work  in 
connection  with  the  building  of  the  school-house. 

The  case  was  submitted  to  the  full  court  upon  report  from  Nisi 
Prius. 

N.  D.  Apjyleton,  for  defendant. 

Eastman  and  Leland,  for  plaintiff. 

Shepley,  C.  J.  ...  It  is  insisted  that  the  committee  could  not  law- 
fully employ  one  of  its  own  members  to  do  such  work  ;  that  the  trust 
was  a  personal  one  to  be  performed  by  all. 

A  majority  of  a  committee  so  composed  is  authorized  by  statute  to 
act.  Ch.  1,  §  3,  art.  3.  A  majority  having  such  authority  to  do  what 
all  its  members  might,  constitutes  a  party  capable  of  employing ; 
and  one  of  the  members  of  the  committee,  not  acting  as  such,  but  as 
an  individual,  constitutes  another  party  capable  of  contracting  or  of 
being  employed.  In  such  case  the  contract  is  not  made  or  the  person 
employed  by  a  committee  attempting  to  make  a  contract  or  incur  a 
liability  with  itself. 

A  committee  might  thus  act  corruptly  and  fraudulently,  by  two  dif- 
ferent members  making  contracts  with  each  of  the  others,  so  that  each 
sliould  have  a  contract  in  the  performance  of  the  work  entrusted  to 
all.  In  such  case  their  contracts  would  be  set  aside.  There  is  in 
this  case  no  proof  authorizing  an  inference  that  there  has  been  fraudu- 
lent or  corrupt  dealing. 


held,  that  a  contract  between  two  corporations  having  one  or  more  common  directors  (if 
not  disapproved  bj'  a  majority  of  the  stockholders)  will  not  be  avoided  at  the  suit  of  a 
minority  stockholder,  unless  the  contract  were  fraudulent  and  injurious  to  the  corporate 
property.  The  court  saj'  that  the  contract  may  be  voidable  at  the  election  of  the  corpora- 
tion. But  the  minority  stockholders  "are  not  entitled  to  make  such  election  in  behalf  of 
the  corporation."  See,  however,  note  to  Farmers'  Loan  and  Trust  Co.  v.  Nero  York  and 
Northern  R.  Co.,  in  a  subsequent  chapter.  —  Ed. 

1  Only  so  much  of  the  report  is  given  as  bears  on  a  single  point.    Argument  omit- 
ted. —  Ed. 


JANNEY  V.   MINNEAPOLIS   INDUSTRIAL   EXPOSITION. 


JANNEY  V.  IVnNNEAPOLIS  INDUSTRIAL  EXPOSITlOlfi^  e<  (^r'  y/^  r     J^^ 

1900.     79  Minnesota,  488.1  *v(  ]         CjAy         OX/ 

Appeal   from   District   Court   for   Hennepin   County,  where'  tae^  rf^  o*    //  ' 
case  was  tried  before  Simpson,  J.  ;  who  found  in  favor  of  plaintiffslf       0  5 

and  denied  a  motion  for  a  new  trial.  .^9      w^ 

Plaintiffs  were  directors  and  creditors  of  the  defendant  corporation.S^^'lO^i 
One  question  in  their  litigation  with  other  stockholders  who  were  |>>^ 
made  defendants  grew  out  of  the  purchase  of  corporate  property  by,    ^  L 
plaintiffs  at  an  assignee's  sale.  'Ijj'  V 

The  facts  found  by  the  trial  court  are  in  part  as  follows  :  —  a^    ^ 

The  corporation,  having  become  insolvent,  made  an  assignment  for,'    ' 
the  benefit  of  creditors.     The  assignee  was  ordered  by  the  court  to 
advertise  for  bids  for  the  corporate  property,  or   any  part   thereof. 
But  no  sale  was  thus  effected,  except  that  of  two  lots  of  land.     Sub- 
sequently, by  order  of  the  court,  the  assignee  was  authorized  to  adver-    '-^    '  /I 
tise  and  sell  the  remaining  property  so  assigned  at  public  vendue  to    yjy^^    M"^ 
the  highest  bidder.     At  such  sale  there  was  no  bidder  except  the     pi^     Ji      A 
plaintiff  Janney,  acting  for  himself  and  other  creditors  (now  co-plain-'^«    -^     w^ 
tiffs).     Janney,  in  order  to  protect  his  own  interests  and  that  of  the*''*A'  ^ 

other  plaintiffs,  did,  in  good  faith,  bid  for  the  property  the  sum  of    n  ^     i  f 
$25,100.     The  assignee  reported  the  sale  to  the  court,  and,  after  a  J^  {/^ 
hearing   therein,  it  was   duly  confirmed,  and   the   assignee   ordered  n^ 
to  convey  to  Janney,  which  was  done ;  he  paying  the  assignee  in 
cash  $25,100.     The  sale  was  fairly  and  lawfully  conducted,  and  the 
amoiint  realized  was  the  highest  sum  which  the  assignee  was  able  to 
obtain  for  the  property.     The  property  so  sold  to  the  plaintiffs  was, 
according  to  the  expert  testimony,  then  worth  the  sum  of  $100,000. 

The  trial  court  did  not  find  that  if  a  resale  of  the  property  was 
ordered  it  would  bring  an  increased  price,  or  that  there  was  any 
reasonable  probability  that  such  would  be  the  case,  other  than  may 
be  inferred,  if  at  all,  from  the  value  of  the  property  as  found  by  the 
court. 

The  defendant  stockholders,  in  their  answer,  objected  to  the  sale ; 
and  asked  that  the  plaintiffs  be  charged  with,  and  be  required  to 
account  for,  the  difference  between  the  purchase  price  paid  by  the 
plaintiffs  for  the  property  and  its  value.  Their  answer  also  prayed 
for  general  relief. 

Hale  &  Montgomery,  for  appellants. 

Hahn,  Belden  &  Hawley,  for  respondents. 

Start,  C.  J.  .  .  .  The  appellants  further  claim  that,  even  if  it  be 
conceded  that  plaintiffs  may  enforce  the  stockholders'  liability  for  the 
payment  of  their  debts  against  the  corporation,  still  the  trial  court 

1  Statement  abridged  from  opinion.  Arguments  omitted.  Only  so  much  of  the  opiaioa 
is  given  as  relates  to  a  single  question.  —  Ed. 


402  JANNEY  V.   MINNEAPOLIS   INDUSTRIAL   EXPOSITION. 

erred  in  its  conclusions  of  law,  for  the  reason  that  the  court,  upon 
the  facts  found,  ought  to  have  ordered  a  resale  of  the  property  at  an 
upward  bid  above  the  amount  paid  by  the  plaintiffs,  or  applied  pro 
tanto  upon  their  debts  against  the  corporation  the  difference  between 
the  amount  they  paid  for  the  property  and  its  value  as  found  by  the 
court.  This  conclusion  rests  upon  the  assumption  that  in  purchas- 
ing the  property  at  the  assignee's  sale,  pursuant  to  the  order  of  the 
court,  the  plaintiffs  violated  their  duties  as  directors.  If  the  pre- 
mises are  correct,  the  conclusion  would  seem  to  follow  that  the  stock- 
holders are  entitled  to  some  relief  if  not  guilty  of  laches.  But  are 
the  premises  correct?  This  question  must  be  answered  from  a  con- 
sideration of  the  special  facts  of  this  case  with  reference  to  the  gen- 
eral principles  of  law  applicable  to  the  rights,  duties,  and  disabilities 
of  directors  of  a  corporation. 

The  relation  between  a  corporation  and  its  directors  is  that  of 
principal  and  managing  agents.     They  are  not  trustees  in  the  sense 
of  holding  the  legal  title  to  any  of  its  propert}'  for  its  benefit,  or  that 
of  its  stockholders  or  its  creditors.     Still,  the  relation  is  essentially 
rt     !a  fiduciary  one,  and  upon  sound  principles  of  public  policy  directors 
/ JL    are  inhibited,  as  a  general  rule,  from  purchasing  for  their  own  benefit 
the  property  of  the  corporation,  very  much  as  a  trustee  is  disqualified 
from  purchasing  for  his  own  advantage  the  property  of  his  cestui  que 
trust.     This  proposition,  upon  principle  and  authority,  is  unquestion- 
ably the  law.     Beach  v.  Miller,  130  111.  162, 17  Am.  St.  Rep.  291,  298, 
notes;  3  Thompson,   Corp.   §  4071;  2  Cook,   Stockh.  §  653.     It  is, 
/however,  equally  clear  upon  principle  that  where  the  legal  title  and 
Icontrol  of  all  of  the  property  of  a  corporation  is  vested  in  an  assignee 
/or   receiver,  in  trust  for  the  benefit  of  its  creditors,  and  the  court 
fc]  orders  the  property  sold  for  the  purposes  of  the  trust,  a  director- 
/  creditor,  having  interests  to  protect,  may  in  good  faith  purchase  the 
A  I  property  at  such  sale,  and  acquire  thereby  the  absolute  title  thereto, 

n  /  Especially  is  this  so  where  there  are  other  active  directors,  and  the 
/  sale  is  made  subject  to  confirmation  by  the  court,  and  is  approved  by 
\  it.  But  in  all  such  cases  the  director  must  act  in  the  utmost  good 
faith,  for  the  transaction  will  be  jealously  scrutinized.  1  Morawetz, 
Priv.  Corp.  §  527  ;  3  Thompson,  Corp.  §§  4068,  4074  ;  Barber  y.  Boiven, 
47  Minn.  118,  49  N.  W.  684 ;  Twin-Lick  Oil  Co.  v.  3Iarbury,  91  U.  S. 
587;  Appeal  of  Lusk,  108  Pa.  St.  152. 

The  facts  of  this  case  bring  it  within  the  exception  to  tlie  general 
rule  that  directors  cannot  purchase  the  property  of  the  corporation 
for  their  own  benefit.  The  title,  possession,  and  control  of  the 
property  were  in  the  hands  of  an  officer  of  the  court  (the  assignee), 
and  had  been  for  nearly  a  year  prior  to  the  sale.  The  sale  was  made 
by  direction  of  the  court,  and  subject  to  its  confirmation.  The  plain- 
tiffs  had  no  control  over  the  property  or  the  assignee,  who  was  the 
i()  5^'i'i<--'' Illative  of  the  corporation,  its  creditors,  and  its  stockholders. 
>3      I  Tii(ry  had  no  power  to  prevent  or  control  the  J^ale,  which  was  a  judi- 


CAMPBELL'S   CASE. 


403 


cial^one,  brought  about  by  the  court  through  its  officer.  They  had 
material  interests  to  protect  by  bidding  at  the  sale.  They  purchased 
in  good  faith,  at  the  best  price  obtainable.  The  appellants  had  notice 
of  the  sale,  and  did  not  object  thereto  until  long  afterwards.  See 
Pinkm  V.  Minneapolis  Linen  Mills,  65  Minn.  40,  67  N.  W.  643.  The 
sale  was  fairly  conducted,  and  was  confirmed  by  the  court.  There 
were  twenty-one  directors  at  the  time  besides  the  plaintiffs.  These 
facts  justify  the  conclusion  of  the  trial  court  to  the  effect  that  the 
plaintiffs,  in  purchasing  the  property  to  protect  their  own  interests, 
did  not  violate  their  duties  to  the  corporation.  The  facts  found  by 
the  court  justify  its  conclusions  of  law. 


Order  affirm^ 


CAMPBELL'S   CASE,D 
MPAGNIE   GENERALE   D^ 


1876.     Law  Reports,  4  Chancery  Division^dX^' 

'' V^P^Y  the  articles  of  association  of  the  Compagnie  Generale  be  Belle- 
'  garde,  Limited,  the  directors  were  authorized  to  borrow  ;  the  repay- 
ment to  be  secured  by  mortgage,  or  by  debentures,  or  in  such  other) 
manner  as  the  directors  might  think  expedient.     In  1872  the  direct-^ 
ors  resolved  to  borrow  £90,000  by  mortgage  obligations,  and  issued .'-^>'  '^.  y^'    I '/ 
a  prospectus  offering  mortgage  certificates  at  par.     Findinsr  that  thev..-t^    .,  ^<^  '^ 


at  par.     Finding  that  they  ►^^    y.  ^  ^*lir 
ar,  the  directors  proceeded  ^^WvK^I<  T  /^, 

...  .^^ . —  .^  .^^  ^. — .^  „.  ^^^,  ^^„.  per  cent.     Of  the  bonds  so  ^         ,  n,      /^    i^ 

issued,  a  director  named  Campbell  took  one  set  of  the  nominal  value  (''     ^«^  y'    if  i' 
of  £1320,  for  which  he  paid  £1221,  being  at  the  rate  of  92  1-2  per  ^^      »  \  ^'^  k/^ 


were  unable  to  place  the  debentures  at  par, 

to  issue  bonds  to  the  public  at  £92,  10s.  per  cent. 


7^ 


y 


cent.,  and  also  another  set  of  the  nominal  value  of  £680,  for  which  he  ^W 
paid  £629,  being  at  the  same  rate.     In  the  company's  books  Cam]>'^'j;Jt/^ 
bell  was  credited  with  payment  of  the  two  sums  of  £1320  and  £680  'K  y  j 
in  full ;   and  was  debited  with  the  two  sums  of  £99  and  £51,  under  y^^y^ 
the  entry,  "  Commission  on  mortgage  obligations."  '       ' 


r* 


f/' 


The  company  having  been,  on  Jan.  15,  1876,  ordered  to  be  wound^'.'^*  {y .  ^'■ 


up,   the  official  liquidator  now  took  out  a  summons  that  Campbell''  ,/■"  . 
might  be  ordered  to  pay  the  two  sums  of  £99  and  £51.  ^'  ^r  ''^  P 

It  appeared  that  all  the  bonds  were  issued  at  £92,  10s.  per  cent,  ^ 
except  two  lots  of  the  aggregate  amount  of  £340,  which  were  issued 
without  any  discount. 

Sir  H.  Jackson,  Q.  C,  and  Terrell,  for  the  official  liquidator. 

Kay,  Q.  C.,  and  W.  Renshaiv,  for  Campbell. 

Bacon,  V.  C.     This  case,  in  one  point  of  view,  is  of  importance,, 
because  it  has  been  argued  as  if  it  fell  within  the  principle  which  the 
Courts  of  Equity  have  always  adhered  to,  not  to  permit  an  agent,  or 
1  Statement  abridged.    Arguments  and  part  of  opinion  omitted. — Ed. 


y. 

L/ 


(^ 


404  Campbell's  case. 

director,  or  any  person  in  a  fiduciary  character,  and  having  power  and 
influence  in  the  concern,  to  make  a  profit  by  his  dealings  with  the 
concern. 

But  the  fact  that  any  profit  was  made  I  find  to  be  wholly  wanting 
in  this  case.  There  was  no  profit.  The  directors  publish  a  prospectus, 
in  which  they  say,  "  We  are  going  to  issue  bonds  at  par."  It  is  all 
very  well  to  say  so,  but  when  they  come  to  issue  these  bonds,  people 
'  will  not  take  them  at  par.  What  are  they  to  do  ?  They  find  they 
cannot  place  them  at  par,  and  they  sell  them  on  the  best  terms  they 
can,  and,  except  in  the  two  particular  cases  mentioned,  they  issue  all 
these  debentures  on  the  same  terms  as  those  on  which  the  debentures 
j  taken  by  Mr.  Campbell  were  issued.  What  is  there  unlawful  in  that  ? 
\What  is  there  to  prevent  the  directors  buying  on  the  same  terms  as 
Sother  people  ?  The  case,  when  examined,  does  not  fall  within  the 
principle  upon  which  the  application  is  made.  The  section  of  the 
Companies  Act  which  has  been  referred  to  is  really  wide  of  the  pre- 
sent case.  That  section  compels  restitution  from  directors  when  they 
shall  have  misapplied  or  retained  in  their  own  hands,  or  become 
lialDle  or  accountable  for,  any  moneys  of  the  company.  But,  in  this 
instance,  when  did  the  difference  between  par  and  92  1-2  per  cent, 
ever  become  the  money  of  the  company  ?  It  was  money  which  they 
never  received,  and  which  was  never  theirs.  The  section  proceeds, 
"  or  has  been  guilty  of  any  misfeasance  or  breach  of  trust  in  relation 
to  the  company."  What  misfeasance  or  breach  of  trust  was  Mr. 
/  Campbell  guilty  of  in  advancing  to  the  company,  on  exactly  the  same 
I  terms  as  everybody  else,  money  which  they  were  in  want  of  ?  It  was 
not  money  for  which  he  had  become  liable  or  accountable.  The  com- 
pany's books  have  been  kept,  as  it  appears  to  me,  in  the  proper  and 
regular  way.  It  is  necessary  for  book-keeping  purposes,  that  there 
should  be  entered  on  the  credit  side  of  the  ledger  the  aggregate  amount 
of  all  the  debentures  representing  the  debt  due  from  the  company. 
Then  the  company  debit  the  amount  unpaid,  and  whether  that  amount 
be  called  commission  or  discount,  the  true  nature  of  the  transaction 
cannot  be  obscured.  The  directors  did  that  which  it  was  lawful  for 
them  to  do  —  they  issued  debentures  at  a  certain  discount.  Mr. 
Campbell  took  them  as  other  people  took  them,  and  paid  his  money 
for  them.  He  derived  no  sort  of  profit  from  them  ;  the  advantage,  if 
any,  was  all  on  the  side  of  the  company. 
[Eemainder  of  opinion  omitted.] 

Summons  dismissed. 


SEYMOUR  V.  SPRING  &c.  ASSOCIATION. 


SEYMOUR  V.   SPEING  &c 

1895.  144  New  York,  333 


ASSO(it!ztTi<yK.)J 


ade  thai,  benansft  Hotr^h-^   /  f*.  *    , 


Finch,  J.  .  .  .  But  the  further  claim  is  made  that,  because  Hotch-^  /  , 
kiss  and  Seymour  were  officers  of  the  corporation,  holding  a  fiduciary^  |r^  \/ 
relation  as  trustees  or  directors,  they  could  not  lawfully  buy  the  valid  ^^ 
and  outstanding  obligations  of  the  company  at  less  than  par  and  en- 
force them  for  the  full  amount  against  the  debtors.  If  that  be  sound 
doctrine,  as  is  stoutly  maintained,  if  directors  cannot  in  any  case 
invest  in  the  bonds  of  their  own  companies  except  at  the  peril  of  a 
constructive  fraud,  if  they  cannot  safely  buy  such  bonds  below  par, 
because  they  deem  them  unduly  depressed,  if  titles  to  corporate  obli- 
gations passing  through  their  hands  become  tainted  by  their  touch,  it 
is  quite  time  that  the  courts  should  give,  what  they  have  not  given, 
a  very  definite  and  distinct  warning.  Some  citations  of  seeming 
authority  are  pressed  upon  us  and  others  exist.  The  broad  rule  is 
stated  in  Perry  on  Trusts  (§  428),  that  "  a  trustee,  executor  or  as- 
signee cannot  buy  up  a  debt  or  incumbrance  to  which  the  trust  estate 
is  liable  for  less  than  is  actually  due  thereon,  and  make  a  profit  to 
himself,"  and  that  is  the  doctrine  invoked  in  this  case  as  applicable 
to  a  director  regarded  as  a  trustee  of  the  corporation.  But  the  state- 
ment, however  correct  in  its  application  to  specific  instances,  must  be 
taken  with  the  limitations  which  belong  to  it.  Its  foundation  is  that 
a  fiduciary  agent,  owing  a  duty  to  his  principal,  cannot  make  a  con- 
tract for  his  own  benefit  which  is  or  may  be  inconsistent  with  that 
duty,,  and  the  cases  generally  are  of  two  kinds.  The  trustee  buys  in 
the  property  of  his  principal  at  a  sacrifice  for  his  own  benefit,  when, 
if  he  bought  it  at  all,  it  was  his  duty  to  do  it  for  his  principal,  or  he 
makes  a  contract  in  behalf  of  his  principal  with  himself  directly  or 
indirectly  as  the  other  party  to  the  agreement.  The  first  class  of 
cases  is  illustrated  by  Slade  v.  Van  Vechten  (11  Paige,  26),  where  the 
assignee  bought  in  assigned  property  at  a  sheriff's  sale  and  claimed 
the  personal  benefit  of  his  bargain  ;  and  the  second  class  by  Munson 
V.  S.  G.  &  C.  E.  E.  Co.  (103  N.  Y.  58),  in  which  the  directors  con- . 
tracting  had  a  private  and  personal  interest,  possibly  adverse  to  their ' 
fiduciary  duty.  Almost,  if  not  quite  all,  of  the  cases  cited  by  the 
learned  counsel  for  the  appellant  belong  to  one  or  the  other  of  these 
two  classes.  But  they  do  not  decide  this  case,  for  Hotchkiss  and 
Seymour  neither  bought  in  any  property  of  the  company  nor  dealt 
with  the  corporation  in  any  respect.  They  made  their  contract,  not 
with  it,  but  with  third  persons  capable  of  protecting  their  own  rights, 
and  bought  nothing  which  the  corporation  owned  or  to  which  it  had  a 
right.  We  must  go  to  still  other  cases,  founded  it  may  be  to  some 
extent  upon  similar  ideas  of  fiduciary  duty,  to  discover  even  an  ap- 
1  Statement  and  arguments  omitted.    Only  part  of  the  opinion  is  given.  —  £o. 


f> 


^ 


406  SEYMOUR  V.  SPRING  &c.    ASSOCIATION. 

proximate  authority.  There  are  cases  of  co-partnership  in  which  the 
general  rules  pertaining  to  that  specific  relation  might  prove  to  be 
broad  enough  to  cover  the  purchase  of  the  debt  owing  by  the  firm 
(Am.  Bk.  Note  Co.  v.  Edson,  56  Barb.  89),  and  other  cases  in  which 
the  duties  flowing  from  a  liquidation  conducted  by  the  trustee,  and  as 
to  which  he  owes  a  specific  trust  duty,  forbid  a  purchase  by  the  trus- 
tee for  his  own  benefit  at  a  discount.  But  in  every  class  of  cases  the 
rule  is  founded  upon  the  unwillingness  of  the  law  to  uphold  contracts 
which  bring  into  collision  the  trust  duty  and  the  personal  interest, 
and  it  is  because  of  that  collision,  and  the  temptations  whicli  surround 
it,  that  it  declares  the  contract  voidable  at  the  election  of  the  bene- 
ficiary without  investigating  the  good  or  bad  faith  of  the  trustee. 
The  entire  basis  of  the  rule  consists  in  this  collision  between  trust 
duty  and  personal  interest,  and  the  equitable  prohibition  has  no  appli- 
cation where  there  is  no  such  possible  inconsistency.  There  is  no 
such  conflict  in  the  ordinary  case  of  the  purchase  by  a  director  in  a 
going  corporation  of  its  outstanding  obligations.  There  is  no  present 
duty  resting  upon  him  to  extinguish  them.  The  time  for  that  has  not 
come,  the  duty  has  not  arisen,  may  never  arise,  the  corporation  is  not 
prepared  to  pay,  does  not  contemplate  paying,  but  intends  and  expects 
to  await  the  full  maturity  of  the  debt.  Unless  some  special  fund 
has  been  provided,  or  some  special  liquidation  has  been  ordered,  the 
director  owes  no  duty  to  his  company  to  discharge  or  buy  in  the  out- 
standing bonds,  and  may  purchase  for  himself  because  no  inconsistent 
trust  duty  has  arisen.  Why  should  he  not  ?  While  the  bonds  are 
running  to  their  maturity,  and  the  corporation  is  not  able  to  extinguish 
them,  is  not  bound  to  do  so,  does  not  even  wish  or  seek  to  do  so,  what 
does  it  matter  who  holds  the  securities  or  on  what  terms  they  pass 
from  hand  to  hand  ?  It  seems  to  me  that  we  are  asked  to  crowd  the 
rule  almost  to  the  verge  of  an  absurdity,  and  to  inflict  a  vital  injury 
upon  business  interests  by  tainting  with  invalidity  the  holding  by  a 
director  of  the  unmatured  obligations  of  the  corporation  bought  by 
him  in  the  open  market  and  not  put  in  liquidation  or  sought  to  be 
'extinguished.  There  must  at  least  be  some  fact  or  circumstance  which 
charges  the  trustee  with  a  present  duty  to  act  for  his  company  in 
respect  to  the  bonds,  which  duty  is  or  may  be  inconsistent  with  a 
personal  purchase.  No  such  duty  rested  upon  Hotchkiss  and  Sey- 
imour,  and  they  had  a  right  to  buy  and  hold  for  their  own  benefit. 

Indeed,  there  is  a  furtlier  and  equally  conclusive  answer.  If  the 
doctrine  invoked  applied  to  this  case  it  would  make  the  purchase  not 
void  but  voidable  at  the  election  of  the  corporation,  and  that  election 
must  be  made  promptly  and  upon  sufficient  knowledge  of  the  facts. 
The  beneficiary  cannot  wait  and  speculate  upon  the  cliances  of  delay, 
but  must  act.  Here  the  purchase  was  made  before  1873,  and  in  1880 
the  corporation  is  found  recognizing  and  ratifying  the  title  of  tlie 
vendees  or  their  successors,  making  payments  to  them,  and  providing 
for  future  payments,  and  it  is  only  after  a  delay  of  fifteen  years  that 
an  attempt  to  repudiate  the  purchase  is  made. 


COMMONWEALTH  V.   BRINGHURST. 


407 


CHAPTER  XI. 
VOTING  RIGHTS   OF  STOCKHOLDERS. 


"It  seems  that,  at  common  law,  each  shareholder  is  entitled  to  east 
but  one  vote,  irrespective  of  the  number  of  shares  which  he  holds ; 
but  there  are  good  reasons  for  holding  that  this  rule  has  no  applica- 
tion to  ordinary  joint-stock  business  corporations  at  the  present  day. 
The  custom  of  giving  the  shareholders  in  such  companies  a  vote  for 
every  share  has  become  so  well  established,  that  it  is  fair  to  imply 
an  intention  to  follow  this  custom  in  the  absence  of  any  indication  to 
the  contrary.  It  is  generally  provided  by  statute  [a  general  law  ap- 
plicable to  all  private  business  corporations],  or  by  express  provision 
in  the  articles  of  association  of  a  corporation,  that  the  shareholders 
shall  be  entitled  to  a  vote  on  account  of  each  share."  Morawetz  on 
Private  Corporations,  2d  ed.  s.  476a. 


COMlvfo. 


WEALTH  V.  BRINGHURST. 


^    f(^  ji'^y^    N\  1883.     103  Pa.  S<a<e,  134.1 

Error  to  Court  of  Common  Pleas,  No.  2,  of  Philadelphia  County. 

Quo  luarranto  by  the  Commonwealth  of  Pennsylvania,  ex  relatione 
John  P.  Verree  et  als.,  against  Bringhurst  et  als.  to  determine  the  right 
of  the  defendants  to  hold  the  office  of  directors  of  the  Philadelphia 
Iron  &  Steel  Company,  a  corporation  chartered  by  special  Act  of 
April  12,  1867  (P.  L.  1211). 

The  suggestion  of  the  relators  set  forth,  in  substance,  that  at  the  i 
annual  meeting  certain  votes  by  proxy  were  received  by  the  inspectors' 
of  election  under  protest ;  that  the  inspectors  refused  to  count  any 
of  the  votes  thus  given  by  proxy ;  that  the  defendants,  who  had  re- 
ceived a  majority  of  the  votes  given  by  stockholders  in  person,  were  de- 
clared elected  directors  ;  whereas  if  the  votes  given  by  proxy  had  been, 
counted  together  with  the  votes  given  in  person  the  relators  were  electedJ '  1^      ^>*^ 

Defendants  demurred.  j-^ ^\ 

The  court  below  sustained  the  demurrer  and  entered  judgment  for  ,      K 
defendants. 

1  Statement  abridged.    Part  of  argument  omitted.  —  Ed. 


y^ 


408 


COMMONWEALTH   V.   BRINGHUKST. 


R.  C.  Dale  and  Samuel  Dickson  for  plaintiffs  in  error.  The  rule  of 
the  common  law,  established  when  municipal,  I'eligious,  and  charitable 
corporations  were  alone  known,  has  no  application  to  trading  or  monied 
corporations  where  the  relation  of  the  members  is  not  personal.  In  the 
former,  the  units  are  persons,  in  the  latter  the  units  are  shares.  State 
V.  Tudor^  5  Da}-,  329.  The  case  of  Taylor  v.  Grisvold  (2  Green, 
N.  J.  223)  manifests  a  narrow  adherence  to  common-law  doctrines, 
Hud  the  other  cases  cited  on  the  other  side  are  not  authorities.  Philips 
V.  WicJcham  (1  Paige,  590,  598)  was  the  case  of  a  quasi  municipal 
•corporation.  Brown  v.  Commonwealth  (3  Grant,  209)  was  decided  on 
un  express  limitation  in  the  charter,  and  Craig  v.  Church  (7  Norris,  42) 
vas  the  case  of  a  religious  society.  An  examination  of  the  general 
legislation  of  this  State  shows  that  the  legislature  regarded  the  right 
j)f  shareholders  to  vote  b}-  proxy  as  an  inherent  right  without  special 
enactment  [citing  various  Acts].  In  all  business  transactions  what  one 
does  by  another  he  does  himself,  and  what  he  can  do  himself  he  can  do 
by  another.  Story  on  Agency,  §  3.  If  a  vote  cannot  be  given  by 
prox}',  the  Guarantee  Trust  Company,  which  is  the  largest  holder  of 
this  stock,  is  disfranchised,  for  a  corporation  can  only  act  through  an 
agent. 

George  JR.  Van  Dusen  and  W.  Heyward  Drayton^  for  defendants 
in  error. 

[Argument  omitted.] 

Mercur,  C.  J.  The  relators  are  stockholders  of  the  Philadelphia 
Iron  and  Steel  Company.  It  was  incorporated  by  special  Act  of  12th  of 
April,  18G7. 

The  contention  is,  whether  the  stockholders  may  vote  by  proxy,  in 
ithe  annual  election  of  officers  of  the  corporation? 

)  Section  2  of  the  Act  declares  "  the  affairs  of  said  company  shall  be 
managed  by  a  board  of  five  directors,  one  of  whom  shall  be  the  presi- 
dent, who  shall  be  chosen  by  the  stockholders.  All  elections  shall  be 
by  ballot,  and  every  share  of  stock  upon  which  the  required  instalments 
have  been  paid,  shall  entitle  the  holder  thereof  to  one  vote."  Section  3, 
inter  alia,  authorizes  the  corporation  to  "  make  all  needful  rules,  regu- 
lations, and  by-laws  for  the  well  ordering  and  proper  conduct  of  the 
business  and  affairs  of  the  corporation.  Provided  the  same  in  no  wise 
conflict  with  the  constitution  and  laws  of  this  State  or  of  the  United 
States." 

The  charter  in  no  wise  refers  to  voting  by  proxy.  No  by-law  has 
been  adopted  authorizing  the  stockholders  to  so  vote. 

In  the  absence  of  any  express  authority  in  the  charter,  and  without 
any  by-law  authorizing  it,  the  question  is  whether  the  stockholders 
may  vote  by  proxy.  In  other  words,  is  it  a  power  necessaril}-  incident 
to  the  corporate  rights  of  the  stockholders  ?  nVO^    ¥'    < '^*^\xi\ '^  ^*^^ 

A  corporation  is  the  mere  creature  of  the  law.  It  cannot  exercise 
any  power  or  authority  other  than  those  expressly  given  by  its  charter, 
»>r  those  neccssarilj  incident  to  the  power  and  authority  thus  granted, 


COMMONWEALTH   V.    BRINGHUEST.  4c79 

and  therefore,  in  estimation  of  law,  part  of  the  same.  Wolfx.  Ooddard, 
9  Watts,  ooO  ;  Diligent  Fire  Co.  v.  Commomcealth,  25  P.  F.  Smith, 
291. 

The  right  of  voting  at  an  election  of  an  incorporated  compan^^by 
proxy  is  not  .a^general  right.  The  party  wlio  claims  it  mnst  show  a 
special  authority  foiLthat  purpose.  Angell  &  Ames  on  Corporations, 
§  128  ;  Philips  v.  Wickham,  1  Paige's  Cases  in  Chancery,  o90.  In  this 
case,  Chancellor  Walworth  says,  the  only  case  in  which  it  is  allowable 
at  the  common  law  is  by  the  peers  of  England,  and  that  is  said  to  be  in 
virtue  of  a  special  permission  of  the  King.  He  adds  :  "  It  is  possible 
that  it  might  be  delegated  in  some  cases  by  by-laws  of  a  corporation, 
where  express  authority  was  given  to  make  such  by-laws,  regulating  the 
manner  of  voting."  In  the  People  v.  Ticaddell,  18  Hun,  427,  it  was 
held,  a  stockholder  cannot  so  vote  unless  expressl}'  authorized  by  the 
charter  or  by-laws.  Taylor  y.  Grisxcold,  2  Green  (N.  J.)  222,  holds 
that  a  right  of  voting  by  prox}'  is  not  essential  to  the  attainment  and 
design  of  a  charter,  and  even  a  general  clause  therein  authorizing  the 
compan}'  to  make  by-laws  for  its  government  was  insufficient  of  itself 
to  give  that  right.  In  State  v.  Tudor^  5  Day  (Conn.)  329,  there  was 
no  clause  in  the  charter  authorizing  the  stockholders  to  vote  b}'  proxy; 
5'et  the  company  made  a  b^-law  authorizing  them  to  so  vote.  The 
validity  of  this  by-law  was  sustained  b}'  a  majority-  of  the  court.  So  in 
People  V.  Crossley,  69  111.  195,  effect  was  given  to  a  by-law  of  the 
corporation,  authorizing  voting  by  prox}',  the  by-law  not  being  in  con- 
flict with  the  Constitution  and  laws  of  the  State. 

That  a  right  to  vote  b}'  proxy  is  not  a  common-law  right,  and  there- 1 
fore  not  necessaril}-  incident  to  the  shareholders  in  a  corporation,  appears 
to  have  been  recognized  in  Broxcn  v.   Commoyiicealth,  3  Grant,  209, 
and  in  Craig  v.  First  Preshyterian  Church,  7  Norris,  42. 

The  selection  of  officers  to  manage  the  affairs  of  this  corporation 
requires  the  exercise  of  judgment  and  discretion.  They  must  be  elected 
by  ballot.  The  fact  that  it  is  a  business  corporation  in  no  wise  dis- 
penses with  the  obligation  of  all  the  members  to  assemble  together, 
unless  otherwise  provided,  for  the  exercise  of  a  right  to  participate  in 
the  election  of  their  officers.  Although  it  be  designated  as  a  private 
corporation,  yet  it  acquired  its  rights  from  legislative  power,  and  it  must 
transact  its  business  in  subordination  to  that  power.  As  then  the  re- 
lators cannot  point  to  anv  language  in  the  charter  expressly  giving  a 
right  to  vote  by  proxy,  and  it  is  not  authorized  by  any  by-law,  they 
have  no  foundation  on  which  to  rest  their  claim.  Judgment  was  correctly 
entered  for  the  defendants  on  the  demurrer. 

Judgment  affirmed. 


^y^cy 


E   BARDELEBEN   COAL   AND   IRON   CO. 


y 


fiif^^v€'/j.,  IN  MACK  V.  DeBARDELEBEN  COAL  AND 
J^      .  ^  IRON  CO. 

■f       Ji^      J^  ^^^^'     ^^  Alabama,  396,  pp.  401-404. 

/}i-         ■  Ia      i'      Many  other  questions   material  to  the  future  government  of  the 

''       l^-^ -^         Eureka  Company  have   been  well   and   ably  argued,  and  we   feel   it 

r  ^j^     rJ^         our  dut}'  to  notice  some  of  the  more  important  of  them.     In  the  act 

y^^^p  (J-^ ^  to  amend  the  charter  of  said  company,  approved  December  6,  1873  — 

I  '^L,^    ^_i/       ( 'Sess.  Acts,  139  —  is  this  language  :    "  No  stock  [holder],  either  in  his 

I   Ky"-^  ^y^^    •djown  right,  or  as  proxy  or  agent  for  others,  shall  be  entitled   to  cast 

r'  Jty^  '  ^       (lt^  jmore  than  one-fourth  of  all  the  votes   at  any  election  of  directors." 

-       i,      ^jy^Jj^Tlus  clause  is  set  forth  in  the  amended  bill,  and  is  in  that  way  brought 

/?  '      V>r^  before  us.     We  hold  this  language  means  one-fourth  of  all  the  votes 

'  /^    ,yui^  ^^®  shares  of  stock  authorize  to  be  cast.     One-fourth  of  the  votes  in 

*^         the  Eureka  Company,  with  its  present  number  of  shares,  is  2,077. 

It  is  averred,  and  not  denied,  that  the  DeBardeleben  Company,  as  a 
L   ^  j^^^     corporation,  is  the  owner  of  more  than  4, GOO  of  the  Eureka  shares.   The 
♦  ^       \       v-*"    amended  bill  charges  that  "the  defendant,  H.  F.  DeBardeleben,  as 
Q. '      ^      •  v-^  president  of  the  DeBardeleben  Coal  and  Iron  Company,  and  acting  as 
fi^   '  y^  aU^  president  of  Eureka  Company',  and  David  Roberts,  as  secretary  of  both 
i/*     ,i^       j^<^f  Said  companies,  and  with  the  knowledge  and  consent  and  connivance 
jL^J/^    ij}-    \jj^  of  the  defendant  A.  T.  Smythe,  a  short  time  prior  to  the  19th  of  January, 
^^^.X)    j^     _     1S90,  had  a  large  lot  of  the  stock  of  the  Eureka  Company,   .  .   .  which 
U         ^-     iji^y^^  owned  and  held  by  the  DeBardeleben  Coal  and  Iron  Company, 
J]c,Mr-        i,   ^X^  •   •  transferred  into  their  individual  names,  that  is  to  say:  they  had 
'     fO0^^\j-    A  transferred  to  each  of  the  following  persons,  who  were  at  that  time 

-  /  ^ iJ-y  ^  directors  of  the  DeBardeleben  Company,  or  large  stockholders  in  said 
♦^^^^i^^^!^ 'Li*^^™^'''^"^'  ^^^  following  number  of  shares:  H.  F.  DeBardeleben,  500 
«M  Shares  ;  David  Roberts,  500  shares  ;  A.  T.  Smythe,  360  shares  ;  M.  B. 
Lopaz,  423  shares;  Robert  Adger,  300  shares;  A.  M.  Adger,  300 
shares ;  F.  J.  Pelzer,  300  shares  ;  leaving  in  the  name  of  the  DeBar- 
deleben Coal  and  Iron  Company  1,990  of  the  4,G23  shares  :  .  .  .  that 
the  said  stock  so  transferred  .  .  .  was,  and  is  now,  the  stock  and 
property  of  the  DeBardeleben  Coal  and  Iron  Company  ;  .  .  .  that  the  . 
transfers  to  said  persons  were  so  made  ...  for  the  purpose  of  avoid- 
ing and  getting  around  the  section  of  the  charter  and  by-laws  of  said 
Eureka  above  set  out.  Said  transfers  of  said  stock  were  so  made  in 
fraud  of  the  minority  stockholders  of  said  Eureka  Company,  and  to 
enable  all  of  said  stock  to  be  voted  in  the  interest,  and  for  the  benefit 
of  the  DeBardeleben  Coal  and  Iron  Company."  The  substantial  aver- 
ments of  fact  in  the  foregoing  extract  are  not  denied  in  the  answers. 

It  is  contended  for  appellees  that  the  said  transferrees  of  the  DeBar- 
deleben Company's  stock  in  the  Eureka  Company  are  of  right  entitled 
to  vote  the  several  shares  standing  in  their  names,  notwithstanding  the 
statutory  inhibition  copied  above.     They  rely  on  the  following  authori- 


MACK   V.   DE   BARDELEBEN   COAL  AND   IRON   CO.  411 

ties  as  supporting  their  contention :  In  re  Stranton  T.  db  S.  Co.,  16 
Eq.  Ca.  L.  R.  55!) ;  Pender  v.  Zushinf/ton,  6  Cb.  Div.  L.  R.  70  ;  Mof- 
fatt  V.  Farquhar,  7  Ch.  Div.  L.  R.  591 ;  Camden  <b  Atl.  R.  R.  Co.  v. 
Flkins,  37  N.  J.  Eq.  273.  Tiie  English  authorities  quoted  do  lend 
some  countenance  to  their  argument,  but  we  can  not  follow  them.  The 
New  Jersey*  case  is  not  fully  in  point.  We  think  the  statutor}-  restraint 
on  the  voting  power  of  the  stockholders  was  enacted  for  very  wise  and 
conservative  purposes,  and  that  it  should  be  upheld  in  its  integrity.  It 
is  perhaps  to  be  lamented  that  our  organic  law  does  not  contain  a  pro- 
vision applicable  to  all  business  corporations  aggregate,  that  no  one 
person,  whether  natural  or  artificial,  can  ever  exercise  a  controlling 
voice  in  their  organization  or  government. 

Giving  due  consideration  to  the  sworn  denials  and  averments  of  the 
answers  in  this  case,  we  find  no  ground  for  imputing  vicious  purposes 
in  the  government  of  the  Eureka  Company  ;  but  the  power  one  corpo- 
ration acquires  bj'  the  ownership  of  a  majority  of  the  stock  of  another 
corporation,  with  which  it  has  business  connections,  opens  an  inviting 
door  for  very  pernicious  possibilities,  which  the  virtues  of  the  manipu- 
lators and  speculators  have  not  always  enabled  them  to  withstand.  The 
provision  we  are  considering  was  conceived  in  the  interest,  and  for  the 
protection  of  minoritj'  stockholders,  and  deserves  to  be  upheld  with  a 
strong  hand.  Thejiighest  junction  of  the  law  is  theprotection  of  the 
weak  against  the  mighty. 

On  principle,  it  would  seem  that  the  restrictive  clause  in  the  amended 
charter  of  the  Eureka  Company  is  too  pronounced  and  emphatic  to  be 
disobe3ed,  or  evaded.  What  cannot  be jlone  direct]}-,  can  not  be  ac-  j 
complished  by  indirection.  I^oiifi.^jexcept  in  matters  ofj)fficial  Imst,  i 
can^  con.fcr  on  another  authority  to^  do_what_he^ jian  nqt_do_  himseKW 
What  one  doe^  by  another,  he  does  byjiimself.  But  we  are  not  with-' 
out  authorities  in  support  of  our  views.  Camphell  v.  Poultney,  6  Gill 
&  Johnson,  94,  presented  the  identical  question  we  have  in  hand.  The 
question  arose  on  a  bill  filed  to  prevent  gratuitous  transferrees  of  stock, 
made  that  the  stock  might  be  voted  in  the  interest  of  the  transferror, 
who  still  remained  the  owner,  from  voting  such  stock  as  an  indepen- 
dent stockholder.  The  court  ruled  that  the  transferror  could  not 
increase  his  voting  power  by  any  such  device,  and  chancery  would 
enjoin  the  casting  of  a  greater  number  of  votes  than  the  transferror 
himself  could  have  cast.  In  Wehh  v.  RUlgehj,  38  Md.  364,  the  same 
doctrine  was  asserted. — 2  High  on  Injunctions.  §  1231.  In  State  ex 
rel.  Banforth  v.  Hunton.,  28  Ver.  594,  a  proceeding  by  quo  warranto 
to  test  the  question  of  the  election  of  certain  persons  as  directors  of  a 
bank,  similar  principles  were  declared.  It  was  ruled  that,  when  the 
transferror  could  not  vote  the  stock,  his  gratuitous  transfer  to  another, 
that  the  latter  might  vote  it  in  his  interest,  and  according  to  his  wishes, 
conferred  on  that  other  no  greater  power  than  he  himself  could  exer- 
cise. The  court,  among  other  things,  said,  '  *  The^  law  is  not  to  bg 
outwitted  by  cunning  devices." 


112 


VANDEKBILT   V.   BENNETT. 


Our  conclusions  are,  that  neither  the  DeBardeleben  Compan}'  nor  any 
other  stockholder  of  the  Eureka  Company,  can,  either  directly  or  indi- 
rectly, vote  more  than  one-fourth  of  all  the  votes  at  any  election  of 
directors ;  that  in  a  proper  case  chancery  will  enjoin  that  company 
from  casting  more  than  one-fourth  of  the  votes ;  that  if,  by  reason  of 
votes  cast  in  excess  of  this  restriction,  any  person  or  persons  are  de- 
clared elected  directors,  on  a  proceeding  in  quo  icarranto  the  illegal 
votes  will  be  disallowed  ;  and  if  such  disallowance  reduces  the  number 
of  votes  cast  for  such  director  or  directors  below  a  majority  of  the 
votes  lawfully  cast,  then  a  judgment  shall  1^  /iwarded  against  them, 
removing  them  from  said  office  or-^m§t. 


f:^^-' 
'^'X^. 


VANDER 

1889.     6  Pflf 

Exceptions  to'm 


^r'sVeport,  C.  P.  No.  1,  Allegheny 


k^^<^ 


fV 


D 


Bill  in  equity. 
jQount}'. 

The  bill  was  filed  b}-  Cornelius  Vanderbilt  against  Bennett  et  als.,  to 

estrain  defendant  from  exercising  the  voting  power  incident  to  2,000 

^        Dl\'shares  of  stock  in  the  Pittsburgh  &  Lake  Erie  R.  R.  Co.,  owned  by 

'  "^A        plaintiff;    and    to    restrain    them   from    interfering   with    plaintiff   in 

the  exercise  of  his  rights  of  ownership  thereof.     Defendant  filed  an 

answer.     The  cause  was  referred  to  C.  S.  Fetterman,  Esq.,  as  master, 

whose  findings  of  fact  were,  in  part,  as  follows  : 

October  20,  1877,  an  agreement  in  writing  was  entered  into  b}'  vari- 
ous stockholders  of  the  railroad  compan}',  including  William  H.  Van- 
derbilt, who  then  owned  2,000  shares.  B}'  this  agreement  all  the 
shares  of  the  subscribers  were  to  be  registered  in  the  names  of  trustees, 
and  these  trustees  and  their  successors  were  to  have  perpetual  power 
o  vote  upon  the  same ;  and  were  to  vote  with  a  view  to  carrj'  out  cer- 
tain objects  and  policies  defined  in  the  agreement.  Certificates  were  to 
r^ptXtie  issued,  and  were  issued,  to  Vanderbilt  and  other  subscribers  giving 
them  all  the  rights  of  stockholders  except  the  right  to  vote  upon  the 
stock,  and  reciting  that  the  perpetual  power  of  voting  is  vested  in  the 
trustees. 

At  the  death  of  William  H.  Vanderbilt,  in  1886,  the  2,000  shares 
became  vested  in  Cornelius  Vanderbilt,  whose  right  to  vote  upon  the 
same  was  denied  at  the  annual  election  in  1887. 

No  consideration  passed  between  the  subscribers  to  the  trust  agree- 
ment or  between  them  and  the  trustees ;  and  the  defendants,  who  were 
the  trustees  at  the  time  suit  was  brought,  claimed  no  interest  in  the 
btock  covered  by  the  agreement,  except  the  right  to  vote  it. 

The  Act  of  Assembly  of  Pennsylvania,  of  February  19,    1849,-to 

^  Statement  abridged.  —  Ed. 


VANDERBILT   V.   BENNETT.  413 

which  the  Pittsburgh  &  Lake  Erie  R.  R.  Co.  was  subject,  provides,  that 
at  all  general  meetings  or  elections  by  the  stockholders,  each  share  of 
stock  shall  entitle  the  holder  thereof  to  one  vote ;  and  that  no  proxy 
shall  be  received,  unless  the  same  shall  have  been  executed  within  the 
three  months  preceding  such  election  or  general  meeting. 

The  master's  conclusions  of  law  were  : 

1st.  That  the  trust  agreement  is  invalid  as  creating  an  unlawful  com- 
bination and  against  public  polic}'. 

2d.  That  if  the  said  agreement  is  such  as  can  be  legally  sustained, 
it  is  simply  a  power  of  attorney  or  proxy,  and  revocable  at  the  option 
of  any  party  to  it. 

The  master's  opinion  on  the  second  point  is,  in  part,  as  follows  : 

Ordinarily  the  authority  of  an  agent  is  subordinate  to  that  of  his 
principal.  Whether  the  agency  be  created  by  parol,  or  by  writing 
under  seal,  unless  it  be  coupled  with  an  interest  in  the  agent  in  the 
property,  which  would  be  detrimental  to  him  should  a  revocation  be 
attempted  before  the  objects  of  the  said  letter  of  attorney  or  trust  — 
whatever  it  may  be  —  be  accomplished,  the  agency  is  revocable  at  any 
time  b}'  the  principal  or  b}-  the  death  of  the  principal.  We  have  in 
this  case  an  agencj'  created,  and,  as  stated  by  the  paper  itself,  a  per- 
petual agenc}',  in  a  certain  bod}'  of  men  designated  as  trustees,  for  the 
purpose  of  voting  and  controlling  the  stock  of  the  parties  subscribing 
to  the  paper  hereinbefore  referred  to,  without  any  other  or  further  duty 
to  be  performed  in  regard  to  the  stock,  excepting  as  specified  in  said 
paper.  The  trustees  themselves  have  no  interest  whatever,  financial 
or  otherwise,  in  it,  and  no  right  to  control  the  transfer  or  disposition 
thereof  in  an\'  wise  whatsoever.  The  trust  raised  b}'  the  said  paper,  if 
any,  is  simpl}'  and  purely  a  dry  trust,  if  we  may  so  call  it,  leaving  or 
giving  no  functions  whatever  for  the  trustees  to  perform,  except  the 
simple  voting  of  the  stock  subscribed  in  said  paper  and  in  accordance 
with  the  vote  thej'  msLy  cast  to  control  the  organization  and  policy  of 
the  said  company.  It  is  common  sense  and  common  law  that  the  power 
or  authorit}'  of  the  agent  cannot  be  greater  than  that  delegated  to  him 
b}'  his  principal. 

[After  quoting  from  Griffith  v.  Jeirett,  Superior  Court  of  Cincinnati, 
15  Weekly-  Law  Bulletin,  119,  and  Hafer  v.  Jewett,  14  Weeklj-  Law 
Bulletin,  G8.  the  master  proceeds  :] 

Ever)^roxy^jiJIUioug]j_b\Mts_terms  irrevocable,  is  revocable  unless 
coupled-witir^an  interest.     Story  on  Agency,  s.  476. 

The  ^principal  may  revoke  the  authority  ofjiis  agent  at  his  mere 
pl^asuxB  if  thB-agent  Jiaa  noLjntejigst  jn  its  executioUj^and  ^ere  is  no 
valid_nnnsidpr.at.ion  foLJl'  It  is  treated  as  a  mere  nude  pact  and  is  -/\ 
deemed  in  law  to  be  revocable  upon  the  general  principle  that  he  alone 
whojias  an  interest  in  the  execution  of  an  act  is  also  entitled  to  con- 
trolit.  Blackstone  v.  Butter-more,  53  Pa.  266  ;  Hartley  &  Minor's  Ap.y 
SoPa.  212  ;  also  see  Walker  v.  Dennison,  86  Illinois,  142;  McGregor 
V.  Gardner^  14  Iowa,  340  ;  Hunt  v.  Rousmanier,  8  Wheaton,  201. 


i 


c^ 


414  VANDERBILT   V.   BENNETT. 

To  constitute  a  power  coupled  with  an  interest^^e  Interest  must  be 
In  the  suI4eciJnatter-.on_wliictLtlie  power  is  to  operate,  and  not  in  the 
mere  results  of  J_ts  execution.  Hartley  dt  Minor's  Ap.,  supra. 
"TheTe  is  no  consideration  whatever  between  the  trustees  and  the 
subscribers  ;  none  is  claimed  or  mentioned  in  the  agreement  itself,  and 
as  between  the  subscribers  themselves,  there  is  also  none.  The  mere 
fact  that  several  or  a  majority  have  signed  does  not  furnish  a  support- 
ing consideration.     IG  Ohio,  27  ;  41  Ohio,  527  ;  131  Mass.  528. 

No  one  subscriber  acquired  under  the  agreement  an}-  interest  in  any 
other  one  stock  or  an  undivided  interest  in  the  whole  of  the  stock 
represented  by  the  subscribers.  No  real  and  special  consideration  is 
claimed,  and  without  this  the  agreement  cannot  be  supported.  An 
agreement  of  shareholders  not  to  sell,  pledge  or  give  proxy  for  their 
shares,  except  by  concurrent  consent,  is  void  without  such  considera- 
tion.    Fisher  v.  Bush.,  35Hun(N.Y.),  641. 

The  entire  beneficial  interest  in  the  stock  is  severally  vested  in  the 
subscriber,  the  voting  power  in  the  trustees,  and  does  not  differ  mate- 
rially from  what  it  would  be  if  the  stockholders  retaining  their  shares 
had  simply  united  in  a  proxy  authorizing  the  trustees  to  cast  the  vote 
of  all  of  them.      Griffith  v.  Jewett.,  supra. 

The  master  is,  therefore,  of  opinion,  that  said  paper  called  a  deed  of 
trust,  if  valid,  is  in  effect  nothhig  more  than  a  power  of  attorney,  or 
proxy,  given  for  the  purpose  of  carrying  out  the  designs  of  the  parties 
therein  mentioned,  and  as  such,  revocable  at  the  pleasure  of  any  party 
o  it.  And  under  all  the  facts  of  the  case  the  complainant  is  entitled 
to  relief,  and  [the  master]  would  recommend  a  decree  therefor  as 
prayed  for  in  the  said  bill  of  complaint. 

To  this  report  the  defendants  excepted. 

George  Shiras^  Jr..,  Jarvis  M.  Adams,  and  Stevenson  Sutler,  for 
the  exceptions. 

John  Dalzell,  and  Knox  <Jb  Heed,  contra. 

Stowk,  p.  J.  The  questions  involved  in  this  controvers}'  are  of  the 
gravest  character,  and  should  have  had  a  more  deliberate  and  careful 
consideration,  both  by  the  master  and  the  court,  than  either  have  had 
time  to  bestow  upon  it.  The  former  has  had  four  or  five  days  to  prepare 
his  report,  and  the  latter  one  day  to  consider  the  exceptions.  It  is 
hoped  that  this  will  be  sufficient  apology  for  any  short-comings  in  the 
one  and  the  want  of  an  extended  opinion  by  the  other  sustaining 
the  views  entertained  by  the  court  in  tliis  matter.  We  think  that 
the  trust  agreement  in  question  is  absolutely  void  as  contrar}'  to  public 
policy,  and  because  it  substantially  amounts  to  a  repeal  of  our  Act  of 
Assembly  in  regard  to  the  right  to  vote  incident  to  the  ownership  of 
railroad  stock.     Rut  whether  this  be  so  or  not,  which,  as  the  case 

f stands,  is  not'jndicially  before  us  for  our  determination,  we  arc  of  the 
opinion  tliat  it  is  at  least  revocable  by  tlio  plaiiitiir,  and  has  been  duly 
r(!v<;ked  so  far  as  his  stock  is  concerned,  and,  therefore,  tiie  exceptions 
to  the  master's  report  are  now  overruled,  and  decree  in  accordance 
herewith  pro  ut. 


SHEPAUG   VOTING   TKUST   CASES. 


415 


But  we  are  also  of  opinion  that  under  the  circumstances  of  this  case 
the  plaintiff  should  pay  the  costs*  of  this  proceeding.  } 

Note.  An  appeal  to  the  Supreme  Court  from  the  decree  entered  iiy^  / 
accordance  with  this  opinion  was  wo/i  proased  at  October  Term,J|^888f  ^ . 
it  being  understood  that  the  parties  h^d  agreed  upon  a  settlemeiC"  ^y 


Robinson 


l^^A^Q^  V^OTG^Tfo^TOt  A^ 


\J 


It  seems  to  the  court  that  the  surrender  by  a  stockholder  of  his 
power  and  right  to  vote  on  his  stock  for  the  term  of  five  years  is  con- 
trary to  the  policy  of  the  law  of  this  state.  Were  this  a  power  of 
attorney  in  formal  terms,  no  claim  would  be  made  but  that  it  was  not 
only  contrary  to  the  policy  of  the  law  of  this  state,  but  in  direct  con- 
flict with  our  statute,  which  says  that  "  no  person  shall  vote  at  any 
meeting  of  the  stockholders  of  any  bank  or  railroad  couipan}-,  by  virtue 
of  an}'  power  of  attorney  not  executed  within  one  year  next  preceding  % 
such  meeting ;  and  do  such  power  shall  be  used  at  more  than  one 
annual  meeting  of  such  corporation."  Gen.  Statutes,  §  1927.  This'' 
statute  tends  to  disclose  what  the  pohcy  of  the  law  of  this  state  is, 
touching  the  matter  of  the  surrender  by  a  stockholder  of  his  voting 
power  to  some  one  else.  It  would  seem  that  it  is  opposed  to  such  sur- 
render for  an  indefinite  period  or  for  a  period  of  five  3ears.  Evidently 
it  was  thought  a  longer  surrender  of  the  voting  power  would  result 
disastrously  in  many  ways. 

It  cannot  be  denied  that  as  much  disaster  might  follow  to  the  busi- 
ness and  the  finances  of  a  corporation  and  the  interest  of  stockholders,, 
where  the  voting  power  is  yielded  up  in  a  five  years  voting  trust,  as  by 
a  five  years  power  of  attorney.  The  difference  between  an  irrevocable 
power  and  a  power  irrevocable  for  five  years,  is  a  difference  in  degree 
and  not  in  principle.  A  five  year  voting  power,  irrevocable  for  that 
time,  would  furnish  time  enough  and  opportunity  enough  to  realize  all  the 
evils  which  our  one  3ear  statute  is  manifestly  intended  to  guard  against. 

It  is  the  polic}'  of  our  law  tbat^n  untrammeled  jjower  to  vote_shjJI 
be  incident  to  thg_ownershi[j^^f  the  stock,  and  a  contract^liy  which  the 
real  owner's  power  is  hampered  by  a  provision  therein  that  he  shall 
vote  .fjjst'js  somebody  else  dictates,  is  objectionable,  ^think  it  against 
the  policy_ijfpur  law  for  a  stockholder  to  contract  that  his  stpc^  shall 
he  voted  juat  as  some  one  who  has  no  beneficial  interest  or  title  in  or^ 
to  the^stock  directs ;  saving  to  himself  simply-  the  title,  the  right  to 


1^ 


7^ 


/< 


416  SHEPAUG  VOTING  TRUST   CASES. 

dividends,^niL43erliaps  the  right  to  cast_the  vote  directed,  wiUicgjir 
tinwilliiTg,  BJigUier  itjje  for  his  interest^  for  the  interest  of  other  stook- 
hoklers,  or  for  the^interest  of  the  corporation,  or  nthermsfi.^  This 
I  conceive  to^bejigainst  the  polic}'  of  the  law,  whether  the  power  .SQ_to 
votejjg  for  five  years  or^or  all  titne.  IMs  the  policy  of  our JajL-that 
ownershij)^  pf_stoc_k_ shalL  JJonlrQl  the  property  and  the-jnanagement 
of  the  corporation._and  this  cannot  be  accomplished,  andj.l]is  good 
polic}'  isdefeated,  if  stockholders  are  permitted  to  surrender  all  their 
discretion^id_vdnjjnJ:he_important  matter  of  voting,  and  suffer  them- 
selves^ bejneni-^Dassive  instruments^  in  the  hands^£some  agent  who 
has  no  interest^  jn^  the  stock,  equita,ble  or  legaj^and  no  interest  in  the 
general  prosperity  of  the  corporation. 

And  this  is  not  entirely  for  the  protection  of  the  stockholder  himself, 
but  to  compel  a  compliance  with  the  duty  which  each  stockholder  owes 
his  fellow-stockholder,  to  so  use  such  power  and  means  as  the  law  and 
his  ownership  of  stock  give  him,  that  the  general  interest  of  stockhold- 
ers shall  be  protected,  and  the  general  welfare  of  the  corporation  sus- 
tained, and  its  business  conducted  by  its  agents,  managers  and  officers, 
BO  far  as  may  be,  upon  prudent  and  honest  business  principles,  and  witb 
just  as  little  temptation  to  and  opportunity  for  fraud,  and  the  seeking  of 
individual  gains  at  the  sacrifice  of  the  general  welfare,  as  is  possible. 
This  I  take  it  is  the  dutj'  that  one  stockholder  in  a  corporation  owes  to 
his  fellow-stockholder;  and  he  cannot  be  allowed  to  disburden  himself 
of  it  in  this  wa}-.  lie  ma}-  shirk  it  perhaps  by  refusing  to  attend  stock- 
holders' meetings,  or  by  declining  to  vote  when  called  upon,  but  the 
law  will  not  allow  him  to  strip  himself  of  the  power  to  perform  his 
duty.  To  this  extent,  at  least,  a  stockholder  stands  in  a  fiduciary 
j  relation  to  his  fellow-stockholders.  For  these  reasons  I  hold  that  this 
^trust  agreement  is  void  as  against  the  polic}'  of  the  law  of  this  state. 
And  why  is  not  the  voting  power  surrendered  in  this  trust  agree- 
ment the  equivalent  of  a  power  of  attorney,  and  why  has  not  the  right 
of  this  Trust  Company  and  this  committee  to  control  and  cast  the  vote 
upon  this  stock,  if  at  any  time  they  had  any  legal  right  to  exercise  it, 
ceased  to  exist?  It  is  now  more  than  one  year  since  the  voting  power 
was  executed,  and  that  power  has  been  used  alread}'  at  one  annual 
meeting.  Why  is  not  this  voting  power  in  this  trust  agreement,  and 
the  attempt  of  this  trustee  and  this  committee  to  exercise  it  now,  a 
disobedience  of  our  one  year  statute  above  quoted? 

It  is  claimed  that  it  is  not  a  power  of  attorney  because  the  Trust 
Company  holds  the  legal  title  to  the  stock.  It  is  said  that  the  right  to 
vote  on  the  stock  is  not  dissociated  from  the  legal  title  to  the  stock  in 
this  instance.  But  does  this  reply  quite  answer  the  objections  created 
by  the  facts  in  the  case,  and  is  it  quite  true  that  the  voting  power  here 
is  not  dissociated  from  the  legal  title?  An  examination  of  the  trust 
agreement  discloses  that  the  Trust  Company  is  a  mere  agent,  with  no 
beneficial  interest  in  the  stock.  It  holds  the  title,  but  the  real  owner 
Is  somebody  ebc.    Tlie  Trust  Company  is  simply  the  hand  to  cast  such 


SHEPAUG   VOTING   TRUST   CASES.  417 

ballot  as  this  committee  directs.  The  committee  is  also  hut  an  agent, 
but  without  the  legal  title  to  the  stock  or  any  title  to  it.  It  is  the 
head,  and  the  Trust  Company  is  the  hand ;  simply  that.  The  com- 
mittee direct,  control,  and  select  what  vote  shall  be  cast,  and  are  the 
agents  and  attorneys  to  perform  this  very  essential  part  of  the  act  of 
voting. 

The  trust  company  is  one  of  the  parties  to  the  trust  agreement,  and 
it  holds  the  legal  title  to  the  stock,  and  as  such  holder  of  the  legal  title 
it  has  in  this  trust  agreement  surrendered  all  a  voter's  power  except 
the  mere  manual  act  of  casting  the  selected  ballot.      It  has  in  this  trust 
agreement  in  effect  surrendered  to  this  committee  the  power  to  select 
the  ballot.     It  has  conceded  to  this  committee  the  power  to  demand 
that  it  shall  vote  as  thej'  direct.     What  remains  then  in  this  trustee  of 
the  voting  power,  be3'ond  being  the  mere  hand,  the  use  of  which  this 
committee  is  given  the  right. to  demand  for  this  purpose  at  any  stock- 
holders' meeting?     Is  not  the  full  voting  power  to  all  intents  and  pur- 
poses in  this  committee,  and  is  it  not  so  by  delegation?     It  seems  tOj 
me  that  the  voting  power  in  this  trust  agreement  falls  within  the  spiril[ 
and  intent  of  the  prohibition  of  our  statute  heretofore  referred  to,  and 
is  terminated  by  lapse  of  time  and  the  use  of  it  already  at  one  aunuaf 
meeting. 

It  is  insisted  that  there  is  nothing  illegal,  per  se,  in  the  pooling 
of  stock  to  carry  out  a  scheme  of  extension  authorized  by  law  and 
favored  by  the  corporation.  This  may  be  true  under  proper  limita- 
tions, and  when  this  is  all  there  is  to  the  scheme ;  but  when  underlying 
that  pooling  contract  there  is  between  the  members  of  the  syndicate, 
who  are  directors  or  a  majority  of  the  directors  of  the  corporation, 
a  secret  agreement  which  enters  into  this  pooling  contract,  and  forms 
the  object  of  its  creation,  and  by  which  they  are  to  take  to  themselves 
the  profits  arising  from  such  extension,  or  from  the  contracts  which 
the}-  as  directors  make,  elements  of  unfairness  and  opportunit}'  for 
fraudulent  and  dishonest  practices  are  introduced,  which  the  court  can- 
not too  severely  condemn.  Such  a  pooling  contract  or  voting  trust 
is  in  violation  of  the  most  elementary  principles  of  law  governing  the 
dealings  of  trustees  with  trust  property  and  their  cestuis  que  trust. 


418 


MOBILE    AND    OHIO   K.    K.    CO.    V.   NI 


% 


/ 


^ 


^ 


/: 


,^ 


Sfainst  the 


&: 


GJ^MOBILE  AND   OHIO   R.  R. 

-J^M^/-  1893.     98  Alabami 

^PAppeal  from  Mobile  Chancery  Court.         \^  'fir    \ 
J ,  Bill  in  equit}'  by  stockholder  in  Mobile  &  Ohio  R.  R}  Cc 
*-^f^ail^oacl  compan^j^he  Farmers'  Loan  &  Trust  Co.,  et  al. 
I'        /  ^/^"^     ^!\     r^  Ii^  1876,  t^failroad  company  was  in  the  hands  of  a  receiver ;  decrees 
\jjo      2>^  jjy  jpf'ioreclo^re  had  been  rendered  in  suits  on  mortgages  ;  and  its  total 
/tV"     i/f^    ^^j'^nd&l^edness  largely  exceeded  the  value  of  the  entire  railroad  propert}'. 
.J         o        ^^n  arrangement  was  made  between  the  creditors  and  the   company 
^      I  C^'^    whereb}'  the  creditors  accepted  debentures  in  lieu  of  their  original  evi- 

jlf/f    '     J       of^lences  of  debt ;  and  the  great  majority  of  the  stockholders,  in  effect, 
(•'       ,S^^  J/    '  ^^onferred  upon  a  trustee  irrevocable  power  to  vote  upon  the  shares  .so 
aV**     ' aS"^   ^      ^P^o  ^s  ^"3"  of  the  debentures  should  be  outstanding.     The  sharehold- 
\  ^  ^/^j^    l^  t^      ^"S  assigned  their  stock  to  the  committee  of  reorganization  ;  the  com- 
*V. //*"^ittee  gave  the  Farmers'  Loan  &  Trust  Company  an  irrevocable  power 
*       pf  attorney  to  vote  npon  the  stock  so  long  as  any  of  the  debentures  should 
'^yy^ya^  outstanding.     The  shareholders  who  had  thus  assigned  their  stock  to 
committee  received  in  exchange  new  certificates  entitling  them  to 
all  the  rights  and  privileges  which  pertain  to  the  ownership  of  the  said 
shares,  saving  and  excepting  that  such  ownership  is  subject  to  the  power 
heretofore  granted  b}'  the  owners  of  said  shares  to  the  Farmers'  Loan  & 
Trust  Company,  in  trust  for  the  security  of  the  debentures,  to  vote  upon 
u\.     s^id  shares. 
yy^    Under  the  foregoing  adjustment,  all  the  creditors,  except  those  secured 


bA^ewly  issued  first  mortgage  bonds,  accepted  the  debentures  provided 

ibr,  in  lieu  of  their  former  evidence  of  debt;  "'      " ' "^ 

were  assigned  to  the  Farmers'  Trust  Company 


^ -^>^ /^or, 'in  lieu  of  their  former  evidence  of  debt;  the  foreclosure  decrees 
f^f^      were  assigned  to  the  Farmers'  Trust  Compan}- ;  the  receiver,  under  the 


^.<^^^ 


I''     ^/^    ,\J,     .  f;?^  orders  of  the  court,  turned  the  property  over  to  the  railroad  compan}' ; 
^t'^^'^^ \M     ^%^  t      ^"^^  ^^^  corporation  resumed  its  control  and  management  of  its  property 

and  business. 

In  1892,  the  plaintiffs  denied  the  authorit}' 

under  the  power  of  attorney  held  b}-  it  to  vote 

for  themselves  the  right  to  vote  their  own  stock 


^A^  ,  \Z        t^  -dtfihd  business 
^)       j^       ^        dismiss  the 


the  plaintiffs  denied  the  authorit}'  of  the  Trust  Company-, 
under  the  power  of  attorney  held  b}-'  it  to  vote  their  stock,  and  claimed 

The  right  of  plaintiffs 

^^  jA     /!> to  vote  at  the  stockholders' meeting  was  denied.     Thereupon  plaintiffs 

t^/.  ^  filed  the  present  bill ;  praying,  among  other  things,  that  the  Farmers' 

Loan  &  Trust  Compan}'  be  enjoined  from  voting  on  the  stock  under 

the  power  of  attorney  ;    and    that  the  railroad   company  be  enjoined 

from  refusing  to  accept  the  votes  of  plaintiffs  and  of  otlier  stockholders. 

A  preliminar}'  injunction  was  granted.     The  defendants  moved  to 

the  bill  for  want  of  equity,  and  to  dissolve  the  injunction.    The 

overruled  the  motions.     From  his  decrees  an  appeal  was 


Statement  abridged.     Arguments  omitted. 
•8  relates  to  a  tjingle  point.  —  Ed. 


Only  RO  much  of  the  o])inion  is  given 


MOBILE    AND    OHIO   R.   R.    CO.    V.    NICHOLAS.  419 

J?.  J.  Phelps^  and  J^red.  W.  Whitridge,  for  railroad  company, 
appellants. 

E.  L.  Russell^  and  R.  P.  Beshon^  for  appellants. 

Ilannis  Taylor,  for  Farmers'  Loan  &  Trust  Co.,  appellants. 

a.  C.  Tomjjkins,  Gaylord  B.  Clark,  William  J.  Curtis,  and  Alfred 
Jaretzki,  for  appellees. 

Coleman,  J.  [After  stating  the  case.]  The  facts  stated  in  the  bill 
show,  that  hy  the  reorganization  and  compromise  of  1876,  perfected 
in  1879,  the  voting  power  was  severed  from  the  stockholder,  and  until 
the  payment  of  the  debentures,  irrevocablv  vested  in  the  Farmers'  Trust 
Company  and  the  debenture  holders.  It  is  contended  for  comi)lainants 
that  the  agreement  was,  and  "  is  void  per  se"  because  1st :  ''  It  con- 
travenes the  language  of  the  charter  of  the  railroad  company  ;  and  2d, 
because  it  is  against  public  polic}'." 

The  charter  expressly  provides,  "  Each  share  shall  entitle  the  holder  i 
thereof  to  one  vote,  which  vote  may  be  given  by  said  stockholder  in  I 
person,  or  by  lawful  proxy." 

So  far,  then,  as  the  right  to  vote  by  proxy  is  questioned,  the  charter 
expressly  grants  the  power,  and  the  legislature  has  thus  declared  that 
it  is  not  unlawful,  jyer  se,  to  separate  the  voting  power  from  the  stock- 
holder, so  far  as  the  appointment  of  a  proxy  may  be  considered  a  sev- 
erance of  the  voting  power.  Where^proxy  is  duly  constituted,  and  the. 
power  of  the  appointment  is  without  limitation,  a  vote  cast  by  tlie  proxy 
ETncls  the  sIocliEoTder7  whether  exercised  in  behajjjofhisjnterest  or_nqt,l 
to  the  ^me  extent^^^ifjhe  vote  had  been  cast  by  the  stockholder  in) 
person.  We  do  not  hold  that  a  poweF^f  attorney,  absolute  in  its  terms, 
will  authorize  the  agent  or  proxy,  to  effect  contracts,  or  legalize  acts, 
outside  of  the  scope  of  his  authority,  or  contrary  to  law  or  public  policy, 
neither  could  the  stockholder  in  person  by  his  vote  effectuate  such  a 
result.  The  invalidity  of  acts  of  this  character  by  a  proxy,  rightly  un- 
derstood, is  not  made  to  rest  upon  the  ground,  that  there  has  been  a 
separation  of  the  voting  power  from  the  stockholders,  but  because  of 
the  unlawful  purpose  for  which  the  proxy  was  appointed,  or  the  unlaw- 
ful end,  attempted  to  be  effected  by  the  exercise  of  the  voting  power. 
The  distinction  should  be  kept  in  view.  Take  the  case  of  the  Rich- 
mond &  Danville  Extension  Comjxiny  v.  The  Woodstock  Iron  Co.^ 
129  U.  S.  643,  cited  by  complainant.  The  Woodstock  Iron  Co.  agreed 
to  pay  thirty  thousand  dollars,  if  the  Georgia  Pacific  Railroad  was  run 
through  the  town  of  Anniston,  where  the  Woodstock  Iron  Co.  owned  a 
large  plant,  mines,  and  other  propert}-.  The  contract  was  held  void 
as  being  against  public  policy.  No  question  of  the  separation  of  the 
voting  power  from  the  shareholder,  arose  in  the  case.  It  was  the 
character  of  the  contract,  the  unlawful  purpose  in  view,  to  build  up 
the  Woodstock  Iron  Co.  at  the  expense  of  the  stockholders  of  the  rail- 
road company  that  was  condemned.  The  same  principle  applies  to 
many  other^  cases  cited  in  which,  it  was  held,  "  that  contracts  naadejo 
iDfluencejaikoa^^omp^a^es~nr8eIecting  their  routes  and  erecting  their 


420  MOBILE   AND   OHIO   JR.   K.    CO.   V.   NICHOLAS. 

liepots  and  stations  bj'  donations  in  land_and  money  to  some  of  ita 
directors  and  stockliolders  were  invalid/'  citing  £estor  v.  Wathe?i,  60 
111.  131;  Linden  X.  Carj)enter,  62'l]l.  307. 

Take  the  case  of  Ba/er  v.  iV".  T. ,  Lake  Erie  &  Western  B.  R.  Co., 
14  "Weekl}'  Law  Bulletin,  p.  68.  The  case  is  thus  stated  :  "  A  control- 
ling interest  in  the  stock  of  the  Cincinnati,  Hamilton,  and  Dayton  Rail- 
road Company  was  bought  up  in  1882,  and  placed  in  the  name  of 
H.  I.  Jewett,  who  was  Vice-President  of  the  New  York,  Lake  Erie,  ana 
"\Vestern  Railway  Co.,  under  the  agreement  thac  he  should  give  irrevo" 
cable  proxy  to  such  persons  as  the  Erie  should  appoint  to  vote  on  the 
stock  ;  that  his  stock  certificates  should  be  left  in  the  hands  of  trustees, 
and  that  they  should  issue  to  the  respective  owners  of  the  stock  trust, 
or  pool  certificates  for  amounts  equal  to  their  respective  equitable  in- 
terest. On  all  stock  thus  pooled,  the  Erie  agreed  to  guarantee  a  certain 
dividend." 

The  court  declared  the  contract  void  "  both  on  the  ground  that  the 
power  is  denied  to  one  corporation  thus  to  acquire  control  of  another, 
and  that  the  stockholder  can  not  barter  away  the  right  to  vote  upon  hia 
stock."  True  the  opinion  declares  as  an  independent  proposition,  "that 
the  stockholder  can  not  barter  away  the  right  to  vote  upon  his  stock," 
and  yet  it  is  shown,  by  the  facts  of  the  case  and  the  opinion,  that  the 
purpose  to  be  effected  b}-  the  barter  of  the  right  to  vote,  to  wit,  the  plac- 
ing "  of  an  Ohio  corporation  into  the  hands  of  a  New  York  corporation," 
the  enabling  "one  corporation  to  acquire  control  over  another"  was 
illegal.  Speaking  of  the  facts  of  the  case  the  opinion  proceeds  as  fol- 
lows :  "  It  is  obvious  that  the  rule  as  to  executed  contracts  can  not  be 
applied  to  the  plaintiff  for  any  such  reason  as  that  last  mentioned,  for 
he  vms  not  a  party  to  the  contract.  There  are  other  cases  wherein 
special  circumstances  made  it  imperative,  as  a  matter  of  good  faith, 
that  the  contract  should  not  be  interfered  with,  and  others,  when  the 
protection  of  interest  acquired  b}-  innocent  parties  caused  the  court  to 
refrain."  There  is  no  rule  of  law  which  requires  contracts  to  be  upheld 
which  are  void  as  against  public  polic}',  in  order  to  preserve  "good 
faitli"  or  "  innocent  parties."  The  rule  of  estoppel  is  often  applied  to 
prevent  undue  advantage  b}-  one  person  over  another,  but  the  rule  does 
not  extend  to  contracts  which  are  void  because  contravening  public  pol- 
icy. Considering  the  opinion  as  an  entirety,  we  do  not  regard  it  as 
authority  to  the  proposition,  that  an  agreement  which  provides  for  a 
separation  of  the  right  to  vote  from  the  holder  of  the  stock  is  '•'■per  se" 
at  all  times  and  under  all  circumstances  contrary  to  public  polic}'  and 
void.  We  have  examined  case  after  case  and  find  generally  that  the 
agreements  declared  void  by  the  courts,  where  the  power  to  vote  was 
separated  from  the  stockholder  and  vested  in  third  persons,  were  under 
icircumstances  which  showed  that  the  purpose  to  be  accom[)lished  was 
/unlawful,  such  as  the  courts  would  not  sanction  if  the  principal  had 
I  voted  and  not  a  proxy  ;  and  in  cases  of  a  mere  dry  trust,  it  is  held  that 
itlie  stocklioldcr  might  revoke  a  power  of  attorney  in  form  irrevocable. 
Tlic  doctrine  as  to  dry  trust  does  not  arise  in  this  case. 


MOBILE   AND    OHIO   R.    R.    CO.    V.    NICHOLAS. 


421 


Certainly  the  case  of  Griffith  v.  Jeioett,  15  Weekly  Law  Bulletin, 
419,  or  of  3foses  v.  tScott,  84  Ala.  G08,  do  not  sustain  complainants' 
contention  in  tliis  respect.  If  there  were  no  precedents,  upon  princi- 
ple, we  would  hold  that  in  determining  the  validity  of  an  agreement, 
which  provides  for  the  vesting  of  the  voting  power  in  a  person  other 
than  the  stockholder,  regard  should  be  had  to  the  condition  of  the  par 


ties,  thejurpose  to  be  accomplished,  the  considei-ation  of  the  undertak- 
ingi  interests  whidi_Jiaye_been_surrenclered,  righ_ts_ac2uu;ed,  and  the  ' 
consequences  to_result.  The  law  does  not  make  contracts  for  parties, 
neither  will  it  annul  them  except  to  preserve  its  own  majesty,  and  to 
conserve  the  greater  interest  of  the  public.  Let  us  examine  the  condi- 
tions of  the  parties,  the  purpose  in  view  and  effect  of  the  agreement  of 
1876,  consummated  in  1879,  the  consideration  and  interest  surrendered 
and  rights  acquired  by  the  readjustment,  and  issue  of  the  debentures, 
the  position  of  the  complainants  thereto,  and  the  results  of  holding  that 
reorganization,  ^:)er  se,  void. 

The  complainants  belong  to  the  class  known  as  "Assenting  Stock- 
holders." They  surrendered  their  stock  to  the  committee  of  reor- 
ganization in  order  that  the  power  of  attorney,  executed  to  the  trust 
company  by  the  committee  of  reorganization,  might  be  executed,  and 
that  the  debentures  should  be  issued  to  the  creditors  of  the  railroad  cor- 
poration. The  certificates  of  stock  held  by  them  show,  upon  their  face, 
that  they  are  subject  to  the  power  of  attorney  and  to  the  rights  of  the 
debenture-holders.  At  the  time  the  plan  of  adjustment  was  agreed 
upon  the  railroad  company  was  in  the  hands  of  a  receiver.  Decrees  of 
foreclosure  rendered  against  the  company-.  The  indebtedness  far  ex- 
ceeded the  value  of  the  railroad  company's  propei'ty.  The  execution 
of  the  decrees  of  foreclosure,  b^-  a  sale  of  the  property,  and  the  pros- 
ecutions of  the  admitted  claims  against  the  railroad  compan}^,  would 
necessarily  have  transferred  the  property  to  other  parties  and  wiped  out 
ever}-  vestige  of  present  available  interest  or  right  of  the  stockholder, 
or  hope  of  future  profit.  The  creditors  held  the  vantage  ground,  and 
in  law  their  rights  and  interest  were  paramount  to  the  stockholders. 
The  latter  might  accept  propositions  but  were  in  no  position  to  dictate 
terms.  These  were  the  circumstances  under  which  the  settlement  and 
agreement  was  made.  Stated  in  short,  the  compromise  and  settlement'' 
led  to  the  issue  of  the  debentures  to  the  creditors  in  lieu  of  their  original 
evidences  of  debt,  and  a  mortgage  upon  certain  property  to  secure  them, 
a  plan  for  a  sinking  fund  for  their  benefit,  and  the  right  and  privilege 
under  an  irrevocable  power  of  attorne_v  to  vote  the  stock  ioitt'l  the  de- 
bentures were  paid.  The  power  of  attorney  was  not  in  perpetuity,  or 
absolute,  but  only  until  the  debentures  were  paid,  and  a  fair  construe-' 
tion  under  the  circumstances  required  that  the  voting  power  should  be 
used  fairl}'  and  honestly  to  this  end,  or  as  stated  in  the  agreement 
itself,  "for the  uses  and  purposes  declared  in  said  memorandum,  and 
until  the  same  are  fully  accomplished."  In  consideration  therefor  the 
decrees  of  foreclosure,  at  first  suspended,  were  transferred  to  the  trust 


(^ 


p 


/fifty. 


422  MOBILE   AND   OHIO   E.   R.   CO.   V.   NICHOLAS. 

compan}',  creditors  surrendered  their  claims  and  accepted  in  lieu  thereof 
the  debentures,  the  receiver  under  the  orders  of  the  court  restored  the 
property  to  the  Mobile  &  Ohio  Railroad  Co.,  which  resumed  manage- 
ment and  control  of  its  property  and  affairs,  and  the  stock  preserved  to 
the  stockholder. 

To  this  agreement  over  forty-five*  thousand  out  of  a  total  of  about 
,'-three  thousand  of  shares  of  stock  assented,  and  among  those  which 
assented  were  complainants.  The^reditors  had  the  right  to  accept_de- 
bgntures  for  their  debts.  The  agreement  continued  in  existence  the 
corporation  and  preserved  to  the  stockholders  their  stock.  It  did  not 
violate  the  charter  of  the  railroad  corporation.  The  purpose  was  legal, 
the  means  used  did  not  contravene  anj*  statute  of  the  State  or  principle 
of  public  policy,  and  was  within  the  scope  of  the  power  of  the  contract- 
■ying  parties.  Good  faith  on  the  part  of  the  assenting  stockholders, 
I  whose  interests  were  thus  preserved,  and  to  those  who  accepted  the  de- 
bentures in  lieu  of  other  evidences  of  debt  and  securities,  and  to  those 
I  who  have  since  purchased  them  upon  the  faith  of  the  plan  of  com- 
promise demand  that  the  terms  of  the  contract  be  fulfilled.  Tested  by 
I  any  principle  of  law,  legal  or  equitable,  the  agreement  was  not  only 
valid  but  fair  at  least  to  the  corporation  company  and  stockholders. 

[It  was  contended  that  the  acceptance  b}'  the  creditors,  under  an 
arrangement  made  in  1887-1888,  of  general  mortgage  bonds,  extin- 
guished the  debentures  issued  under  the  previous  settlement ;  and  that 
thereby  the  stockholders  became  reinvested  with  the  voting  power  which 
they  had  relinquished  for  the  benefit  of  the  debenture  holders.  The 
Court  held,  that  the  acceptance  of  the  general  mortgage  bonds,  under 
the  conditions  and  terms  then  specified,  did  not  eflfect  an  extinguish- 
ment of  the  debentures. 

It  was  also  contended,  that  the  agreement  by  which  the  stockholder 
parted  with  his  voting  power  created  the  relation  of  surety  and  creditor 
between  the  stockholder  and  the  debenture  holder;  and  "  that  the  vot- 
ing trust  has  been  terminated  b}-  the  extension  and  enlargement  of  the 
debt,  and  by  the  substantial  modification  of  the  terms  upon  which  the 
voting  franchise  was  to  be  exercised."  The  Court  held,  that  the  rela- 
tion of  surety  and  creditor  did  not  exist.] 

A  decree  will  be  here  rendered  dissolving  the  injunction  granted  upon 
the  original  bill,  and  dismissing  the  original  bill  for  want  of  equity. 

1  In  Durkee  v.  People,  ex  rel.  AsJcren,  a.  d.  1895,  155  Illinois,  355,  a  by-law  of  a  railroad 
cor7)oration  purported  to  confer  on  bondholders  the  right  to  cast  one  vote  on  every  one 
hundred  dollars  of  bonds  ;  and  the  stock  certificates  contained  an  express  statement  that 
the  stock  was  subject  to  the  bondholders'  right  to  vote  at  all  meetings  of  stockholders. 
Section  25  of  the  general  railroad  incorporation  statute  is  as  follows: 
"  In  all  elections  for  directors  and  managers  of  such  railway  corporations,  every  stock- 
holder shall  have  the  right  to  vote,  in  person  or  by  proxy,  for  the  number  of  shares  of 
Block  owned  by  him,  for  as  many  persons  as  there  are  directors  or  managers  to  be  elected, 
or  to  cumulate  said  shares,  and  give  one  candidate  as  many  votes  as  the  number  of  di- 
rectors, multiplied  by  the  number  of  his  shares  of  stock,  shall  equal,  or  to  distribute  them, 
on  the  same  principle,  among  as  many  candidates  as  he  shall  think  fit;  and  such  directora 
or  maaagefB  shall  not  be  elected  in  any  other  manner." 


LINVILLE   IMPROVEMENT   CO. 


LINVILLE  IMPEOVEMENT  COj     . 

1896.    118  North  Carolina,  693.1  I/-^\  ^.'v 

^     - 
Action  for  an  injunctiou  and  other  relief,  heard  before 

lake,  J.  '  ^         si^     '-^'y   'J  yt  , 

Plaintiff  has  an  option  for  the  purchase  of  a  sufficient  number  of  i^     '^  J'    ^  AY* 
shares  of  the  capital  stock  of  the  company  to  give  him  a  majority      -j     y\\/C      j.^-   r 
thereof ;  and  intends  to  purchase  the  same  provided  he  can  get  controlff^  l/\     ^         \  1^ 
of  the  company.     He  asks  {inter  alia)  for  an  injunction  restraining|K        ^  >»      ~V  % 
Divine,  Lenoir  and  MacRae  (who  are  joined  as  defendants)  from  voting       >      /^     3'  ^  '<f 
certain  shares  of  stock,  alleged  to  have  now  been  purchased,  by  plain-o'^'y      J"  '2" 
tiff,  from  Hahn,  Worth  and  Kelsey.  V 

It  appeared  that  before  plaintiff  purchased  said  stock,  a  pooling    -^ 
agreement  had  been  entered  into  by  a  majority  of  the  stockholders,pv. 
including  Hahn,  Worth  and  Kelsey.     The  plaintiff  sought  to  have  thisi^*"^  J  » 
pooling  agreement  declared  invalid.  }■    \^   \^ 

The  pooling  agreement  was  as  follows  :  | V^  ^ 

"  Whereas,  the  Linville  Improvement  Company  is  indebted  to  vari- 
ous persons  in  large  sums  of  money,  and  is  now  in  the  hands  of  a  (J^^  ,fJ^  .-  ^ 
receiver,  appointed  by  a  decree  of  the  superior  court  of  the  County  of  ^^    r?^ 
Mitchell  in  the  State  of  North  Carolina  ;  and  whereas  the  undersigned,    t^'  a  •^. 
who  are  stockholders,  and  some  of  whom  are  also  creditors  of  the  said     '      '   ■^ 
Company,  are  desirous  to  extricate  the  Company  from  its  present 
financial  embarrassment,  pay  off  its  debts,  and  enable  it  to  resume  its 
operations,  now  therefore  we,  the  undersigned,  stockholders  of  the 
Linville  Improvement  Company,  have  agreed,  and  do  hereby  agree 
with  each  other  as  follows  : 

"  That,  for  the  purpose  herein  set  forth,  we  will  pool  of  the  stock 
of  the  said  Company  owned  by  us  respectively,  and  will  transfer  the 
same  to  John  S.  Divine,  T.  B.  Lenoir  and  Hugh  MacRae,  to  be  held 
by  them  and  their  successors  upon  the  trusts  and  for  the  purposes 
herein  declared.  The  said  trustees  shall  give  proper  receipts  for  the 
stock  so  transferred  to  them.  The  said  trustees  shall  have  power 
to  vote  the  said  stock  so  transferred  to  them  in  all  meetings  of  the 
stockholders  of  said  Company,  to  borrow  money  to  pay  off  and  dis- 
charge the  present  indebtedness  of  the  Company  and  to  pledge  the 
stock  so  held  by  them,  or  any  part  of  it,  as  collateral  security  for  the 
money  so  borrowed. 

"  If  any  vacancy  among  the  said  trustees  shall  occur  at  any  time, 

Said  section  25  was  enacted  in  pursuance  of  section  3,  article  11,  of  the  constitution, 
which  contains  the  same  provision  and  prohibition  concerning  the  election  of  directors  by 
stockholders  as  section  25  of  the  statute. 

It  was  htld,  that  the  attempt  to  confer  voting  power  upon  bondholders  (putting  them  on 
an  equality  in  that  respect  with  stockholders)  was  in  conflict  with  the  constitution  and 
Btatute;  and  that  hence  votes  cast  by  bondholders  could  not  be  counted.  —  Ed. 

1  Statement  abridged.  —  Ed. 


424  HAKVEY  V.   LINVILLE   IMPKOVEMENT   CO. 

the  same  shall  be  filled  by  the  votes  of  the  holders  of  the  majority 
of  the  stock  represented  in  the  agreement.  And  the  holders  of  the 
majority  of  such  stock  shall  have  the  right,  whenever  they  see  proper 
to  do  so,  to  instruct  the  said  trustees  how  to  vote  upon  matters  aris- 
ing, or  to  arise,  in  any  meeting  of  the  stockholders  of  said  Company. 
Any  one  or  two  of  the  said  trustees  may  vote  the  entire  stock  so 
transferred  to  them  in  any  meeting  of  the  stockholders  of  said  Com- 
pany, being  so  duly  authorized  in  writing  by  the  other  or  others. 

"  Any  one  or  more  of  the  said  trustees,  or  of  their  successors  herein, 
may  at  any  time  be  removed,  and  their  places  filled  by  a  vote  of  the 
majority  of  the  stock  herein  represented.  All  stockholders  shall  at 
once  pay  up  all  unpaid  subscriptions  owing  to  the  Company  on  the 
stock  held  by  them.     A  meeting  of  the  stockholders  executing  this 

agreement  may  be  called  by  the  trustees  at  any  time  upon days' 

notice,  and  shall  be  called  by  them  upon  like  notice  at  any  time,  upon 
request  of  any  three  or  more  of  the  stockholders  executing  this  agree- 
ment ;  and  in  all  such  meetings,  a  majority  of  the  said  stock  being 
present  in  person  or  by  proxy,  shall  be  a  quorum ;  and  any  action 
taken  by  them  shall  be  binding  on  all. 

"  This  agreement  shall  be  void  if  not  executed  by  holders  of  the 
majority  of  all  the  stock  of  said  Company,  but  when  so  executed  it 
shall  be  enforced  and  binding  upon  all  who  sign  it  for  the  period 
of  five  years  from  the  date  hereof,  unless  it  be  sooner  determined 
and  put  an  end  to  by  a  vote  of  the  holders  of  two-thirds  of  the  stock 
represented  herein.  Upon  the  determination  of  this  agreement  the 
trustees  shall  transfer  to  each  of  us  the  stock  owned  by  us  respec- 
tively.    Dated  the  23d  day  of  April,  1894." 

Timherlalce,  J.,  refused  to  grant  an  injunction.     Plaintiff  appealed. 

Davidson  &  Jones,  for  appellant. 

Junius  Davis,  for  appellee. 

Clark,  J.  At  common  law  stockholders  could  not  vote  by  prpxy. 
Taylor  v.  Griswold,  14  N.  J.  Law,  222,  and  other  cases  cited  in  Cook 
on  Stocks,  Sec.  610.  This  is  now  otherwise,  but  it  is  still  held  that 
each  -stockholder,  whether  by  himself  or  by  proxy,  must  be  free  to  cast 
his  vote  for  what  he  deems  for  the  best  interest  of  the  corporation,  the 
other  stockholders  being  entitled  to  the  benefit  of  such  free  exercise 
of  his  judgment  by  each  ;  and  hence  any  combination  or  device  by 
which  any  number  of  stockholders  shall  combine  to  place  the  voting 
of  their  shares  in  the  irrevocable  power  of  another  is  held  contrary  to 
public  policy.  Cone  v.  Russell,  48  N.  J.  Eq.,  209.  Various  devices 
have  been  resorted  to  for  the  purpose  of  so  tying  up  the  stock  that  no 
one  of  the  parties  to  the  "pool"  or  combination  can  break  the  agree- 
ment. "  Irrevocable"  proxies  to  vote  the  stock  have  been  given  to  a 
designated  party  who  acted  as  trustee  or  agent,  but  the  courts  held 
Buch  proxies  not  irrevocable  and  that  they  might  be  revoked  at  any 
time.     Cook,  supra,  Sees.  GIO,  622 ;    Woodniff  v.  Dubuque,  30  Fed. 


HARVEY  V.  LINVILLE   IMPROVEMENT   CO.  425 

Rep.,  91 ;  Vanderhilt  v.  Bennett,  2  Railway  &  Corp.  L.  J.,  409.  An- 
other plan  was  to  place  the  stock  of  the  various  parties  in  the  hands 
of  trustees,  with  power  to  transfer  the  stock  to  themselves  and  to 
hold  and  vote  the  same,  trustees'  certificates  being  issued  to  the  vari- 
ous parties,  specifying  the  amount  of  stock  so  deposited  by  them  and 
their  interest  in  the  pool,  but  the  courts  held  that  any  holder  of  a 
trustee's  certificate  might  at  any  time  demand  back  his  part  of  the 
stock.  Woodruff  v.  Dubuque,  supra,  and  other  cases  cited  in  Cook, 
supra,  Sec.  622.  Another  device  was  that  the  parties  contracted  to- 
gether not  to  sell  their  stock  for  a  specified  time  or  only  to  a  pur- 
chaser acceptable  to  them  all.  It  was  held  that  notwithstanding  such 
contract  any  one  of  the  parties  might  sell  his  stock  to  any  one  he 
pleased  and  at  any  time.  Fisher  v.  Bush,  35  Hun,-  642  ;  Williams  v. 
Montgomery,  68  Hun,  416.  Another  plan  was  to  restrict  by  a  by-law 
the  right  to  transfer  stock,  but  this  was  held  illegal.  Morgan  v. 
Stricthers,  131  U.  S.,  246,  and  other  cases  cited  in  Cook,  supra,  Sec. 
332.  A  provision  that  a  purchaser  of  a  certificate  of  stock  who  sold  in 
violation  of  the  agreement  should  be  entitled  to  the  dividends,  but 
should  receive  no  right  to  vote,  was  likewise  held  invalid.  Harper  v. 
Raymond,  3  Bosw.,  (X.  Y.,)  29.  Numerous  decisions  afiirm  the  cor- 
rectness of  the  above  rulings,  which  are  based  upon  the  illegality,! 
because  against  public  policy,  of  permitting  large  blocks  of  stock  to 
be  irrevocably  tied  up  for  the  purpose  of  being  voted  in  solido  for  the\  rV 
interest  of  a  clique  or  section  of  the  stockholders,  and  not  according 
to  the  judgment  of  each  individual  stockholder  for  the  benefit  of  the 
entire  corporation.  There  are  some  few  decisions  trenching  more  or 
less  upon  the  principles  above  stated,  but  we  deem  them  contrary  to 
sound  principle  of  public  policy,  and  hence  not  authority.  In_sliort,  ^ 
all  agreements  and  devices  by  jwhich  stockholders^„siiii:ender_their 
voting  powers  are  invalid^  5  Thompson  Corporations,  Sec.  6604. 
Ttie_powerjto  vote  is  inherently  annexed  to  aiid^inseparable  from  the  /V 
real  ownership  of  each_share,  and  can  only  be  delegated  by  proxy  r-^ 
with  power  of  evocation.  The  ^^ooling  "  arrangement,  admitted  to 
have  been  entered  into  by  the  majority  of  stockhoWers  in  the  present 
case^  is  contrary^to^ public  policy  anH  voidable  {Woodruff  \.  Dubuque, 
supra),  and  the  plaintiff  assignee  of  certain  of  the  trustees'  certificates 
is  entitled  to  have  his  name  entered  as  the  owner  and  holder  of  the 
shares  of  stock  represented  by  said  trustees'  certificates,  and  to  have 
said  shares  issued  to  him,  should  the  facts  be  found  in  accordance 
with  his  allegation,  and  to  have  the  defendant  restrained,  till  the 
hearing,  from  voting  or  controlling  in  any  way  the  stock  purchased  by 
the  plaintiff  or  in  anywise  interfering  with  the  plaintiff's  right  to  vote, 
control  or  dispose  of  said  stock. 

Error. 
Avert,  J.,  did  not  sit  on  the  hearing  of  this  case. 


h; 
^ 


CO. 

// 

Qyf^   i      jO)/        McTioi^f,  under  s.  315,  Civil  Code,  for  the  purpose  of  having  it  de 

t/^       I        pic^ared  that  Sidney  V.  Smith  was  elected  a  director  at  the  annual  meet- 

^/r^     ( )r    ing  of  the  stockholders  of  the  defendant  company,  instead  of  P.  N. 

*(.   ^       Lilienthal,  who  was  declared  elected.     If  certain  votes  which  were 

I  (L*     i^y    j-^ected  had  been  received,  Smith  would  have  been  chosen.     One  of 

j/    j  Jnthe  votes  rejected  was  that  of  Smith  himself  upon  stock  standing  in 

f^  /y*      f  ^        J*^^'  ii3'Da6.^    To  justify  the  exclusion  of  Smith's  vote,  the  defendants, 

(I*       ijj      -^         trill  their  answers,  alleged  the  following  facts  :  In  February,  1893,  the 

.4,/.'        "j^  5   I    (1  j^tate  of  James  M.  Donahue,  deceased,  was  the  owner  of  forty -two 

^    jy/^  C  "       ^  J^thousand  shares  or  thereabouts  of  the  capital  stock  of  the  defendant 

XjP^    A       .jL      J  iwailway  company,  which  the  superior  court  of  Marin  county  had  or- 

j/^^^  ItV      ^Oi/      dered  to  be  sold  in  the  course  of  the  administration  of  his  estate. 

1^^  ^      (j  ^       ^y   Prior  to  the  sale  an  agreement  was  entered  into  between  Smith,  Fos- 

/jv^    /I  I    r     J^ ^  ter,  and  Markham  for  the  purchase  of  this  stock  as  an  entirety,  upon 

(M  ny     1/^     the  representations  of  Smith  that  upon  acquiring  the  shares  an  agree- 

•  V     ^  ,         ment  would  be  made  by  them  whereby,  in  order  to  secure  the  control 

^(T^  jM'  ^    Y^   ^    of  the  management  and  business  policy  of  the  railway  company,  and 

-'    [y^  -^    \/     •  >^or  its  prudent  and  economical  management  in  the  interest  of  all  of  its 

5^  V*^  ^J      x^  stockholders,  the  said  forty-two  thousand  shares  should,  for  the  term 

f^        p/'    (^^         o^ve  years  thereafter,  be  voted  as  a  unit  in  the  election  of  directors 

[tJ.y  ^ji  ♦     ly}^ri\P^^  ^^^^  railway  company.     In  pursuance  of  this  agreement  Smith  and 

^  -^/^  ^0       I  ^  Foster,  on  the  24th  of  February,  made  their  joint  bid  for  the  shares, 

offering  to  purchase  them  as  an  entirety  for  the  sum  of  eight  hundred 

thousand  dollars  and  upward,  and  by  order  of  court  their  bid  was 

^^^cepted,  and  on  March  23d  the  sale  was  completed  and  the  price 

paid.     After  the  making  of  the  bid,  and  before  the  consummation  of 

y   '       ly  the  purchase  and  completion  of  the  sale,  Smith  prepared  the  agi-eement 

*   fLr     for  the  voting  of  the  shares  as  a  unit  that  had  been  contemplated  by  the 

f  >        "V      pj^rties  to  the  purchase,  and  on  the  22d  of  March  the  same  was  executed 

-^    ILjA^  wiplicate  between  Smith,  Markham,  and  Foster.     By  this  instru- 

ir^  ment,  after  reciting  therein  that  the  parties  thereto  had  purchased 

the  forty-two  thousand  shares  of   stock,  and  had  agreed  to  retain  the 

f'l^  ''  ^f  jy^  f^^H.  iP^^^^  of  voting  the  stock  for  five  years,  *'  so  as  to  keep  the  control  of 

/'^,he  corporation  from  passing  to  persons  other  than  themselves,"  it 

'  /^   was  "  mutually  agreed  between  said  Foster,  Markham,  and  Smith  that 

iM     4fiey  will,  during  said  period,  retain  the  power  to  vote  said  shares  in 

o>ie  body,  and  that  the  vote  which  shall  be  cast  by  said  shares,  whether 

for  directors  or  for  any  other  purpose,  shall  be  determined  by  ballot 

between  them  or  their  survivors."     It  was  in  the  contemplation  of  the 

Stnlfimfnt  rewritten.     Argumenls  and  part  of  opinion  omitted.  —  Ed. 
^Tiie  votes  of  Gundecker  and  Wagner  were  also  rejected;  the  ground  being  that  they 
ere  not  bona  fide  stockholders.     The  statement  as  to  their  right  is  here  omitted.  —  Ed. 


p^.  y> 


'^^I 


SMITH  V.   SAN   FRANCISCO   &   N.  P.  R.  CO.  427 

parties  to  the  agreement  that  they  might  sell  or  otherwise  dispose  of 
some  of  the  shares,  and,  accordingly,  they  made  provision  in  this  in- 
strument for  retaining  the  right  to  vote  the  stock  so  sold  by  them,  and 
annexed  thereto  the  form  of  an  agreement  to  be  taken  by  them  from 
their  vendees.  This  form  or  draft  recited  the  purchase  of  the  forty- 
two  thousand  shares  by  Foster,  Smith,  and  Markham,  and  that,  "  for 
the  purpose  of  keeping  control  of  said  road  in  the  interest  of  them- 
selves and  of  all  persons  who  shall  buy  any  portion  of  the  stock  from 
them,"  they  have  agreed  that  for  the  period  of  five  years  "  they  shall 
vote  the  said  stock  in  one  block  "  at  all  elections  for  officers.  The 
purchase  of  the  stock  hy  Foster,  Smith,  and  Markham  was  completed 
and  the  price  therefor  paid  on  the  23d  of  jMarch,  and  twelve  thousand 
three  hundred  and  thirty-six  shares  of  the  stock  were  transferred  on 
the  books  to  each  of  them  —  five  thousand  shares  being  left  in  the 
name  of  the  Mercantile  Trust  Company,  subject  to  some  prior  trust. 
Prior  to  the  day  for  the  election  in  1896,  a  conference  was  called  to 
be  held  between  Foster,  Smith,  and  Markham,  upon  proper  notice 
therefor,  to  determine  by  ballot  how  the  vote  of  the  shares  should  be 
cast  at  the  next  annual  meeting  for  directors,  and,  in  accordance^  with 
said  notice,  said  conference  was  held,  at  which  Foster  and  Markham 
were  present,  and,  upon  a  ballot  had  thereat,  it  was  determined  that 
said  shares  should  be  voted  for  Markham,  Xewhall,  and  Lilienthal  as 
directors.  It  was  shown  at  tlie  trial  that  at  the  meeting  of  the  stock- 
holders, held  on  February  2oth,  Smith  tendered  a  vote  for  the  shares 
standing  in  his  name,  and,  at  the  same  time,  Foster  presented  the  vote 
of  the  same  stock  by  himself  and  Markham  in  behalf  of  Smith.  Mu- 
tual jDrotests  against  the  votes  were  made  by  different  stockholders, 
and  the  vote  cast  by  Foster  and  Markham  was  received  and  counted, 
and  that  cast  by  Smith  was  rejected.  Smith  also  testified  that,  after  . 
receiving  the  notice  for  the  conference  to  determine  the  ballot  to  be 
cast,  he  informed  Foster  and  Markham  that  he  did  not  recognize  the 
validity  or  legality  of  the  agreement,  and  that  he  withdrew  from  the 
same,  and  would  not  be  bound  by  anything  which  they  might  do  there- 
under. 

At  the  trial  the  defendants  sought  to  introduce  in  evidence  the 
agreement  of  March  22d,  and  offered  to  prove,  in  connection  there- 
with, the  matters  set  forth  in  their  answer  relative  thereto ;  but  upon 
the  objection  by  the  plaintiffs  to  this  offer,  "  on  the  ground  that  said 
agreement  was  not  a  proxy,  and  did  not  provide  that  any  of  the  par- 
ties thereto  should  vote  the  stock  belonging  to  the  other,  and  that  it 
was  revoked  before  the  election  and  was  invalid  as  against  public 
policy,"  the  evidence  was  excluded,  the  court  saying  :  "  I  will  assume, 
for  the  purpose  of  my  ruling,  that  it  was  a  valid  agreement,  but  that 
it  was  not  an  agreement  which  gave  authority  to  an}'  other  person  to 
cast  the  vote  of  Mr,  Smith." 

The  superior  court  found  that  the  agreement  by  Smith  with  the 
other  stockholders  did  not  preclude  him  from  the  right  to  vote  the 


428  SMITH  V.  SAN  FRANCISCO   &  N.  P.  R.  CO. 

stock  standing  in  his  own  name  as  he  might  choose,  and  that  the  vote 
by  the  other  stockholders  for  his  stock  was  unauthorized,  and  his  own 
vote  shouhl  have  been  received.  Judgment  was  thereupon  rendered 
that  Lilienthal  had  not  been  chosen  as  a  director,  and  was  not  entitled 
to  exercise  the  office,  and  that  at  the  said  election  Smith  was  chosen 
one  of  the  directors,  and  was  entitled  to  be  so  recognized.  A  motion 
for  a  new  trial  on  behalf  of  the  defendants  was  denied,  and  from  both 
the  judgment  and  the  order  denying  the  new  trial  appeals  have  been 
taken. 

W.  S.  Goodfellow,  Jesse  W.  Lilienthal,  and  Garret  W.  McEnerney,  for 
appellants. 

Page,  McCutcheon  &  Eells,  for  respondents. 
Harrison,  J.  .  .  . 

.  .  .  for  the  purpose  of  this  appeal  it  is  to  be  assumed  that  the  evi- 
dence offered  by  the  defendants  would  sustain  the  allegations  of  their 
answer,  and  the  sufficiency  of  these  averments  to  authorize  the  exclu- 
sion of  the  vote  by  Smith  is  to  be  determined.  .  .  .  That  the  instru- 
ment of  March  22d  constitutes  an  agreement  that  the  forty-two  thou- 
sand shares  are  to  be  voted  "  in  one  body,"  and  that  the  parties  thereto 
agreed  that  "  they  "  would  vote  the  stock  "  in  one  block,"  is  stated 
therein  in  express  terms.  By  this  instrument  they  also  "  mutually 
agreed  "  that  "  the  vote  "  to  be  cast  by  said  shares  should  be  deter- 
mined by  ballot  ''  between  them  "  or  their  survivors.  To  "  determine 
by  ballot "  is  to  ascertain  the  result  of  balloting  upon  a  proposition 
by  those  entitled  to  cast  the  ballots  ;  and  the  "  vote  "  —  that  is,  the 
voting  paper  or  ticket  to  be  cast  for  the  officers,  which  the  parties 
agreed  should  be  thus  determined —  is  to  be  the  same  for  the  entire 
forty-two  thousand  shares.  That  by  virtue  of  this  agreement  an  au- 
thority was  given  by  each  of  the  parties  to  the  others  to  determine 
"  the  vote  "  to  be  cast  by  the  forty-two  thousand  shares  of  stock  is 
too  clear  for  argument.  When  they  mutually  agreed  that  they  would 
"determine"  between  them  the  vote  which  "  shall  be  cast "  for  di- 
rectors, they  declared  by  necessary  implication  that  such  vote  should 
be  cast  in  accordance  with  the  results  of  that  ballot,  and  that  if  either 
of  them  should  fail  to  cast  the  vote  as  should  be  determined  by  the 
ballot,  the  vote  so  determined  might  be  cast  by  the  others.  If  we 
should  hold  that  this  instrument  is  to  be  construed  as  not  giving 
authority  to  the  majority  of  the  parties  thereto  to  cast  the  vote  of  the 
entire  forty-two  thousand  shares  of  stock,  as  might  be  determined  upon 
such  ballot,  we  should  be  compelled  to  hold  that  the  instrument  was 
prepared  in  disregard  of  the  agreement  between  the  parties,  and  of 
the  purpose  for  which  it  was  to  be  executed.  If  there  is  any  am- 
biguity in  the  language  used  for  the  expression  of  that  agreement,  it 
is  to  be  construed  so  as  to  carry  the  agreement  into  effect,  rather  tlian 
to  defeat  its  operation.  No  particular  form  of  words  is  requisite  to 
constitute  a  proxy.  (Morawetz  on  Corporations,  sec.  48(3.)  Like  any 
other  agency,  the  instrument  by  which  it  is  created  may  be  informal, 


/I 


SMITH  V.   SAN  FKANCISCO   &   N.  P.  R.  CO.  429 

but  if,  in  order  to  give  effect  to  its  language  in  view  of  the  purpose  for 
which  it  is  executed,  it  is  necessary  to  construe  the  instrument  as 
creating  an  agency,  such  construction  will  be  given. 

The  instrument  executed  between  the  parties  must^  therefore,  be 
held  to  be  a  proxy,  and  to  authorize  the  vote  of_JJiP.  fnrty-twoJJTon-^ 
sand  shares  of  stock  to  be  cast  in  accordance  with  thejjetermination 
of  the  majority  of  the  parties  thereto,  and,  if  it  was  made  upon  a  con- 
sideration siiMcient  to  bind  thejparties^tCL  its  enforcement,  jt  must  be 
regarded  as^ still  operative.  One  of  the  inducements  for  the  purchase 
of  the  stoclc,  and  under  which  the  parties  entered  into  the  agreement, 
was  that  the  shares  should  be  voted  in  one  body,  and  held  for  five 
years  as  a  unit.  It  is  immaterial  that  the  voting  agreement  was  not 
reduced  to  writing  and  executed  until  after  the  bid  had  been  made  for 
the  stock.  It  was  so  executed  before  the  parties  thereto  had  com- 
pleted the  purchase  and  become  the  owners  of  the  stock  by  paying 
the  purchase  price.  Nor  is  the  validity  of  the  agreement  or  the  effect 
of  its  terms  different  by  reason  of  different  certificates  having  been 
issued  in  the  names  of  the  several  parties  to  the  transaction,  rather 
than  in  the  name  of  one  of  them.  The  agreement  between  them  was 
with  reference  to  the  forty-two  thousand  shares  of  stock,  and  that  it 
should  be  voted  as  a  unit,  and  the  purpose  of  the  agreement  was  the 
economical  management  of  the  road,  and  to  prevent  irresponsible  per- 
sons from  getting  control.  It  was  within  the  power  of  the  parties  to 
contract  in  reference  to  this  property  as  fully  as  with  regard  to  any 
other  property.  They  were  at  liberty  to  make  as  a  condition  of  their 
purchase  that  its  management  should  be  held  by  either  of  them,  or  by 
a  majority  of  the  three,  and  the  terms  of  the  agreement  for  such  pur- 
chase could  not  be  repudiated  by  either  after  the  purchase  had  been 
made.  It  may  be  assumed  that  neither  of  the  parties  would  have 
entered  into  the  transaction,  or  agreed  upon  the  purchase  of  the  stock, 
except  upon  these  conditions,  and  it  must  be  held  that  each  contributed 
his  money  to  the  purchase  of  the  stock  upon  the  promise  made  to  him 
by  the  others.  There  was  thus  a  sufficient  consideration  for  the  agree- 
ment granting  the  right  to  vote  the  stock.  It  was  in  the  nature  of  a 
power  coupled  with  an  interest,  and,  being  given  for  a  valuable  con- ' 
si  deration,  could  not  be  revoked  at  the  pleasure  of  either,  {Hey  v. 
Dolphin,  92  Hun,  230.) 

Although  the  court  in  excluding  this  evidence,  assumed  that  the 
instrument  was  valid,  counsel  for  respondents  have  presented  an  argu- 
ment in  support  of  their  further  objection  thereto,  that  the  instrument    Kff^' 
is  invalid  by  reason  of  being  against  public  policy,  and  it  therefore  ^  J'       a 
becomes  necessary  to  consider  this  objection,  inasmuch  as  the  action'^  ^a^ 
of  the  court,  rather  than  its  reason  for  so  acting,  is  to  be  reviewed ;  '^ 
for,  if  the  instrument  is  invalid,  the  refusal  of  the  court  to  allow  any 
effect  to  be  gained  from  its  exercise  was  proper. 

"Public  policy"  is  a  term  of  vague  and  uncertain  meaning,  which 
it  pertains  to  the  law-making  power  to  define,  and  courts  are  apt  to 


430 


SMITH  V.   SAN   FRANCISCO   &  N.  P.  R.  CO. 


I 


^ 


oA'f^i 


encroach  upon  the  domain  of  that  branch  of  the  government  if  they 
characterize  a  transaction  as  invalid  because  it  is  contrary  to  public 
policy,  unless  the  transaction  contravenes  some  positive  statute  or 
some  well-established  rule  of  law.  Sir  George  Jessel,  as  Master  of  the 
i\olls,  said  in  Besant  v.  Wood,  L.  R.  12  Ch.  Div.  605,  that  public  policy 
is  "  to  a  great  extent  a  matter  of  individual  opinion,  because  what  one 
man  or  one  judge  might  think  against  public  policy,  another  might 
think  altogether  excellent  public  policy  "  ;  and  in  another  case  {Print- 
ing, etc.,  Co.  V.  Sampson,  L.  R.  19  Eq.  465),  the  same  jurist  said:  "If 
there  is  one  thing  which  more  than  another  public  policy  requires,  it 
is  that  men  of  full  age  and  competent  understanding  shall  have  the 
utmost  liberty  of  contracting,  and  that  their  contracts  when  entered 
into  freely  and  voluntarily,  shall  be  held  sacred,  and  shall  be  enforced 
by  courts  of  justice."  It  is  not  in  violation  of  any  rule  or  principle 
of  law  for  stockholders,  who  own  a  majority  of  the  stock  in  a  corpora- 
tion, to  cause  its  affairs  to  be  managed  in  such  way  as  they  may  think 
best  calculated  to  further  the  ends  of  the  corporation,  and,  for  this 
purpose,  to  appoint  one  or  more  proxies  who  shall  vote  in  such  a  way 
as  will  carry  out  their  plan.  Nor  is  it  against  public  policy  for  two 
or  more  stockholders  to  agree  upon  a  course  of  corporate  action,  or 
upon  the  officers  whom  they  will  elect,  and  they  may  do  this  either  by 
themselves,  or  through  their  proxies,  or  they  may  unite  in  the  appoint- 
\  ment  of  a  single  proxy  to  effect  their  purpose.  Any  plan  of  procedure 
they  may  agree  upon  implies  a  previous  comparison  of  views,  and 
there  is  nothing  illegal  in  an  agreement  to  be  bound  by  the  will  of  the 
majority  as  to  the  means  by  which  the  result  shall  be  reached.  If 
they  are  in  accord  as  to  the  ultimate  purpose,  it  is  but  reasonable  that 
the  will  of  the  majority  should  prevail  as  to  the  mode  by  which  it  may 
be  accomplished.  It  would  not  be  an  illegal  agreement  if  articles  of 
partnership  should  provide  that  stock  in  a  corporation  owned  by  the 
partnership,  though  standing  in  the  individual  names  of  the  partners, 
should  be  voted  by  one  of  its  members,  and  it  is  no  more  against  pub- 
lic policy  for  such  an  agreement  to  be  entered  into  between  stockhold- 
ers whose  interests  in  the  stock  are  separate  than  where  their  inter- 
ests are  joint.  Viewed  from  considerations  of  public  policy  merely, 
it  is  immaterial  whether  such  an  agreement  is  made  by  the  members 
of  an  existing  partnership,  which  owns  the  shares,  or  in  pursuance  of 
an  agreement  by  two  or  more  persons  to  form  a  partnership  for  their 
purchase,  or  to  purchase  them  for  their  joint  account,  or  as  one  of  tlie 
terms  of  an  agreement  for  their  purchase,  by  persons  who  contem- 
plate no  relation  to  each  other  further  than  that  of  owning  stock  in 
the  same  corporation.  Such  agreement  would,  in  any  case,  be  outside 
of  the  corporation  and  disconnected  with  the  interest  of  every  other 
stockholder,  and,  in  either  case,  the  same  rules  would  control.  Whether 
Buch  an  agreement  is  illegal,  so  that  any  action  or  vote  under  it  can 
be  set  aside,  or  is  of  such  a  character  that  it  will  not  be  enforced,  will 
depend  upon  the  object  with  which  it  is  made,  or  the  acts  that  are 


SMITH  V.    SAN   FRANCISCO  &  N.  P.  R.  CO. 


431 


done  under  it,  and  will  be  governed  by  other  rules  of  law.     [Omitting 
quotations  and  references.] 

In  cases  of  "  voting  trusts,"  where  the  owners  of  stock  transfer  the^ 
shares  to  trustees,  with  authority  to  vote  at  elections  according  to  the 
direction  of  a  majority  of  those  holding  trust  certificates,  and  the  only 
consideration  for  such  transfer  and  agreement  is  the  mutual  promises 
of  the  several  stockholders,  it  has  been  held  that  any  stockholder  may 
revoke  his  agreement  and  withdraw  his  stock  at  will ;  and  it  is  also 
held  that  stockholders,  who  become  such  after  an  agreement  of  this 
nature  is  entered  into,  are  not  bound  by  its  terms,  but  will  hold  their 
shares  freed  from  the  limitations  of  the  agreement.  {Fisher  v.  Bush, 
'60  Hun,  641 ;  Woodruff  \.  Dubuque,  etc.,  Co.,  30  Fed.  Rep.  91 ;  Brown 
v.  Pacific  Mail  S.  S.  Co.,  5  Blatchf.  525 ;  Griffith  v.  Jewett,  15  Week. 
Law  Bull.  419.)  .  .  . 

The  agreement,iT)  question  cannot  be  regarded  a,s  illegal  by  reason 
of  being  in  restraint  of  trade.  The  rule  invalidating  contracts  in 
restraint  of  trade  does  not  include  every  contract  of  an  individual  by 
Avhich  his  right  to  dispose  of  his  property  is  limited  or  restrained, 
Section  1673  of  the  Civil  Code  makes  void  every  contract  by  which 
one  is  restrained  from  "  exercising  a  lawful  profession,  trade,  or  busi 
ness,"  except  in  certain  instances.  Bu^jyiis_is_ia!r_differen1^^ 
contract  limiting  his  right  to  dispose  of  a  parti cula^iece  of  property 
Except  upon^ceTtain  conditions.  XsThe  owner  of  property  has  th 
right  to  withhold  it  from  sale,  he  can  also,  at  the  time  of  its  sale,' 
impose  conditions  upon  its  use  without  violating  any  rule  of  public 
policy,  and  there  is  nothing  inconsistent  with  public  policy  for  two  or 
more  persons,  who  contemplate  purchasing  certain  property,  to  agree 
with  each  other,  as  a  condition  of  the  purchase,  that  neither  will  dis 
pose  of  his  share  within  a  limited  period,  or  for  less  than  a  fixed  sum, 
or  except  upon  certain  limitations.  They  have  the  same  right  to  con- 
tract with  reference  to  the  terms  under  which  they  will  hold  or  dis- 
pose of  the  property  after  it  shall  have  been  purchased,  as  they  have 
to  agree  upon  any  other  terms  upon  which  the  purchase  shall  be  made, 
and  they  no  more  violate  a  rule  of  public  policy  in  making  such  agree- 
ment a  consideration  of  their  purchase  than  would  two  or  more  part- 
ners who  should  purchase  property  for  partnership  purposes,  and  agree 
that  it  should  not  be  disposed  of  unless  their  vendee  would  assent  to 
certain  conditions  regarding  its  use.  These  terms  enter  into,  and  form 
a  part  of,  the  consideration  for  the  agreement  to  purchase,  and  are  as 
binding  and  enforceable  as  any  other  terms  of  the  agreement.  (New 
England  Trust  Co.  v.  Abbott,  162  Mass.  148 ;  Hodge  v.  Sloan,  107  N. 
Y.  244 ;  1  Am.  St.  Rep.  618  ;  Williams  v.  Montgomery,  148  X.  Y.  519 ; 
Matthews  v.  Associated  Press,  etc.,  136  N.  Y.  333 ;  32  Am.  St.  Rep. 
741.)  The  contract  in  Fisher  v.  Bush,  35  Hun,  641,  was  held  to  be 
invalid  for  want  of  any  other  consideration  than  the  mutual  promise 
of  the  parties ;  but  it  was  said  in  that  case :  "  If  these  parties  and 
their  associates  were  the  promoters  of  this  corporation,  then,  doubt- 


'^f'^ 


^ 


432 


SMITH   V.  SAN  FRANCISCO   &   N.  P.  K.  CO. 


I 


\. 


y 


•A 


less,  they  could  have  entered  into  a  valid  agreement  regulating  a  sale 
of  the  same,  and  requiring  the  owners  to  hold  them  from  market  for  a 
reasonable  and  definite  period  of  time,  and  thus  forbidding  a  sale  by 
either  of  his  interests  to  one  against  whom  his  associates  might  have 
a  reasonable  objection.  {Moffatt  v.  Farquhar,  7  Ch.  Div.  591 ;  re- 
ported in  23  Moak  Eng.  Kep.  731.)  A  stipulation  of  that  character 
would  not  be  illegal  as  against  public  policy,  as  it  would  be  simply  a 
provision  assented  to  by  all  that  the  newcomer  into  the  business  trans- 
action should  be  with  the  approval  of  the  other  joint  owners." 

Neither  is  it  illegal  or  against  public_policy  to  separate^ the  voting 
power_o^_the  stockTrom  its  ownership.  The  statute  authorizes  the 
stockhaLdfir_iQJVote  hydroxy]  and  it  was  held  in  Peoples  Bank  v. 
Superior  Court,  104  Cal.  649,  43  Am.  St.  Rep.  147,  that  a  by-law  re- 
stricting the  selection  of  proxies  to  stockholders  was  invalid ;  that  the 
statute  places  no  limitation  upon  the  right  of  selection,  and  that  a 
stockholder  may  appoint  as  his  proxy  one  who  is  an  entire  stranger  to 
ithe  corporation.  The  right  to  appear  by  proxy  implies  of  itself  that 
the  voting  power  may  be  separated  from  the  ownership  of  the  stock, 
and,  unless  the  authority  of  the  ju-oxy  is  limited  by  the  terms  of  his 
appointment,  he  is  necessarily  required  to  use  his  own  discretion  in 
any  vote  that  he  gives.  Being  the  agent  of  the  stockholder,  he  is 
required  to  use  this  discretion  in  behalf  of  his  principal ;  but  he  is  at 
liberty  to  use  his  own  discretion  as  to  the  means  by  which  his  princi- 
pal's interest  will  be  best  subserved.  The  cases  in  which  it  has  been 
said  that  the  stockholder  could  not  divest  himself  of  the  voting  power 
of  his  stock,  and  that  it  should  not  be  separated  from  the  ownership 
of  the  stock,  were  cases  which  involved  either  the  sufficiency  of  the 
agreement  by  which  the  voting  power  was  transferred,  or  the  validj^ 
of  the  purpose  for  which  the  power  was_toJ)e_exer£ised.  The  proxy 
must  exercise  a  discretioiTofthe'sarae^nature  as  that  which  the  stock- 
holder is  authorized  to  exercise,  and  an  authority  to  do  otherwise 
would  be  invalid ;  but  the  authority  to  exercise  a  discretion  differs 
from  an  authority  to  perform  a  particular  act.  Under  an  appoint- 
ment without  words  of  limitation  the  proxy  may  act  against  the  inter- 
ests of  the  stockholder,  or  even  against  the  interests  of  the  corpora- 
tion, and  the  corporation,  as  well  as  the  stockholder,  will  be  bound  by 
his  act  as  fully  as  if  the  stockholder  had  acted  in  person,  while,  if 
the  authority  had  been  directed  in  terms  to  that  act,  it  might  have 
been  invalid.  ''J^he  distinctioii_is  that  between  an  unlawful  exercise 
of  a^ lawful  power,  and  the  attemjjt  tojiuthome  the  exercisej3f_an  un- 
lawful  power.  The  question  has  been  presented  in  cases  of  voting 
i/^l'trusts,  but  an  examination  of  these  cases  will  show  that  the  question 
has  arisen  either  when  the  authority  was  expressly  given  to  carry  out 
some  illegal  purpose,  or  wlien,  having  been  given  without  any  con- 
sideration, though  purporting  to  be  for  a  definite  term,  subsequent 
pwners  of  the  stock  have  sought  to  revoke  it  before  the  expiration  of 
{Shepaug   Voting  Trust  Cases,  60  Conn.  553,  sometimes 


>". 


^^  '^.■<' 


tt^ 


^vt 


SMITH  V.  SAN  FRANCISCO   &   N.  P.  R.  CO. 


433 


reported  under  the  name  of  Bostwick  v.  Chapman  ;  White  v.  Thomas 
Inflatable  Tire  Co.,  52  jST.  J.  Eq.  178.)  We  have  been  cited  to  no  in- 
stance where  the  purpose  of  a  proxy  given  upon  a  sufficient  considera- 
tion was  lawful,  and  the  person  by  whom  the  proxy  was  created 
continued  to  be  the  owner  of  the  stock,  in  which  the  agreement  has 
been  held  invalid.  The  stockholder  cannot  separate  the  v^ing  power 
from  bja^stock  by  selling  his  right  to  vote  for  a  consideration  personal 
to  himself_alone,  any  more  than  he  could  agree  for  the  same  considera- 
tion to  cast  the  votejiimself,  and  an  agreement  with  others^  to  aj^point 
a  proxy  upon  the  same  considerations  would  be  equally  invalid.  In-, 
{Jone^yTT^usseU,  48  N.  J.  Eq.  208,  an  agreement  by  the  purchaser  of 
stock  to  give  to  other  stockholders  his  irrevocable  proxy  for  the  pur- 
pose of  securing  and  maintaining  the  control  of  the  company  was  held 
invalid,  for  the  reason  that  it  was  one  of  the  terms  of  the  agreement 
that  the  directors,  to  be  elected  under  its  provisions,  should  employ 
the  one  giving  the  proxy  at  a  fixed  salary  during  its  existence.  Such 
an  agreement  was  held  to  operate  as  an  inducement  to  elect  directors 
who  would  not  act  disinterestedly  for  the  benefit  of  all  of  the  stock- 
holders, but  rather  to  promote  the  interest  of  the  parties  to  the  agree- 
ment alone,  and  was  therefore  void,  as  being  against  public  policy. 

The  court,  however,  said :  "  This  conclusion  does  not  reach  so  far 
as  to  necessarily  forbid  all  pooling  or  combining  of  stock,  where  the 
object  is  to  carry  out  a  particular  policy  with  the  view  to  promote  the 
best  interests  of  all  the  stockholders."  It  was  upon  this  principle 
that  the  agreements  in  Hafer  v.  New  York  etc.  R.  K.  Co.,  14  Week. 
Law  Bull.  68,  Guernsey  v.  Cook,  120  Mass.  501,  and  Fennessy  v.  Ross, 
5  N.  Y.  Sup.  Ct.  App.  Div.  342,  were  held  invalid.  The  same  princi- 
ple was  declared  in  Gage  v.  Fisher,  65  N.  W.  Eep.  809.  In  Mobile 
etc.  R.  R.  Co.  V.  Nicholas,  98  Ala.  92,  the  court  held  that  there  was 
nothing  illegal  or  contrary  to  public  policy  in  separating  the  voting 
power  of  the  stock  from  its  ownership,  saying :  "  Where  a  proxy  is 
duly  constituted,  and  the  power  of  the  appointment  is  without  limita- 
tion, the  vote  cast  by  the  proxy  binds  the  stockholder,  whether  exer- 
cised in  behalf  of  his  interest  or  not,  to  the  same  extent  as  if  the  vote 
had  been  cast  by  the  stockholder  in  person.  The  invalidity  of  acts 
of  this  character  by  a  proxy,  rightly  understood,  is  not  made  to  rest 
upon  the  ground  that  there  has  been  a  separation  of  the  voting  power 
from  the  stockholders,  but  because  of  the  unlawful  purpose  for  which 
the  proxy  was  appointed,  or  the  unlawful  end  attempted  to  be  effected 
by  the  exercise  of  the  voting  power." 

From  the  foregoing  considerations  it  follows  that  the  superior  court 
erred  in  finding  that  Gundecker  and  Wagner  were  bona  fide  stock- 
holders in  the  defendant  railway  company,  and  also  in  refusing  to 
receive  in  evidence  the  instrument  of  ]\Iarch  22d,  and  the  evidence 
offered  by  the  defendants  in  connection  therewith,  for  the  purpose  of 
sustaining  the  averments  of  their  answer. 

The  judgment  and  order  denying  a  new  trial  are  reversed. 


k- 


>^ 


,^>^' 


434 


BRIGHTMAN   V.   BATES. 


M 


.r** 


li^ 


Van  Fleet,  J.,  McFarland,  J.,  and  Henshaw,  J.,  concurred. 

Beatty,  C.  J.,  dissenting.  —  I  dissent  from  the  judgment  and  from 
the  conclusions  of  the  court  on  both  of  the  principal  points  decided. 

The  contract  between  Smith,  Markham,  and  Foster  was,  in  my 
opinion,  void  as  against  the  policy  of  the  law  giving  to  the  holders  of 
a  majority  of  the  stock  of  a  corporation  the  right  of  control.  Its  sole 
purpose  and  object  was  to  give  to  a  minority  of  the  stockholders  the 
power  to  control  the  affairs  of  the  corporation  against  the  will  of  the 
jjiajority,  and  that  object  is  secured  by  means  of  this  judgment, 
here  is  not  time  at  my  command  to  go  over  the  decisions,  but  I  am 
satisfied  that  the  weight  of  authority  is  against  the  validity  of  any 
contract  by  which  the  sole  owner  of  stock  parts  irrevocably  with  the 
right  to  vote  it,  with  the  effect  of  putting  a  minority  in  control  of  the 
corporation.  \^ 

[Eemainder  of  opinion  omitted.]  Eeheari^g  denied. 


BEIGHTMAN 


H 


1900. 


BATES^v 

175  Massachusetts,  105.1' 


^l^^'l^aAir 


K.  ^^ 


lants. 


C.  J.  These  are  actions  upon  a  covenant  executed  by  the 

The  covenant  recites  that  1,360  shares  of  the  stock  of 

7t^^  ''%t/^'J^  j^<' the  Union  Street  Eailway  Company  in  New  Bedford  have  been  or  are 

^»£t>     y-  )S  ^bout  to  be  purchased  by  a  syndicate,  under  an  agreement  of  Sep- 

^    ^      vy.     "^   tember  4,  1894,  that  the  plaintiff  has  been  largely  instrumental  in 

(^       organizing  the  syndicate,  and  that  "  he  considers  that  for  his  services 

n^ .  ^    therein  in  case  the  syndicate  is  formed,  and  the  aforesaid  shares  pur- 

'\    ]y  chased,  he  should  receive  for  his  compensation  "  a  certain  amount  of 

<^  stock.     These  recitals  are  followed  by  several  covenants  on  the  part 

^c^     i  <^ ^  \         of  the  defendants  and  one  other  to  give  the  plaintiff,  in  stock  of  the 

^^f^'^'^^y^^  A      i,>^ompany  at  $169  a  share,  a  commission  of   $4  a  share  "  upon  the 

^  ^A^''^^^^        number  of  shares  of  said  stock  we  sell  to  said  syndicate,  less  the  num- 

(K^^{^%/^^\  ber  of  shares  we  have  severally  subscribed  as  members  of  said  syndi- 

0M  • )     ~^^   cate,"  and  certain  other  deductions,  in  case  the  compensation  was  not 

V''*  ^.    U^ ^J^    got  from  the  syndicate.     The  judge  before  whom  the  case  was  tried 

aM'''^^r-^  jQuiid  for  the  plaintiff,  and  the  case  is  here  upon  a  report  of  requests 

'*   ■  '       ^"  for  rulings  which  in  various  forms  raise  the  question  whether  such  a 


^r 


ffy/O  Ending  can  be  justified  in  law. 

jJ^I       oT^ •       .   • 

/K*-  The  syndicate  referred  to  was  formed  under  another  written  agree- 

•^     -,/vv*     ^j^^-^ent,  whereby  the  subscribers  recite  their  desire  to  become  members 

^^of  it  to  the  end  that  control  of  the  railway  company  and  advantage 

to  them  may  be  gained,  agree  to  take  the  shares  set  against  their 

^  J^  '^'^  '^*^.^;*Miame8  at  $169  a  share,  and  further  agree  after  the  purchase  to  enter 

{Cy>y-''^\M.  ***     iL/*     X-^"  ^1  Staten/ent  omitted;  also  part  of  opinion.  — Ed 


X-^^ 


^ 


^ 


<i' 


BKIGHTMAN  V.    BATES.  435 

into  a  pooling  contract  whereby  all  the  syndicate  stock  "  shall  be 
voted  at  each  annual  meeting  for  a  period  of  not  less  than  three  years, 
for  such  board  of  directors  as  shall  be  named  "  by  a  committee  of  five 
of  the  subscribers,  with  power  to  a  majority  of  them  to  fill  any  va- 
cancy in  the  committee.  It  is  said  that  this  agreement  was  illegal, 
and  that  the  covenant  sued  upon  was  so  directly  aimed  at  helping  to 
bring  the  unlawful  arrangement  about  that  it  must  fall  with  the  other. 
Barnes  v.  Smith,  159  Mass.  344,  347 ;  Gihbs  v.  Consolidated  Gas  Co., 
130  U.  S.  396. 

Without  deciding  whether,  if  the  covenant  was  dependent  upon 
the  rendering  of  further  services,  it  was  so  closely  connected  with  the 
syndicate  agreement  as  to  fall  if  the  latter  cannot  be  sustained,  we 
pass  to  the  question  whether  the  latter  agreement  is  unlawful  on  its 
face,  bearing  in  mind  that  unless  it  is  unlawful  on  its  face  it  has  the 
advantage  of  a  finding  in  favor  of  the  plaintifl:.  In  dealing  with  this 
question  it  does  not  need  to  be  said  that  combination  of  common  in- 
terests is  necessary,  and  constantly  is  taking  place.  It^is  as  legitimate 
for  a^aiiLcity  of  stockholders  to  combine  as  for  other  people.  The 
fact  that  they  expect  ^^  gain  and  advantage  "  —  in  the  words^of  the 
syndicate  agreement  —  to  accrue  to  them,  does  not  make  the  combi- 
nation  unlawful.  That  expectation  and  intent  would  have  that  e^ffect 
onlyif_the_gain  was  to  be^t  the  expense  of  the  corporation,  or  in 
somejwuy_waslnjtend£dJo_wwk^  wrong  to  the  other  stockholders. 
Xo  such  intent  appears,  and  although  it  is  impossible  iiot  to  view 
such  an  arrangement  .wrEE~suspicion,  IMs^  also  impossible  to  let  suspi- 
cl on  take  the  place  of  proof. 

The  only  serious  ground  of  objection  is  the  agreement  that  the 
stock  "  shall  be  voted  at  each  annual  meeting  "  for  three  years,  for  a 
board  of  directors  named  by  the  committee.  It  is  suggested  that  thisj 
was  an  unlawful  attempt  by  the  contracting  parties  to  deprive  them-/ 
selves  in  advance  of  their  deliberative  power  and  duty  as  stock/ 
holders,  and  to  submit  themselves  to  the  dictation  of  five  men  who  in 
the  future  might  not  be  even  members  of  the  corporation.  Perhaps 
the  notion  upon  which  these  suggestions  are  founded  has  been  pressed 
somewhat  further  than  would  be  warranted  by  more  far-seeing  views, 
but  we  have  no  occasion  to  discuss  it  in  this  broad  form.  The  ques- 
tion before  us  is  not  whether  it  would  be  possible  to  carry  out  the 
contract  in  a  way  which  would  have  made  the  contract  bad  if  specified 
in  it,  but  whether  it  was  impossible  to  carry  out  the  contract  in  a  way 
which  might  lawfully  have  been  specified  in  advance.  We  put  the 
question  in  this  form  because  there  is  no  doubt  that  the  subscribers 
might  actually  have  done  the  things  stipulated  without  giving  anyone 
a  right  to  complain.  That  is  to  say,  they  might  have  held  their  stock 
and  voted  by  previous  .understanding  according  to  the  advice  of  the 
committee,  as  long  as  they  chose.  The  question  is  what  they  might 
cojitract-lo-dof  for  this  is  supposed  to_bejrcase  where  a  contract  to 
do  lawful  acts  is  unlawful. 


I 


436  BRIGHTMAN  V.  BATES. 

The  syndicate  agreement  does  not  specify  how  it  is  to  be  carried 
out.  It  contemplates  the  making  of  another  contract.  As  the  later 
contract  is  to  be  a  pooling  contract,  it  was  possible,  if  not  probable, 
that  one  element  of  the  arrangement  would  be  that  the  title  to  the 
stock  should  be  given  to  a  trustee,  and  this  happened  in  fact.  During 
the  three  years  the  stock  seems  to  have  been  held  by  a  bank.  The 
stock  was  transferred  to  it,  and  was  not  transferred  to  the  members 
of  the  syndicate.  But  it  would  have  been  possible,  consistently  with 
the  terms  of  the  syndicate  agreement,  that  the  committee  who  were 
to  name  the  board  of  directors  themselves  should  be  the  trustees.  In 
that  case  the  trustees,  of  course,  would  have  voted  on  the  stock. 
They,  not  their  cestuis  que  trust,  would  have  been  the  stockholders  for 
the  time  being.  We  know  nothing  in  the  policy  of  our  law  to  pre- 
vent a  niajority  of  stockholders^rom  jransferrmg  their  stock  to  a 
trustee  with  unrestricted  power  to  vote  upon  it.  Brown  v.  Pacific 
Mail  Steamship  Co.,  5  ^latchf.  525,  527.  See  Greene  v.  JVash,  85 
Maine,  148. 

Supposing  that  the  committee  had  been  trustees,  what  would  the 
syndicate  agreement  have  amounted  to  then  ?  Merely  an  agreement 
by  each  of  the  trustees  to  vote  as  they  should  jointly  agree  to  vote, 
and  an  agreement  by  the  subscribers  not  to  demand  back  their  shares 
for  three  years.  The  latter  term  certainly  is  not  illegal,  whether 
fvalid  or  not.  A  stockholder  has  a^  right  to  put  his  shares  in  trust, 
'whatever  his  motive.  If_the  trust  is  an  active  one  he  cannot  termi- 
']  inate  it  atjvvill,  and  the  attempt  to  cut  himself  off  by  contract,  instead 
V  jOf  by  the  imposition_of_duties^rom  ending  it,  certainly  is  not  enough 
yto  poison  the  covenant  with  the  plaintiff.  See  Williams  v.  Mont- 
gorkery^iS  JM .  Y .  51 9,  52^  It  might  beTield  that  the  duty  of  voting 
incident  to  the  legal  title  made  such  a  trust  an  active  one  in  all  cases. 
As  to  the  arrangement  for  the  trustees  uniting  to  elect  their  candi- 
dates, the  decisions  of  other  States  show  that  such  arrangements  have 
been  upheld,  and  we  do  not  think  that  it  needs  argument  to  prove 
that  they  are  lawful.  If  stockholders  want  to  make  their  power  felt, 
they  must  unite.  There  is  no  reason  why  a  majority  should  not  agree 
to  keep  together.  Faulds  v.  Yates,  57  111.  416 ;  Smith  v.  San  Fran- 
e.isr.n^^  North  Paciiic  ^Railway,  115  Clal_-584  ;  Havemeyer  v.  Have- 
meyer,  11  Jones  and  Spen.  50G,  512,  513.  Affirmed,  according  to 
Beach,  Corporations,  §  304,  n.  6,  and  Fisher  v.  Bush,  35  Hun,  641,  in 
86  N.  Y.  618.  See  Brown  v.  Pacific  Mail  Steamship  Co.,  5  Blatchf. 
525,  527. 

We  have  considered  such  decisions  elsewhere  as  have  been  called 
to  our  attention  or  found  by  us.  Few  of  them  are  by  courts  of  final 
resort.  Nothing  that  we  have  found  in  them  satisfies  us  that  the 
judge  below  was  not  warranted  in  finding  for  the  ])laintiff. 

Judgment  for  the  plaintiff. 


l") 


BiWtTX  V^ilJbliTHWESTlrflir  tKANSPOIlTATION   CO.  437 

lTTY  i.    NORTHWESTERN   TRANSPORTATION   CO/X^       <|    i/** 

1884.     {Chancery  Division  of  Ontario),  G  Ontario,  300.        Q^      ^yJ^    3^  ^JZi^ 

1885.     (Court  o/ Appeal  o/ Ontario),  \]  Ontario  Appeal,  20b.     ,riy>    yW^      y^ r   "V 

1886.     (Supreme  Court  of  Canada),  12  Canada  Supreme  C oui-t,  59S.   ^/^  ^ 

I    _  0        ,     (A 
1887.     (Judicial  Committee  of  Privy  Council),  L.  R.  12  ^/jp.  Cases,  589.^  I^i  "^ 

"^ 4 

Bill  ix  equity  by  Henry  Beatt}-,  a  minority  stockholder,  against  tne'' 
North  Western  Transportation  Company,  and  its  directors,  including"^ 
James  H.  Beatt}'.     The  bill  seeks  to  rescind  the  purchase  by  the  cor- 
poration of  the  steamer  United  Empire.     The  defendants  filed  a  state-* 
ment  of  defence.     The  plaintiff  joined  issue,  and  the  case  was  heard? 
before  Boyd,  Chancellor. 

The  material  facts  are  as  follows  :  — 

The  Transportation  Company-  is  a  corporation,  with  a  capital  stock^o^ 
of  $300,000,  divided  into  600   shares  of  6500  each.     On  January  1,,^-^' 
1883,  James  H.  Beatty  owned  200  shares,  and  was  a  director.     He' ' 
was  tlien  building  a  steamboat,  to  be  called  the  United  Empire ;  an(r.^ 
desired  to  sell  it  to  the  company.     In  Januar}-,  1883,  he  purchased  101 '^. 
additional  shares.     On  the  day  of  the    annual   meeting   in  Februar3','t^^L/v 
1883,  he  transferred  5  shares  to  Rose  and  5  to  Laird,  whereby  theyi^''^y/^  , 

became  qualified  to  be  directors  ;  and  they  were  then  elected  directors.       '     -fv^    ^  '\'^ 
The  board  was  composed  of  five  directors ;   and  James  H.  Beatt}'/     ''^  Jk     \S    ^ t  ^ 
Rose,  and  Laird  constituted  a  majorit}'.  y^Jy^"      ir^'    1     'jj^ 

The  board  of  directors,  while  .James  H.  Beatty  was  present  and  act-    j^        %        iy''^ 
ing,  passed  a  vote  (called  a  bye-law)    to  purchase  the  steamboat  of  .   ^  e/^   ^  Cj(^^ 
James  H.  Beatty  upon  specified  terms.     The  directors,  at  the  same       i,^    jt/^  "''''. 
time,  voted  to  submit  the  said  bye-law  to  a  special  meeting  of  thef^^'y^''^'^   '^      '^ 
stockholders.    At  such  meeting,  a  vote  to  adopt  the  bve-law  was  carried/,       '  t 


by  a  vote  of  306  to  289.     Of  the  306  affirmative  votes,  291  were  cas^^  ^Xa'^^^^> 

bv  James  H.  Beattv,  and  ten  bv  his  transferees,  Rose  and  Laird.  1  0^    -^        ..r^  J^ 

The  bill  charges  that  the  purchase  was  not  entered  into  by  James'  ^^^  ^      -}    I 
H.  Beatty  et  ah.  on  behalf  of  the  company  in  good  faith  for  the  P"t^^<-^*^ji^      \j^ 
pose  of  promoting  the  best  interests  of  the  company,  but  for  the  \>yvc''\,'^    Jr^     ^^^^"^ 
pose  of  serving  tlieir  private  interests  contrary  to  their  duty  to  \\\qY°*\^  r^  -<()::         \ 
company  and  its  stockholders.     Subsequently  all  charges  of  fraud  and  J/^  t)^      l-Y^ 
collusion  were  abandoned.     It  was  proved  by  uncontradicted  evidence,  [^  /^      ^^^ 

and  was  substantially  admitted,  that,  at  the  date  of  the  purchase,  the'  ^j^'  \    ^-./i, 
acquisition  of  another  steamer  was  essential  to  tlie  efficient  conduct  of*"      jt  J^^ 

the  company's  business;    that  the  United  Empire  was  well  adapted  J^^ '-  t/>^  Vir^  '  c^ 
for  that  nurnose  :    that  it  was  not  within  the  nower  of  thp   r-nmnnnr  1^^^  nAi      .■•-'  T 


for  that  purpose  ;    that  it  was  not  within  the  power  of  the  company  >'"'"V->^      'i' 
to  acquire  any  other  steamer  equally  well  adapted  for  its  business  \Jy^''^^_W^''^ 

1  Statement  compiled  from  the  various  reports.     The  greater  portions  of  the  argiiAA'  ,^   'r     p^^ 
ments  and  opinions  are  omitted.  —  Ed.  "  ^«jC^      Aj- 


438  BEATTY    V.    NOETHWESTERN   TRANSPORTATION    CO. 

and  that  the  price  agreed  to  be  paid  for  the  steamer  was  not  exces- 
sive or  unreasonable. 

The  case  was  heard  in  the  Chancery  Division,  at  Toronto,  before 
Boyd,  Chancellor,  who  decreed  that  the  purchase  should  be  set  aside. 
(6  Ontario,  300.) 

The  Court  of  Appeal  of  Ontario  (Hagarty,  C.  J.,  Burton  and 
OsLEK,  J  J.)  unanimously  reversed  the  decree  of  the  Chancellor.  (11 
Ontario  Appeal,  205.) 

The  Supreme  Court  of  Canada  (Ritchie,  C.  J.,  Fournier,  Henry, 
Taschereau,  and  Gwynne,  JJ.)  unanimously'  reversed  the  last  men- 
tioned decision,  and  restored  the  decree  of  the  Chancellor. 

Sir  W.  J.  Ritchie,  C.  J.  Though  it  may  be  quite  true,  as  a  general 
proposition,  that  a  shareholder  of  a  corapan}',  as  such,  may  vote  as  he 
pleases,  and  for  purposes  of  his  own  interest,  on  a  question  in  which 
he  is  personally  interested,  does  that  proposition  necessaril}'  cover  this 
case?  Is  it  not  abundantly'  clear  that,  whatever  a  simple  stockholder 
may  do,  no  director  is  entitled  to  vote,  as  a  director,  in  respect  to  an^' 
(  V  contract  in  which  he  is  personall}'  interested?  Directors  cannot  man- 
age the  affairs  of  the  company  for  their  own  personal  and  private 
advantage ;  they  cannot  act  for  themselves  and,  at  the  same  time,  as 
the  agents  of  the  corporation  whose  interests  are  conflicting ;  the}'  can- 
not be  the  sellers  of  property  and  the  agents  of  the  vendee  ;  there  must 
be  no  conflict  between  interest  and  duty ;  they  cannot  occupy  a  posi- 
tion which  conflicts  with  the  interests  of  the  parties  they  represent  and 
are  bound  to  protect.  Is  it  not  somewhat  of  a  mockery  to  say  that 
this  by-law  and  sale  were  invalid  and  bad,  and  not  enforceable  against 
the  company  as  being  contrary  to  the  policy  of  the  law  by  reason  of  a 
director  entering  into  the  contract  for  his  personal  benefit  where  his 
personal  interests  conflicted  with  the  interests  of  those  he  was  bound 
to  protect,  but  that  it  can  be  set  right  by  a  meeting  of  the  shareholders, 
by  a  resolution  carried  by  the  vote  of  the  director  himself  against  a 
large  majority  of  the  other  shareholders?  If  this  can  be  done,  how 
has  the  conflict  between  self-interest  and  integrity  ceased  ? 

While  recognizing  the  general  principle  of  non-interference  with  the 
powers  of  the  company  to  manage  its  own  aff"airs,  this  case  seems  to 
me  to  be  peculiarly  exceptional ;  a  director,  acting  for  the  company, 
makes  a  sale,  acting  for  himself,  to  the  comp.any,  a  transaction  admit- 
tedly indefensible  ;  this  purchase  is  submitted  to  the  shareholders,  and 
the  director,  having  acquired  a  controlling  number  of  votes  for  this 
purpose,  secures  a  majority  by  his  own  votes  thus  obtained  without 
wliich  tlio  purchase  would  not  have  been  sustained,  and  confirms  as  a 
Bhareholdcr  his  invalid  act  as  a  director,  and  thus  validates  a  transac 
tion  against  which  the  polic}'  of  the  law  utterly  sets  its  face. 


BEATTY   V.   XORTHWESTERX   TRANSPORTATION   CO.  4o9 

It  does  seem  to  me  that  fair  plaj'  and  common  sense  alike  dictate 
that  if  the  transaction  and  act  of  the  director  are  to  be  confirmed,  it 
should  be  by  the  impartial,  independent,  and  intelligent  judgment  of 
the  disinterested  shareholders,  and  not  by  the  interested  director  him- 
self, who  should  never  have  departed  from  his  duty.  If  he  had  done 
his  duty  and  refrained  from  acting  in  the  transaction  as  a  director  the 
b3--lavv  might  never  have  been  passed,  and  the  contract  of  sale  never 
entered  into  ;  and  having  acted  contrarj'  to  his  duty  to  his  co-share- 
holders he  disqualified  himself  from  taking  part  in  the  proceedings  to 
confirm  his  own  illegal  act ;  and  then  to  saj'  that  he  was  a  legitimate 
party  to  confirm  his  own  illegal  act  seems  to  me  simply  absurd,  for 
nobody  could  doubt  what  the  result  in  such  a  case  would  be,  as  the 
futileness  of  the  interested,  but  discontented,  shareholders  attempting 
to  frustrate  the  designs  of  the  interested  director  with  his  majority 
is  too  manifest ;  but  he,  if  he  had  done  his  duty  towards  them  and 
refrained  from  entering  into  the  transaction,  would  never  have  been  in 
the  position  of  going  through  this  farce  of  submitting  this  matter  to 
the  shareholders,  and  when  so  submitted  of  himself  voting  that  he, 
though  he  had  acted  entirely  illegally,  had  done  right,  and  thereby  bind- 
ing all  the  other  shareholders  who  thought  the  purchase  undesirable  ; 
or  in  other  words,  b}'  his  vote  carrying  a  resolution  that  the  bargain  he 
himself  had  made  for  the  companj-  as  buver,  from  himself  as  seller,  was 
a  desirable  operation  and  should  be  confirmed. 

I  rest  this  case  entirely  on  the  position  Beatty  held  as  a  director, 
and  the  duty  which  pertained  to  that  office.  In  that  view  it  is  not 
necessary  to  discuss  how  far,  or  rather  under  what  circumstances  a 
shareholder  may  vote  at  a  general  meeting  of  shareholders  on  matters 
on  which  he  is  individually  interested.  I  cannot,  however,  but  look! 
upon  it  as  rather  a  bold  and  startling  proposition  that  a  shareholder 
should  be  able  to  offer  a  property  for  sale  to  the  company  from  a  bare 
majority  of  votes  and  by  such  vote,  against  the  will  of  all  the  other 
shareholders,  compel  the  company  to  become  the  purchaser  at  his 
own  price  and  on  his  own  terms,  against  the  wish  of  all  the  other! 
shareholders,  who  may,  as  in  this  case,  be  a  minority  of  289  votes 
against  306. 

Henry  and  Gwynne.  JJ.  ,  delivered  concurring  opinions. 

The  case  was  then  carried  by  appeal  to  the  Judicial  Committee  of 
the  Privy  Council. 

Sir  H.  jEJ.  Webste?',  Attorney  General,  and  Jexne,  for  appellants, 
contended  that  the  judgment  of  the  Court  of  Appeal  was  correct,  and 
that  of  the  Supreme  Court  should  be  reversed.  The  fiduciary  position 
of  J.  H.  Beatty  as  director  had,  it  was  submitted,  nothing  to  do  with 
the  question.  His  vote  as^areholder  at  the  generaljarieeting  was  the 
thingin_dispute,  wliether  he  was  prevented  from  giving  it  on  a  jnatter 
in  which  h^  was~^fsonalkJutei'e^ed.     As  for  his  voting  for  the  bve- 


440  BEATTY   V.    NOETHWESTERN   TRANSPORTATION   CO. 

law  at  the  directors'  meeting  it  had  no  other  object  or  effect  than  that 
of  bringing  the  matter  before  a  general  meeting.  At  the  most  it  was 
voidable^jid^.not_void,  and  the  question  was  as  to  the  validitj'orTts 
ratification,  and  that  jlejjerided  u])on  the  validity  of  the  appellant's  vote 
aTa  shareholdej\^.^'rhere_i£jioj3n^^ 

should  be  disqualified_frornj\'atijTg  at  a  general  meeting,  or  why  his 
vote  should  be  examined  and  disiillos'jed^jexceptibjLfauad.  The  dis- 
qualification of  directors  results  from  their  agenc}'.  The  shareholders 
are  principals.  In  this  case  if  the  raajorit}'  were  interested  in  the  ves- 
sel sold,  the  minority  were  interested  in  a  comiDcting  line  and  had 
interests  adverse  to  the  compan}- ;  and  the  validit}-  of  their  votes  might 
also  on  the  respondent's  contention  be  examined  on  the  ground  of  per- 
sonal interest.  The  motives  of  shareholders  for  their  votes  cannot  be 
inquired  into.  If  there  is  no  fraud  the}'  are  free  to  exercise  their  own 
judgment  as  they  please,  and  that  exercise  cannot  be  called  in  question 
by  other  shareholders.  Reference  was  made  to  Pender  v.  Lushing- 
ton ;  ^  M'  Doug  all  \.  Gardiner  ;  ^  East  Pant  Pit  United  Lead  Min- 
ing Company  v.  Merr y weather ^^  Mason  v.  Harris.* 

Sir  Horace  Pavey,  Q.  C,  and  Premner^  for  respondent. 

[Argument  omitted.] 

Sir  Richard  Baggallay. 

The  question  involved  is  doubtless  novel  in  its  circumstances,  and 
the  decision  important  in  its  consequences  ;  it  would  be  veiy  undesira- 
ble even  to  appear  to  relax  the  rules  relating  to  dealings  between  trus- 
^  tees  and  their  beneficiaries ;  on  the  other  hand,  great  confusion  would 
be  introduced  into  the  affairs  of  joint  stock  companies  if  the  circum- 
stances of  shareholders,  voting  in  that  character  at  general  meetings, 
were  to  be  examined,  and  their  votes  practically  nullified,  if  they  also 
stood  in  some  fidjuciiary  relation  to  the  company. 

It  is  clear  upon  the  authorities  that  the  contract  entered  into  by  the 
directors  <^n  the  10th  of  February  could  not  have  been  enforced  against 
the  company  at  the  instance  of  the  defendant  J.  H.  Beatty,  but  it  is 
equally  clear  that  it  was  within  the  competency  of  the  shareholders  at 
the  meeting  of  the  16th  to  adopt  or  reject  it.  In  form  and  in  terms 
they  adopted  it  by  a  majority  of  votes,  and  the  vote  of  the  majority 
must  prevail,  unless  the  adoption  was  brought  about  by  unfair  or 
\  improper  means. 

The  only  unfairness  or  impropriety  which,  consistently  with  the  ad- 
mitted and  established  facts,  could  be  suggested,  arises  out  of  the 
fact  that  the  defendant  J.  IT.  Beatty  possessed  a  voting  power  as 
a  shareholder  which  enabled  him,  and  those  who  thought  with  him, 
to  adopt  the  bye-law,  and  thereby  either  to  ratify  and  adopt  a  void- 
able contract,  into  which  he,  as  a  director,  and  his  co-directors  had 
entered,  or  to  make  a  similar  contract,  whicli  latter  seems  to  have  been 

1  6  Ch.  D.  73.  -  1  f'li.  1).  13. 

8  2H.  &M.  254.  ■•  11  Ch.  D.  107. 


PENDER   V.   LUSHINGTOX.  441 

what  was  intended  to  be  done  by  the  resolution  passed  on  the  7th  of 
Febniaiy. 

It  ma}'  be  quite  right  that,  in  such  a  ease,  the  opposing  minorit}- 
should  be  able,  in  a  suit  like  this,  to  challenge  the  transaction,  and  to 
shew  that  it  is  an  improper  one,  and  to  be  freed  from  the  objection 
that  a  suit  with  such  an  object  can  only  be  maintained  by  the  company 
itself. 

But  the  constitution  of  the  compan}-  enabled  the  defendant  J.  H. 
Beatty  to  acquire  this  voting  power ;  there  was  no  limit  upon  the  num- 
ber of  shares  which  a  shareholder  might  hold,  and  for  ever}'  share  so 
held  he  was  entitled  to  a  vote  ;  the  charter  itself  recognised  the  defend- 
ant as  a  holder  of  200  shares,  one-third  of  the  aggregate  number;  he 
had  a  perfect  riglit  to  acquire  f-irther  shares,  and  to  exercise  his  voting 
power  in  such  a  manner  as  to  secure  the  election  of  directors  whose 
views  upon  policy  agreed  with  his  own,  and  to  support  those  views  at 
any  shareholders'  meeting  ;  the  acquisition  of  the  United  Empire  was 
a  pure  question  of  policy,  as  to  which  it  might  be  expected  that  there 
would  be  differences  of  opinion,  and  upon  which  the  voice  of  the  ma-  i  ^ 
jority  ought  to  prevail ;  to  reject  the  votes  of  the  defendant  upon  the 
question  of  the  adoption  of  the  bye-law  would  be  to  give  effect  to  the 
views  of  the  minority,  and  to  disregard  those  of  the  majority. 

The  judges  of  the  Supreme  Court  appear  to  have  regarded  the  exer- 
cise by  the  defendant  J.  H.  Beatty  of  his  voting  power  as  of  so  oppres- 
sive a  character  as  to  invalidate  tlie  adoption  of  the  bye-law ;  their 
Lordships  are  unable  to  adopt  this  view  ;  in  their  opinion  the  defend- 
ant was  acting  within  his  rights  in  voting  as  he  did,  though  they  agree 
with  the  Chief  Justice  in  the  views  expressed  by  him  in  the  Court  of 
Appeal,  that  the  matter  might  have  been  conducted  in  a  manner  less 
likely  to  give  rise  to  objection. 

Their  Lordships  will  humbly  advise  Her  Majesty  to  allow  the  appeal ; 
to  discharge  the  order  of  the  Supreme  Court  of  Canada ;  and  to  dis- 
miss the  appeal  to  that  Court  with  costs ;  the  respondent  must  bear  the 
costs  of  the  present  appeal. 


Jessel,  M.  R.,  in  PENDER  v.  LUSHINGTON.^vf    ^   /' 

1877.     J.aw  Reports,  6  Chancery  Division,  70,  pp.  74-76.  V^      jv      IV  s^  V^r 

Jessel,  M.  R.     This  is  a  motion  by  Mr.  X  Petider,  on  behalf  of 
himself  and  all  shareholders  who  voted  with  him  against  an  amend-  Ml 
ment,  and  the  Direct  United  States  Cable  Company,  Limited,  as  Plain-  * 
tiffs,  against  E.  H.  Lushington  and  other  gentlemen  as  Defendants,  in 
substance  to  obtain  the  opinion  of  the  Court  that  certain  votes  at  a  gen-,  _  "^r"?  ' 
eral  meeting  on  behalf  of  the  Plaintiff  were  improperly  rejected  Ity  the  -^fi  ^ 


^ 


442  PENDER   V.   LUSHINGTON. 

chairman.  That  is  the  substance  of  the  case,  though  there  are  other 
technical  questions  to  which  I  must  also  refer. 

In  all  cases  of  this  kind,  where  men  exercise  their  rights  of  prop- 
erty, the}'  exercise  their  rights  from  some  motive  adequate  or  inade- 
quate, and  I  have  always  considered  the  law  to  be  that  those  who 
have  the  rights  of  property  are  entitled  to  exercise  them,  whatever 
their  motives  may  be  for  such  exercise  —  that  is  as  regards  a  Court 
of  Law  as  distinguished  from  a  court  of  morality  or  conscience,  if 
such  a  court  exists.  I  put  to  Mr.  Harriso^i,  as  a  crucial  test, 
whether,  if  a  landlord  had  six  tenants  whose  rent  was  in  arrear,  and 
three  of  them  voted  in  a  way  he  approved  of  for  a  member  of  Par- 
liament, and  three  did  not,  the  Court  could  restrain  the  landlord  from 
distraining  on  the  three  who  did  not,  because  he  did  not  at  the 
same  time  distrain  on  the  three  who  did.  He  admitted  at  once 
that  whatever  the  motive  might  be,  even  if  it  could  be  proved  that 
the  landlord  had  distrained  on  them  for  that  reason,  that  I  could 
not  prevent  him  from  distraining  because  they  had  not  paid  their  rent. 
I  cannot  deprive  him  of  his  property,  although  he  ma}-  not  make  use 
of  that  right  of  property  in  a  way  I  might  altogether  approve.  That 
is  really  the  question,  because  if  these  shareholders  have  a  right  of 
propert}',  then  I  think  all  the  arguments  which  have  been  addressed  to 
me  as  to  the  motives  which  induced  them  to  exercise  it  are  entirely 
beside  the  question. 

I  am  confirmed  in  that  view  by  the  case  of  Menier  v.  Hooper'' s  Tele- 
graph Worlis^  where  Lord  Justice  MelUsh  observes  :  "  I  am  of  opinion 
that,  although  it  may  be  quite  true  that  the  shareholders  of  a  company 
may  vote  as  they  please,  and  for  the  purpose  of  their  own  interests, 
yet  that  the  majoritj'  of  shareholders  cannot  sell  the  assets  of  the  com- 
pany and  keep  the  consideration."  In  other  words,  he  admits  that  a 
man  may  be  actuated  in  giving  his  vote  by  interests  entirely  adverse  to 
the  interests  of  the  company  as  a  whole.  He  may  think  it  more  for 
his  particular  interest  that  a  certain  course  ma}'  be  taken  which  may 
be  in  the  opinion  of  others  very  adverse  to  the  interests  of  the  com- 
pany as  a  whole,  but  he  cannot  be  restrained  from  giving  his  vote  in 
what  way  he  pleases  because  he  is  influenced  by  that  motive.  There 
is,  if  I  may  say  so,  no  obligation  on  a  shareholder  of  a  company  to 
give  his  vote  merely  with  a  view  to  what  other  persons  may  consider 
the  interests  of  the  company  at  large.  He  has  a  right,  if  he  thinks  fit, 
to  give  his  vote  for  motives  or  promptings  of  what  he  considers  his  own 
individual  interest. 

This  being  so,  the  arguments  which  have  been  addressed  to  me  as  to 

whether  or  not  the  object  for  which  the  votes  were  given  would  bring 

about  the  ruin  of  the  company,  or  whether  or  not  the  motive  was  an 

mproper  one  which  induced  these  gentlemen  to  give  their  votes,  or 

hether  or  not  their  conduct  shews  a  want  of  appreciation  of  the 

1  Law  Rep.  9  Ch.  350,  '554. 


PRICE   V.    HOLCOMB. 


443 


principles  on  which  this  company  "was  founded,  appear  to  me  to  be 
wholly  irrelevant.  Therefore  I  do  not  intend  to  enter  into  the  ques- 
tion as  to  what  the  objects  of  the  company  were,  or  what  was  the  mode 
in  which  it  was  proposed  to  carry  out  those  objects.  I  am  only  bound 
to  decide  whether  or  not  these  people  were  entitled  to  vote.  To  tbatu 
question  I  am  nawi^oing  to  address  myself.^  ^  jY 


PKICE 


HOLCOMB   et  al.      >  ys* 


1893.     89  Iowa,  123.2 

Action  in  Equity,  by  minority  stockholder  in  the  lOwa 
Mill  Company,  to  set  aside  a  sale  of  the  corporate  property  to  Hol-iy    \i/ , 
comb.    The  property  was  purchased  by  Holcomb  as  the  highest  bidder  »    .  \  a 
at  a  public  sale,  which  was  authorized  by  a  resolution  passed  at  a^,vr     \  \     j^ 
meeting  of  the  stockholders.    Out  of  393^  shares  voted  in  the  affirma-  Ap        tT 
tive,  Holcomb  voted,  in  his  own  right,  on  177^  shares  ;  and  also  voted,/^    ^ 
as  a  proxy,  on  180  shares.  S>    <:^  •.    ^ 

In  the  District  Court  a  decree  was  entered  dismissing  the  plain- *^-'^^      "  '^  •• 
tiff's  petition.     Appeal. 

C.  L.  Poor  and  Thomas  Hedge,  for  appellant. 

Power  &  Huston,  for  appellees. 

Given,  J.     [After  deciding  other  questions.]     The  appellant  cites  Ol^^ 
cases  announcing  the  familiar  rule  that  a  party  holding  a  fiduciary      S^ 
relation  to  trust  property  can  not  become  a  purchaser  thereof,  either  jl.^     '^ 
directly  or  indirectly.     It  is  contended  that  the  defendant  Holcomb, 
in  voting  the  majority  of  the  stock,  as  already  stated,  stood  in  the 
place  of  the  corporation,  and  was  charged  with   its  trust  relation^ 
toward  the  stockholders,  and,  therefore,  within  the  rule  forbidding 
him  from  purchasing  the  property.      Mr.   Holcomb's  relation  as  a- 
stockholder  was  not  that  of  agent  or  trustee,  but  a  joint  owner.     An ' 
agent  or  trustee  is  charged  wjth__the,_interests  of  his_principal  ~  or  '  o^ 
cestui  que  ^rwg^,  andT  can  not  have  any  interest  adverse  thereto.     Not  ^ 
so,  however^3^~lb' aTstockhoIder.     He  has  his  own_interests_to  jpro- 
tect,  jjid^js_iiQt_charged  ^vith  the  care  of  the  jnterejts  of  the  othej 
stockhoMgrs.    They_actjQr  themselves.    The  rule  applicable  to  stock- 
holders is  well  stated  in  Rice's  Appeal,  79  Pa.  St.  204,  as  follows  : 
"  Where  a  person  has  the  actual  control  of  a  corporation,  whether 

1  In  Dorchester  v.  Youngman,  A.  d.  1880,  60  New  Hampshire,  385,  it  was  decided  thati 
a  citizen's  special  pecuniary  interest  in  a  question  of  town  affairs  does  not  disqualify  himl 
from  voting  upon  it.  Seven  suits  had  been  brought  by  the  town  against  different  citizensJ 
A  vote  in  town  meeting,  authorizing  the  settlement  of  these  suits,  was  passed  bj'  the  heln 
of  the  votes  of  the  seven  defendants.  Held,  that  their  interest  did  not  disqualify  then! 
from  voting. — Ed.  | 

2  Statement  abridged.  Only  so  much  of  the  case  is  given  as  relates  to  a  single  point.  — 
Ed. 


444 


GUERNSEY   V.    COOK. 


'.^ 


such  control  arises  from  the  ownership  of  a  majority  of  the  shares,  or 
from  his  position  or  influence,  he  is  held  to  most  rigid  good  faith. 
The  onus  is  upon  him  to  show  the  fairness  of  the  transaction  if  it  is 
called  in  question."  This  brings  us  to  inquire  whether  the  appellee 
Holcomb  acted  in  good  faith.  It  is  unnecessary  that  we  extend  this 
opinion  by  here  discussing  the  evidence  on  this  point.  It  is  sufficient 
to  say  that  purchasers  for  such  property  were  not  numerous,  the  sale 
was  advertised  and  open,  it  was  postponed  in  hope  of  securing  bid- 
ders, the  minimum  price  was  fixed,  and  at  an  open  sale  the  appellee 
Holcomb  made  his  bid.  It  is  true  that  the  price  bid  was  much  less 
than  the  cost  of  the  property,  but  it  was  all  it  would  bring  at  an  open 
sale,  and,  in  view  of  the  past  failures  of  this  new  enterprise,  may  be 
said  to  be  equal  to  the  then  value  of  the  property.  We  find  no  evi- 
dence of  fraud  or  bad  faith  in  the  transaction.  What  was  done  was 
authorized  by  the  circumstances,  and  was  done  in  good  faith,  and  for 
the  best  interests  of  all  concerned.^  . 

Judgmenw(Mlr^ed. 


^^  J>* 


^\r^'^- 


r,^- 


n  ^   ^    -i^^^'/]  CoMpf  J.     The  contract  declared  on  has  been  lield  to  be  the  personal 

t*^  ,  a*  .^jl^  ,^ddfttract  of  the  defendant.  117  Mass.  548.  It  provided  in  substance 
y»  «M  iTOh  the  part  of  the  defendant  and  Mr.  Beebe,  who  together  owned  a 
majority  of  the  stock  of  the  India  Company,  that  the  plaintiff  should 
be  made  treasurer  of  that  company  at  a  stipulated  salar}' ;  the  plaintiff 
on  his  part  agreeing  to  take  part  of  their  stock  at  par,  with  an  agree- 
ment that  it  should  be  taken  back  and  an  allowance  made  for  interest, 
''  in  case  it  should  be  desirable  for  an}'  reason  to  dispense  with  the 
plaintiff's  service  as  treasurer."  The  question  is  whether  such  a 
contract  is  void  as  being  against  public  policy.  Its  decision  depends 
upon  the  construction  which  must  be  fairly  given  to  the  terms  of  the 
(y^  (^^    ^  contract. 

^Ar^^'^'^     "y    It,         In  consideration  of  the  purchase  of  a  part  of  their  stock  at  a  pricfe 
1/      Ah^^^t^       ,,/a.named,  two  of  the  stockholders  agree  to  secure  to  the  purchaser  the 
Z*^      <        /  '7^       treasurership  of  the  corporation,  of  which  they  are  members,  and  to 
^^^  I  ^^^^  secure  to  him  also  a  sum  named,  as  the  annual  salary  of  the  office. 
ij^^^ie.  purchase  of  the  defendant's  stock  and  the  agreement  relating  to 
^the  office  are  incorporated  into  the  contract  as  part  of  one  transaction ; 
Ia^^*"^  and  each  agreement  is  the  valuable  consideration  of  the  other.     The 
contract,  if  reasona])ly  susceptible  of  two  meanings,  one  legal  and  the 
other  not,  must  indeed   receive  an  interpretation  which  will    support 
1  rather  than  defeat  it,  and  the  presumption  is  in  favor  of  its  legality. 

1  But  see  Reilly  v.  Oghbay,  a.  d.  1884,  25  West  Virginia,  36;  and  Chicago  Hansom  Cai 
Co.  V.  Yerkes,  a.  d.  1892,  HI  Illinois,  320.  —  Ed. 


'I      /<   '^    A 


"-^ 


k'- 


GUERNSEY  V.    COOK.  445 

But  this  contract  necessarily  implies  that  the  defendant  intended  to 
derive,  and  the  plaintif  intended  to  give  to  him.  a  private  advantage, 
not  shared  b}-  tlie  other  stoel<hoIders,  in  consideration  of  his  election  as 
treasurer.  And  there  is  nothing  in  the  facts  disclosed  at  the  trial  to 
show  that  such  was  not  in  fact  the  result  of  the  transaction,  or  that 
the  agreement  in  question  was  known  and  consented  to  by  the  other 
members  of  the  corporation. 

It  was  the  purpose  and  effect  of  the  contract  to  influence  the  defend- 
ant, in  the  decision  of  a  question  affecting  the  private  rights  of  others, 
by  considerations  foreign  to  those  rights.  The  promisee  was  placed 
under  direct  inducement  to  disregard  his  duties  to  other  members  of 
the  corporation,  who  had  a  right  to  demand  his  disinterested  action  in 
the  selection  of  suitable  officers.  He  was  in  a  relation  of  trust  and 
confidence,  which  required  him  to  look  only  to  the  best  interests  of  the, 
whole,  uninfluenced  by  private  gain.  The  contract  operated  as  a  fraud/ 
npon  his  associates. 

In  Fuller  v.  Dame,  18  Pick.  472,  a  contract  was  held  to  be  con- 
trary to  public  policy,  and  to  open,  upright  and  fair  dealing,  which 
tended  injuriously  to  affect  the  interest  of  the  corporations  of  which 
the  promisee  was  a  member.     It  was  compared  to  the  case  of  a  compoyt 
sition  deed  where  all  the  creditors  release  the  common  debtor  upon  the  1 
pa^'ment  of  a  certain  percentage,  and  where  a  stipulation  for  a  separate  1 
and  distinct  advantage  is  held  to  be  a  fraud  on  other  creditors  and  ' 
void.      Case  v.  Gerrish,  15  Pick.  49.     Upon  the  same  principle,  agree-i 
ments  not  to  bid  against  each  other  at  a  public  auction,  as  well  as 
agrjeements  for  the  employment  of  underbidders  and  puffers,  are  held 
to  be  a  fraud  upon  the  bidders  at  the  sale,  and  void  as  against  public 
policy.      So  contracts  with  brokers  or  agents,  upon  a  consideration 
founded  on  violations  of  dut\'  to  the  principal,  are  void.     /Stnith  v. 
Toicnsend,  109  Mass.  500.     Phippen  v.  Stickney,  3  Met.  384.    Gibbs 
v.  Smith,  115  Mass.  592.      Curtis  v.  Aspimcall,  114  Mass.  187.     See 
also  Waldo  v.  Martin,  4  B.  &  C.  319  ;  3Iarshall  v.  Baltimore  &  Ohio 
Railroad,  16  How.  314  ;  Elliott  v.  Richardson,  L.  R.  5  C.  P.  744. 

Upon  the  facts  disclosed,  this  action,  which  is  not  in  avoidance  but 
in  direct  affirmance  of  the  contract,  cannot  be  maintained.  White  v. 
Franklin  Bank,  22  Pick.  181.  The  objection  that  the  contract  is. 
illegal,  although  it  comes  with  no  good  grace  from  the  defendant,  is. 
allowed  to  prevail,  not  as  a  protection  to  him,  but  for  the  sake  of  the 
public  good,  and  because  the  court  will  not  lend  its  aid  to  enforce  an 
illegal  contract.  Myers  \.  Meinrath,  101  Mass.  366.  Taylor  \.  Chester, 
L.  R.  4  Q.  B.  309. 

Judgment  for  the  defendant. 

J.  G.  Abbott  &  B.  Dean,  for  the  plaintiff. 

B.  F.  Butler  c&  J.  A.  Gillis,  for  the  defendant 


7\ 


446 


DUDLEY  V.   KENTUCKY   HIGH   SCHOOL. 


CHAPTER  XII. 


POWEK  OF  MAJORITY  OF 


STOCKHOLDERS.*  >^ 
DUDLEY  V.  KENTUCKY  HIOTv^SCHOW. 

1873.     9  Bush  (Ky. 

Cradock  &  Trahue,  for  appellant. 

Ira  Julian.,  for  appellee.^ 

Lindsay,  J.     The  order  from  which  this  appeal  is  prosecuted  must 

be  regarded  as  final.     The  special  demurrer  to  the  jurisdiction  of  the 

[V  ,  '^    /"^       cou^t  was  sustained,  and  a  judgment  rendered  against  appellant  for  the 

\V.  (r     <>        ,ic!6sts  of  the  entire  proceeding.     This  is  equivalent  to  dismissing  the 

Jr  L^     /r*^    petition  for  the  want  of  jurisdiction  in  the  court,  and  effectually  pre- 

^  .Iw    .^    eludes  appellant  from  taking  further  steps  in  this  litigation  to  obtain 

the  relief  desired. 

We  are  inclined  to  differ  with  the  circuit  court  as  to  its  want  of  juris- 
diction to  enjoin  the  collection  of  so  much  of  appellant's  subscription  to 
the  high-school  as  had  not  been  reduced  to  a  judgment  in  the  FranMin 
Quarterly  Court ;  but  this  question  need  not  be  considered  in  view  of 
the  fact  that  we  feel  satisfied,  after  a  careful  examination  of  the  petition, 
that  it  sets  out  no  cause  of  action,  and  that  under  the  facts  as  presented, 
and  the  provisions  of  the  act  of  the  General  Assembly  incorporating  the 
high-school,  it  cannot  be  so  amended  as  to  present  a  cause  of  action. 

The  object  of  the  corporation  was  to  establish  and  maintain  a  high- 
school,  and  not  to  make  money,  and  it  has  no  legal  right  to  engage  in 
speculations  or  investments  in  real  estate  for  the  last  named  purpose  ; 
but  it  has  the  expressly  delegated  power  ' '  to  receive  and  hold  for  the 
I)enefit  of  said  high-school  any  lands,  tenements,  etc.,  ...  by  gift, 
devise,  donation,  contract,  or  purchase."  It  is  not  complained  that  the 
house  and  lands  purchased  or  about  to  be  purchased  from  Gaines  are  not 
to  be  held  for  the  benefit  of  the  school,  but  that  the  corporation  is  unable 
to  pay  the  contemplated  price,  and  that  the  inevitable  result  of  the  pur- 
chase, if  consummated,  will  be  the  bankruptcy  of  the  corporation  and 
the  failure  of  tlie  project  to  establish  the  school. 

^  This  subject  is  also  discussed  in  various  cases  which  are  given  under  special  topics 
treated  of  in  subsequent  chapters ;  especially  in  the  cases  relating  to  the  stockholder's 
right  to  maintain  suit,  the  cases  relating  to  the  reserved  power  of  the  legislature  to 
alter  or  amend  charters,  and  the  cases  on  ukra  vires.  —  En. 

*  Citations  of  counsel  omitted.  —  Ed. 


T)TTT)T.li".V    OJ     KVKTItnw    mnvr    crtxTnr>^ 


tli^i  ]/' 14/ k.AA^^'-^M^ 


/  /'  \-J- — — ■      I 


r 


4- 


I 


DUDLEY   V.   KENTUCKY   HIGH   SCHOOL.  447 

It  may  be  conceded  that  the  facts  stated  in  the  petition  full}'  autbon 
ize  this  conclusion,  and  yet  it  does  not  follow  that  a  court  of  equity  has  , 
the  power  at  the  suit  of  a  stockholder  to  interfere  by  injunction  to  pre- 
vent the  corporation  from  executing  a  contract  it  has  the  lawful  right 
to  make. 

It  is  true  that  a  majorit}'  of  stockholders,  no  matter  how  great,  have 
Dotjlie  right  to  divert  the  fundsj)f  ajpint-stock  incorporated  company 
to  anyjother  than  the  purposes  for  which  it  was  organized ;  and Jf  such 
funds  are  about  to  be  so  diverted,  a  stockholder  may  file  a  bill  i^jequity 
against  the  company  to  restrain  it  by  injunction  from  such  diversion  or 
misapplicationj_  Bngshaw  v.  Eastern  Counties  Railway  Go.  (7  Hare, 
114;  1  Beavan,  1)  ;  Marsh  v.  Eastern  Railway  Co.  (40  N.  H.  548). 
But  relief  will  not  be  granted  unless  the  corporation  is  about  to  do  some 
act  outside  of  the  scope  of  its  authority,  or  in  disobedience  to  the  pro- 
visions of  its  constitution,  for  so  long  as  it  exercises  the  powers 
granted  b}*  the  charter  the  acts  of  the  company  must  be  treated  by  the 
courts  as  the  acts  of  all  the  stockholders. 

Each  and  every_stockholder  conjractsjtjiat  the  will  of  the  majority 
shall^2y£i''^  ^^  ^^^  matters  coming  within  the  limits  of  the  act  of  incor- 
porationPandnuT  cases  involving  no  breach  of  trust,  but  only  error  or 
mistake  of  judgment  upon  the  part  of  the  directors  who  represent  the 
companj',  individual  stockholders  have  no  right  to  appeal  to  the  courts 
to  dictate  the  line  of  policy  to  be  pui-sued  bj*  the  corporation.  Angell 
and  Ames  on  Corporations,  sec.  393.  Nor  does  the  irregular  manner 
in  which  the  board  of  directors  voted  upon  the  proposition  to  make 
the  purchase  from  Gaines  authorize  the  chancellor  to  interpose  to  pre- 
vent its  consummation.  In  the  case  of  Foss  v.  Harhottle  (2  Hare, 
461),  where  the  object  of  the  bill  in  equity  was  to  obtain  relief  against 
what  was  alleged  to  be  a  fraud  committed  by  certain  of  the  directors  in 
an  incorporated  compan}-,  which  fraud  consisted  in  the  sale  to  themselves, 
as  representatives  of  the  company,  of  lands  in  which  they  were  indi- 
vidually interested,  Vice-Chancellor  Wigram  held  that  although  the  act 
might  be  voidable  by  the  companj',  yet,  inasmuch  as  a  majority  of  the 
proprietors  might  at  a  general  meeting  confirm  it,  he  declined  to  inter- 
fere, saying,  "•  While  the  court  may  be  declaring  the  acts  complained  of 
to  be  void  at  the  suit  of  the  present  plaintiffs,  who  in  fact  may  be  the  only 
proprietors  who  disapprove  of  them,  the  governing  body  of  proprietors 
may  defeat  the  decree  by  lawfully  resolving  upon  the  confirmation  of 
the  ver}-  acts  which  are  the  subject  of  the  suit."  So  in  this  case,  while  I 
it  may  be  that  ohe  corpo'^alion  has  the  right  to  avoid  the  purchase  from 
Gaines,  because  one  of  the  directors,  without  whose  vote  the  propo- 1 
sition  would  have  been  rejected-  was  allowed  to  vote  b}'  proxy,  yet  it 
may  be  that  Dudley  is  ^he  onl}-  stockholder  who  disapproves  of  the 
purchase,  and  it  might  result  that,  at  the  time  the  court  was  protecting 
him  against  the  payment  of  his  subscription  because  of  the  unauthor 
ized  action  of  the  directors,  a  majority  of  the  stockholders  in  general 
meeting  might  ratify  or  have  already  ratified  the  purchase,  pud  bound 


448 


NATUSCH  V.  IRVING. 


Dudley  under  his  contract  of  subscription  to  submit  to  their  wili  ^hus 
regiilarl}'  and  legally  expressed. 

It  may  be  that  the  price  agreed  to  be  paid  for  the  house  and  lands  is 
greatly  more  than  its  value,  but  about  this  matter  the  opinion  of  the 
majorit}'  of  the  stockholders  as  expressed  through  the  directory  must 
control,  and  so  far  as  the  action  of  the  court  in  this  case  is  concerned 
it  is  immaterial  whether  the  corporation  acted  wisely  or  unwisel}'  in 
jcontracting  a  debt  which  possibl}'  it  will  be  unable  to  pa}-.  The  chcirter 
empowers  it  to  make  purchases  of  land,  to  contract  debts,  and  to  "issue 
bonds  to  an  amount  not  over  two  thirds  of  the  stock  subscribed  ;  and 
if  these  powers  are  so  exercised  as  to  result  in  loss  to  the  stockholders, 
it  is  a  misfortune  against  which  the  court^  can  afford  no  protection. 

jj.'  Judgment  affirmed. 


■   4^ 


)  Vv^ 


P- 


rV 


NATUSCH  u.  IRVING  et  als. 

1824.     Gow  on  Partnership,  Appendix  No.  VI.     Page  398.1 

Tj Plaintiff,  on  behalf  of  himself  and  all  others  the  shareholders,  mem- 
^^ers,  or  partners  of  the  Alliance  British  and  Foreign  Life  and  Fire 
,  Assurance  Company,  filed  this  bill  against  the  president  and  directors-, 
praying,  i/iter  alia,  for  an  injunction  to  restrain  them  from  carrying  on 
the  business  of  marine  insurance  in  the  name  or  on  the  account  of  the 
company,  and  from  applying  the  capital  of  the  company  to  any  such 
purpose. 

The  case  made  by  the  bill  and  affidavits  was,  in  part,  as  follows : 

A  prospectus  was  issued  for  the  formation  of  an  unincorporated  com- 

fS/i/^V^^y  to  grant  fire  and  life  insurance,  with  a  capital  of  five  million 

pounds  divided  into  fifty  thousand  shares,  plaintiff  subscribed  for  fifteen 

li'^s,  paid  the  required  deposit,  insured  his  life  in  the  company  and 

paid  the  insurance  premium.     He  was  willing  also  to  execute  a  proper 

deed  of  settlement.     After  the  plaintiff  had  subscribed,  &c.,  the  ma- 

jorit}'  of  the  company  undertook  to  carry  on  the  additional  business  of 

marine  insurance.    The}*  prepared  a  deed  of  settlement  which  contained 

provisions  for  enabling  tlic  company  to  carry  on  marine  insurance  ;  and 

which  plaintiff  refused  to  execute.     Plaintiff  objected  to  the  company's 

arrying  on   a  marine   insurance  business.      The   directors   informed 

plaintiff  that,   if  he  was  dissatisfied  with  the  course  intended  to    be 

pursued,  he  might  receive  back  his  deposit  with  interest,  and  also  have 

his  life  policy  cancelled  and  the  premium  returned. 

Loud  Eldon,  Chancellor. 


'   Statement  abrirlged.     Part  of  opinion  omitted.     The  case  was  first  reported  in 
Gow,  and  has  since  been  reported  in  2  Cooper,  Tempore  Cottcuham,  358. — Ed. 


\jr 


i>^ 


:>^- 


.,}' 


NATUSCH  V.   IRVING. 


449 


3.  An  oflfer  is  made  to  the  plaiutiflF  that  he  may  reoeive  back  his 
deposit  with  interest  from  the  date  of  the  paj'ment,  and  he  is  desired 
to  consider  himself  as  liaving  received  notice  thereof  But  it  is  notT] 
I  apprehend,  competent  to  any  number  of  persons  in  a  partnership 
(unless  they  show  a  contract  rendering  it  competent  to  them)  formed 
for  specified  purposes,  if  they  propose  to  form  a  partnership  for  ver}' 
different  purposes,  to  effect  that  formation  b}'  calling  upon  some  of 
their  partners  to  receive  their  subscribed  capital  and  interest  and  quit 
the  concern  ;  and,  in  effect,  merely  by  compdling  them  to  retire  upon 
such  terras,  so  to  form  a  neio  company.  This  would,  as  to  partner- 
ships, be  a  most  dangerous  doctrine.  "Where  a  partnership  is  dissolve(^ 
(even  where  it  can  be  in  a  sense  dissolved  the  instant  after  notice  to 
dissolve  is  given,  if  there  be  no  contract  to  the  contrary),  it  must  still 
continue  for  the  purpose  of  winding  up  its  affairs,  of  taking  and  settling 
all  its  accounts,  and  converting  all  the  property,  means  and  assets  of  the 
partnership  existing  at  the  time  of  the  dissolution  as  beneficially  as  ma}' 
be  for  the  benefit  of  all  who  were  partners,  according  to  their  respective 
shares  and  interests  ;  and  the  other  partners  cannot  say  to  him,  to 
whom  the}'  have  given  an  offer  of  his  deposit  and  interest,  T(iJ<e  that, 
and  v:e  are  a  neio  company^  keeping  the  effects,  means,  assets,  and 
propert}'  of  the  old,  as  the  propert}'  of  the  new  partnership. 

4.  The  company  will  indemnif}'  the  plaintiff  against  loss  by  its  trans- 
actions alread}'  had,  or  hereafter  to  be  had,  not  for  the  specified  pur- 
poses of  the  institution.  But  the  right  of  a  partner  is  to  hold  to  the 
specified  purposes  his  partners  whilst  the  partnership  continues,  and  not 
to  rest  upon  indemnities  with  respect  to  what  he  has  not  contracted  to 
engage  in. 

0.  A  dissatisfied  partner  may  sell  his  shares  for  double  what  he 
originally  gave  for  them.  But  he  cannot  be  compelled  to  part  with 
them  for  that  reason  ;  it  may  be  his  principal  reason  for  keeping  them^ 
having  the  partnership  concern  carried  on  according  to  the  contract. 
The  original  contract  and  the  loss  which  his  partners  would  suffer  by  a 
dissolution,  is  his  security  that  it  shall  be  so  carried  on  for  him  and 
them  beneficially,  and  with  augmented  improvement  in  the  value  of  his 
shares  and  their  shares. 


If  six  persons  joined  in  a  partnership  of  life  assurance,  it  seems  clear 
that  neither  the  majority,  nor  any  select  part  of  them,  nor  five  out  of 
the  six,  could  engage  that  partnership  in  marine  insurances,  unless  the 
contract  of  partnership  expressly  or  impliedly  gave  that  power ;  be- 
cause if  this  was  otherwise,  an  individual  or  individuals,  by  engaging 
in  one  specified  concern,  might  be  implicated  in  any  other  concern 
whatever,  however  different  in  its  nature,  against  his  consent. 

But  if  a  part  of  the  six  openly  and  publicly  professed  their  intention 
to  engage  the  partnership  in  another  concern,  and  clearly  and  distinctly 
brought  this  to  the  knowledge  of  one  or  more  of  the  other  partners,  and 
such  one  or  more  of  the  other  partners  could  be  clearly  shown  to  have 


3 


450  NATUSCH   V.   IKVING. 

acquiesced  m  such  intention,  and  to  have  permitted  the  other  partners 
to  have  entered  upon  and  to  have  engaged  themselves  and  the  body  in 
such  new  projects,  and  thereby  to  have  placed  their  partners,  so  en- 
gaged, in  difficulties  and  embarrassments,  unless  they  were  permitted 
to  proceed  in  the  farther  execution  of  such  projects,  if  a  court  of  equity 
would  not  go  the  length  of  holding  that  such  conduct  was  consent,  it 
would  scarcely  think  parties  so  conducting  themselves  entitled  to  the 
festinum  reniedium  of  injunction. 

It  may  be  taken  that  the  principle  that  would  appl}'  to  the  partner- 
ship of  six,  will  apply  to  this  partnership  of  600  or  700  ;  340  have  exe- 
cuted in  respect  of  not  quite  half  the  number  of  shares  :  there  probably 
may  be  therefore  600  or  700  members.  To  those  who  have  not  had 
occasion  to  observe  the  boldness  of  speculation,  it  ma}'  seem  astonishing 
that  persons,  and  so  many  in  number,  should  have  engaged  themselves 
in  a  speculation  so  little  explained,  and  undertaken  to  execute  deeds, 
of  the  contents  of  which  they  had  so  little  information.  To  those  who 
know  the  difficulty  of  applying  the  rules  of  law  and  equity  to  societies 
constituted  of  such  numbers  of  persons  not  incorporated,  it  is  not  matter 
of  surprise  that  persons,  ignorant  of  those  difficulties,  should  become 
members  of  such  societies  ;  it  may  be  matter  of  surprise  to  them  that 
persons  who  know  the  difficulty  of  applying  those  rules  should  become 
members,  even  where  tiie  nature  of  the  speculation  is  clearly  explained, 
and  full  information  is  given  of  the  contents  of  the  deeds  to  be  exe- 
cuted. Much  has  been  done  with  respect  to  the  difficulty  alluded  to,  by 
provisions  how  those  who  have  demands  upon  such  societies  are  to  sue, 
and  how  such  societies  are  to  be  sued ;  much  remains  to  be  done,  and 
particularly  as  to  rendering  simple  and  effectual  the  remedies  of  the 
members  of  such  societies  against  each  other.  It  is  observed  that  the 
members  of  this  society  underwriting  will  be  each  liable  to  the  bank- 
rupt laws.  That  depends  upon  the  act  of  parliament  which  is  to  take 
effect  in  May  next.^  Shares  may  devolve  to  feme  coverts,  infants,  &c. ; 
Dut  whatever  are  the  difficulties,  courts  must  struggle  to  remedy  them, 
and  to  prevent  particular  members  of  those  bodies  from  engaging  other 
members  in  projects  in  which  they  have  not  consented  to  be  engaged, 
or  the  engaging  in  which  the}-  have  not  encouraged,  assented  to,  em- 
powered, or  acquiesced  in  expressl}'  or  tacitly,  so  as  to  make  it  not 
equitable  that  they  should  seek  to  restrain  them.  The  principles  which 
a  court  would  act  upon  in  the  case  of  a  partnership  of  six  must,  as  far 
I  as  the  nature  of  things  will  admit,  be  applied  to  a  partnership  of  600. 

The  injunction  was  granted. 

^  5  Geo.  4,  c.  98,  s.  2,  by  which  an  underwriter  is  declared  to  be  a  trader  liable  to 
the  bankrupt  laws,  and  see  6  Geo.  4,  c.  16,  s.  2.  Formerly  it  was  held  that  an  under 
writer,  merely  in  that  character,  could  not  be  a  bankrupt.  Ex  parte  Bell,  15  Vesey, 
»5ft. 


t 


ASHTON   V.   BURBANK. 


ASHTON  V.  BURBANK.  ^  o^  / /C 

1873.     2  Dillon,  435.^       "^  \^     R       (<       ^  ^  sV / 

Suit  on  a  note  given  for  an  assessment  upon  stock  in  a  corporatloa  ^^'^ 
Original  charter  authorized  compan}'  to  transact  a  "life  and  accident 
insurance"  business.  After  defendant's  subscription  to  the  stock,  the 
charter  was  amended,  the  name  was  changed,  and  the  corporation 
was  authorized  to  transact  the  business  of  "  fire,  marine,  and  inland' 
insurance."  5^ ' 

The  amended  charter  was  accepted,  but  in  point  of  fact  the  corpora-  '^J^ 
tion  took  no  risks  during  the  short  period  it  afterwards  did  business    t<^, 
except  such  as  were  authorized  by  its  original  charter.     The  defendant 
neither  procured  nor  assented  to  the  amendatory  act,  nor  did  he  know 
of  it  until  after  its  passage,  and  thereupon  he  protested  against  it  and 
refused  to  pay  the  note  on  this  ground.     The  note  was  sold  to  plaintiff 
by  the  insurance  company  after  it  ceased  to  do  business,  and  long  after(g 
the  note  was  due. 


Dillon,  J. 

I  3.  The  change  in  the  charter,  by  which  a  life  and  accident  com- 
'panj-  was  authorized  to  transact  fire,  marine,  and  inland  insurance, 
is  an  organic  change  of  such  a  radical  character  as  to  discharge  pre- 
vious subscribers  to  the  stock  of  the  company  from  any  obligation  to 
pay  their  subscription,  unless  the  change  is  expressly  or  impliedly 
assented  to  by  them.  Here  there  was  no  such  assent,  and  no  acquies-^ 
cence  in  the  structural  change  made  in  the  charter  of  the  company.! 
The  company  could  not,  against  such  a  subscriber,  maintain  a  suit  to 
collect  his  subscription,  and  take  the  monej'  and  use  it  as  capital  for 
the  transaction  of  business  under  the  charter  as  altered.  We  think,  m 
such  a  case,  the  subscriber  is  not  bound  to  enjoin  action  under  the 
amended  charter,  but  may,  if  he  elects,  defend  against  an  action  to 
recover  on  his  subscription  to  the  stock.  If  the  company  accepted  the 
amended  charter,  as  it  did  by  adopting  a  new  name,  it  is  not  essential 
to  such  a  defence  to  show  that  at  the  time  of  the  trial  the  corporation 
had  actually  exercised  the  enlarged  powers  conferred  upon  it.  The  I 
defendants  are  not  bound,  on  their  subscription,  to  pay  to  the  company 
money  which,  if  paid,  may  be  used  as  capital  to  carry  on  the  business 
authorized  b}-  the  amended  charter 

Judgment  for  the  defendants. 
Nelson,  J.,  concurs. 

1  Statement  abridged.    Only  so  much  of  the  case  and  of  the  opinion  given  as  relates 
to  one  point.  —  Ed. 


Ko 


i4" 


HART 


452       HAl^FOR^  ^ND/ijSW   H 


CROSWELL. 


CROSWELL. 


5  nm  (N.  Y.),  383. 


fvA^^^AssTJMPSiT,  tried  at  the  New- York  circuit  in  March,  1841,  before 
■^j^    Gridley,  C.  Judge.     The  action  was  brought  to  recover  certain  instal- 


^^ 


i^^ 


h  "  ^-xy 


(in 


j^' 


-jb.     figments  upon  the  defendant's  subscription  to  the  capital  stoclf  of  the 
^  ifj'       plaintiffs'  company'.     On  the  trial  the  case  was  this  :  In  Ma}-,  1833,  the 
<^     ,  J^islature  of  Connecticut  passed  an  act  authorizing  the  plaintiffs  to 
'  ,5t?x^construct  a  rail-road  from  the  town  of  Hartford  to  the  city  of  New- 
Haven.     The  capital  stock  was  divided  into  shares  of  $100  each,  and 
the  defendant  subscribed  for  and   was  allowed  10  shares.     The  sub- 
scription was  in  these  words:  "Whereas  the  general  assembl}- of  the 
state  of  Connecticut,  at  their  session  in  May,  1833,  passed  a  resolution 
incorporating  the  Hartford  and  New-Haven  Rail-Road  Compan}',  with 
power  to  construct  a  rail-road  or  way  from  the  town  of  Hartford  to  the 
city  of  New-Haven :  We  do  hereb}-  subscribe  to  the  stock  of  said  com- 
pan}'  the  number  of  shares  annexed  to  our  names  respectively,  on  the 
terms,  conditions  and  limitations  mentioned  in  said  resolution.     New- 
York,  July  31,  1835.''     In  May,  1839,  the  legislature   of  Connecticut 
amended  the  act  of  incorporation  by  authorizing  the  company-  to  "  pro- 
cure, charter  or  purchase  and  hold  "  such  number  of  steamboats,  to  be 
used  in  connection  with  their  road,  as  they  might  deem  expedient,  to  an 
amount  not  exceeding  $200,000  ;  and,  for  that  purpose,  to  increase  their 
1  capital  stock  to  the  same  amount.     On  the  2d  of  July  following,  the 


^ 


v^ 


.Vn 


,  ~"I' "  — —     -       J    ----O' 

0^  board  of  directors  resolved  to  accept  the  amendment,  and  to  adopt  it  as 
a  part  of  the  charter.  They  also  resolved  that  the  stockholders  who 
were  paying  up  their  instalments  should  be  allowed  a  preference  in  the 
distribution  of  the  new  stock  to  be  created  in  pursuance  of  the  amend- 
ment. In  September,  1839,  at  a  general  meeting  of  the  stockholders, 
the  resolution  to  accept  the  amendment  was  ratified.  Due  notice  of 
this  meeting  was  given  ;  but  the  defendant  was  not  present,  nor  did  it 
appear  that  he  had  at  any  time  signified  his  assent  to  an  acceptance  of 
the  amendment.  Intermediate  the  date  of  the  defendant's  subscription 
and  the  amendment  of  the  charter,  the  instalments  sought  to  be  recov- 
ered were  regularly  called  for  by  public  notice  to  that  effect,  and  a  per- 
sonal demand  thereof  was  shown  to  have  been  made  of  the  defendant, 
who  refused  to  pay.  The  road  was  completed  and  put  in  operation 
before  the  commencement  of  the  suit.  Upon  these  facts  a  verdict  was 
rendered  for  the  plaintiffs  by  consent,  subject  to  the  opinion  of  the  court 
upon  a  case. 

S.  P.  Staples^  for  the  i)lain tiffs. 

C.  3Ic  Vean,  for  the  defendant. 

B;/  the  Courts  Nelson,  Ch.  J.  The  main  objection  taken  to  a  recov- 
ery in  this  case  is,  that  the  plaintiffs  are  seeking  to  enforce  the  per- 
formance of  a  different  contract  from  that  into  which  the  defendanf 


HARTFORD   AND   NEW   HAVEN   RAILROAD   CO.   V.   GROSWELL.      453 

entered  when  he  subscribed  for  the  stock ;  in  other  words,  that  the 
defendant  never  assented  to  tlie  contract  upon  which  the  action  is 
founded. 

The  original  charter  conferred  upon  the  compan}'  all  the  usual  and 
necessary  powers  for  locating  and  constructing  a  railroad  from  the 
town  of  Hartford  to  the  city  of  New-Haven.  The  ten  shares  sub- 
scribed for  b}-  the  defendant  were  express]}-  taken  upon  "  the  terms, 
conditions  (Did  limitations "  mentioned  in  the  charter.  And  such 
would  doubtless  have  been  the  legal  effect  of  the  subscription  had  no 
reference  to  the  charter  been  made  in  it.  The  contract  thus  entered 
into  was  as  specific  and  definite  as  the  charter  of  the  companj'  could 
make  it ;  and  the  meaning  and  intent  of  the  parties  cannot  therefore 
be  mistaken.  It  was  a  contract  to  take  stock  in  an  association  incor- 
porated for  a  particular  object,  having  such  limited  and  well  defined 
powers  as  were  necessar}-  to  the  accomplishment  of  that  object.  The 
defendant  assented  to  the  object  b}^  his  subscription,  and  thereb}-  agreed 
that  his  interest  should  be  subject  to  the  direction  and  control  of  the 
powers  thus  expressly-  conferred,  but  nothing  more. 

Since  entering  into  this  contract,  the  plaintiffs  have  procured  an 
amendment  of  their  charter,  by  which  they  have  superadded  to  their 
original  undertaking,  a  new  and  very  different  enterprise  —  and,  for 
auglit  that  can  be  known,  a  very  hazardous  one  —  with  the  necessary 
additional  powers  to  carrj-  it  into  effect.  Instead  of  confining  their 
operations  to  the  construction  and  management  of  their  rail-road  between 
Hartford  and  New-Haven,  thej-  have  undertaken  to  establish  and  main- 
tain a  line  of  water  communication  b}'  means  of  steamboats,  at  an 
expense  not  to  exceed  S200,000  ;  to  all  which,  it  is  insisted,  the  con- 
tract of  the  defendant  has  become  subject,  without  his  approbation  or 
assent. 

It  is  most  obvious,  if  incorporated  companies  can  succeed  in  estab- 
lishing this  sort  of  absolute  control  over  the  original  contract  entered 
into  with  them  by  the  several  corporators,  there  is  no  limit  to  which  it 
may  not  be  carried  short  of  that  which  defines  the  boundary  of  legis- 
lative authority.  The  proposition  is  too  monstrous  to  be  entertained 
for  a  moment.  Corporations  possess  no  such  power.  Indeed  the}'  can 
exercise  no  powers  over  the  corporators  beyond  those  conferred  by  the 
charter  to  which  they  have  subscribed,  except  on  the  condition  of  their 
agreement  or  consent.  This  is  so  in  the  case  of  private  associations,! 
where  the  articles  entered  into  and  subscribed  by  the  members  are 
regarded  as  the  fundamental  law  or  constitution  of  the  societ}',  which 
can  only  be  changed  by  the  unanimous  voice  of  the  stockholders. 
(Livingston  \.  Lyncli,  4  John.  Ch.  Rep.  573;  Coll.  On  Part.  641.) 
So  here,  the  original  charter  is  the  fundamental  law  of  the  association 
—  the  constitution  which  prescribes  limits  to  the  directors,  officers  and 
agents  of  the  company  not  only,  but  to  the  action  of  the  corporate 
body  itself — and  no  radical  change  or  alteration  can  be  made  or 
allowed,  by  which  new  and  additional  objects  arc  to  be  accomplished 


& 


454       HARTFORD   AND   NEW   HAVEN   RAILROAD   CO.    V.    CROSWELL. 

or  responsibilities  incurred  by  the   company,  so  as  to  bind  the  indi" 
viduals  composing  it,  without  their  assent. 

The  question  has  been  the  subject  of  consideration  in  Massachusetts 
and  Penns3'lvania,  and  in  each  the  courts  have  not  hesitated  to  main- 
tain the  inviolability  of  the  contract  as  originally  entered  into,  denying 
to  the  company  the  power  of  altering  it  essentially  and  of  binding  the 
subscribers  who  have  not  given  their  assent.  In  the  case  of  The  Mid- 
dlesex Turnpike  Corporation  v.  LocJce^  (8  Mass.  Rep.  268,)  the  suit 
was  brought  upon  a  subscription  contract  for  stock,  by  which  the 
defendant  agreed  to  take  one  share  and  to  pay  all  assessments  made 
upon  it.  The  ground  of  defence  which  prevailed  was,  that  the  location 
of  the  turnpike  road  had  been  changed  by  an  act  of  the  legislature ; 
after  the  defendant's  subscription,  the  act  having  been  passed  at  the 
instance  of  the  corporation  ;  and  that  the  defendant  had  never  assented 
to  the  alteration.  The  court  said  :  "  The  plaintiffs  rely  on  an  express 
contract,  and  were  bound  to  prove  it  as  they  allege  it.  Here  the  proof 
is  of  an  engagement  to  pay  assessments  for  making  a  turnpike  in  a  cer- 
tain specified  direction.  The  defendant  may  truly  say,  non  hmc  in 
fcedera  veni.  He  was  not  bound  by  the  application  of  the  directors  to 
the  legislature  for  the  alteration  of  the  course  of  the  road,  nor  by  the 
consent  of  the  corporation  thereto."  The  same  principle  was  recog- 
nized and  admitted  in  the  case  of  The  Indiana  <&  Ehenshurgh  Turn- 
pike Co.  V.  Phillips.,  (2  Penn.  Rep.  184.) 

I  do  not  deny  that  alterations  may  be  made  in  the  charter  by  the 
procurement  of  the  company,  without  changing  the  contract  so  essen- 
tiall}'  as  to  absolve  the  subscriber.  Such  would  be  the  case,  perhaps, 
in  respect  to  mere  formal  amendments,  or  those  which  are  clearly 
enough  beneficial,  or  at  least  not  prejudicial  to  his  interests.  A  modi- 
fication of  the  grant  may  frequently  be  advisable,  if  not  necessary,  in 
order  to  facilitate  the  execution  of  the  very  object  for  which  the  cora- 
pan}'  was  originally  established  ;  and  I  admit  there  are  intrinsic  diffi- 
culties in  the  way  of  la3'ing  down  any  general  rules  by  which  to 
distinguish  between  the  two  kinds  of  cases.  Each  must  depend  upon 
its  own  circumstances,  and  be  disposed  of  with  due  regard  to  the  invio- 
lability belonging  to  all  private  contracts. 

Some  of  the  cases  which  have  occurred  exemplifj'  the  difldculties 
attending  the  question.  In  Irvin  v.  The  Turnpike  Co..,  (2  Penn.  Rep. 
466,)  it  was  held  that  a  benefit  which  results  to  individual  property  by 
the  location  of  the  road,  did  not,  in  contemplation  of  law,  enter  into  the 
consideration  of  the  contract  of  subscription.  Hence,  it  was  there 
decided  that  the  subscriber  was  bound,  notwithstanding  a  change  in 
the  location  of  the  road  made  by  an  act  of  tlie  legislature  against  his 
remonstrance  ;  and  this  though  the  change  was  obviously  to  his  preju- 
dice in  point  of  fact.  The  decision,  it  will  be  perceived,  is  contrary  to 
the  case  before  referred  to  in  Massachusetts.  The  court,  moreover, 
were  not  unanimous,  Rogers  and  Kennedy,  Js.  having  dissented.  In 
Qray  v.  The  Monongahela  Navigation  Co..,  (2  Watts  dt  Serg.  156,) 


STEVENS   V.   KUTLAND   AND   BURLINGTON   RAILROAD   CO. 


455 


the  same  learned  court  held,  that  an  alteration  in  the  charter,  by  which 
additional  privileges  were  granted  to  the  corporation,  was  not  such  a 
violation  of  the  contract  of  subscription  as  would  relieve  the  subscriber, 
although  the  additional  privileges  might  extend  the  liabilities  of  the 
company  and  thus  incidentally  affect  him. 

I  refer  to  the  last  two  cases  as  affording  a  very  full  and  able  exam- 
ination of  the  subject,  without  intending,  at  this  time,  to  assent  to  their 
conclusions  or  to  all  the  reasonings  of  the  learned  chief  justice  who 
delivered  the  opinions.  In  each  of  them,  however,  the  general  principle 
before  asserted  in  T/ie  Indiana  &  Ebensh.  Turnpike  Co.  v.  Phillips 
is  recognized,  viz.  that  the  alteration  by  the  legislature  may  be  so 
extensive  and  radical  as  to  work  a  dissolution  of  the  contract ;  but  an 
effort  is  made  so  to  modify  and  regulate  the  application  of  the  principle 
as  to  admit  of  improvements  in  the  charter,  useful  to  the  public  and 
beneficial  to  tl\e  company,  without  this  consequence. 

In  the  case  before  us,  the  change  in  the  powers  and  purposes  of  the 
plaintiffs'  company  has  been  so  extensive  as  to  preclude  us  from  sanc- 
tioning a  recovery  upon  the  defendant's  subscription,  unless  we  are 
prepared  entirely  to  abandon  the  principle  above  stated  and  to  declare^ 
that  the  interests  of  subscribers  shall  be  subject  to  the  will  and  pleasured 
of  a  m"Sij>ority  o£rthe  stockholders.       \   Ajpdgment  for  the  defendant 


mS^i^ 


,^^ 


Bill   in  crifANCERY,  preferred   oefore  the  Chanwllor  of  the  Third'   ^  \ 


Judicial  Circuit,  against  the  Rutland  &  Burlington  Railroad  Company^. jji-     »[    \A^ y%/^ 
and  three  of  its  directors,  by  a  stockholder  ;  the  object;  of  which  is  to  \y  '^    *^l/    >^ ^*^ 
obtain  an  injunction,  restraining  defendants  from  using  the  corporate9i5\* \<^'^>^   i/'  -f^ 


funds  or  credit  for  the  purpose  of  constructing  a  railroad  from  Burlington 
to  Swanton.     The  original  charter  authorizes  the  building  of  a  railroad^ 


on  the  Connecticut  River.     It  provides  that  the  capital  shall  be  one!;^"^     ^^t'     )J/' 
million  dollars;  with  the  right  in  the  corporation  to  increase  it  to  an.  v' 
amount   sufficient   to   complete  said  road    and   furnish    all    necessary  ni)'^ 
apparatus  for  conveyance.     The  corporation  was  organized,  the  stock  \     - 
taken,  and  the  road  constructed  and  put  in  operation.     The  plaintiff  '\y\^ 


subscribed,  and  paid  for,   five  shares  ; 
same.     After  the   plaintiff  had   become 


and  is  still  tlie  owner  of  the 


^ 


X 


•^ 

i- 


t^ 


lu   IS   sLiii  Lut;  uwiiei   ui    lue       ^  t        a 

stockholder,  and  after  the3''  J^'^i  C^. 
road  was  in  operation,  the  legislature  passed  an  additional  act,  author- J'^  fZ^V  J-~^ 
izing  the  corporation  to  extend  its  railroad  from  Burlington  northerly  ^  "^    us*  ' 

to  Swanton,  a  distance  of  about  thirty  miles;   also  providing  that  the  (jtA~^      )^  "M'****^'^ 

\     ^^  ^^  ^^^  ^ 
^  Statement  abridged.     Portions  of  opinion  omitted.  —  Eu  /  ^jj-j^      1        »        ,j>y^\ 


c-o. 


vih^ 


tJ^ 


X      S:|r£VEHS    V.    RUTLAND    AND   BURLINGTON   RAILROAD   CO. 

■  A 
corporation,  in  the  construction  of  this  extension,  shall  have  aR  the 

rights  and  privileges  and  be  subject  to  all  the  liabilities  contained  in 

)\^e  original  charter.     This  additional  act  was  accepted  by  the  board  of 

(^-^  directors.     The  directors  caused  a  meeting  of  the  stockholders  to  be 

called,  to  see  if  they  would  accept  of  this  act  as  an  amendment  of  their 

charter ;  and  threatened,  in  case  of  acceptance,  to  apply  the  corporate 

funds  in  constructing  the  extension  against  the  will  of  the  minority  and 

particularly  of  the  plaintiff.     After  the  bill  was  filed,  and  prior  to  the 

lieaping,    the  meeting  was  held,  and  a   majority  of  the  stockholders 

^^vtoted  to  accept  the  additional  act  as  an  amendment  of  their  charter. 

J\*    /"O    '     /I  <*-'      The  defendants  filed  no  affidavits,  nor  did  they  apply  for  a  delay  of  the 

r  ,"1^      i^      hearing  for  the  purpose  of  answering  the  bill 


/ii^-  L*^  /r^  f  Bennett,  Chancellor.  The  question  is,  can  the  orator,  upon  such 
/•  ^t^  (T  /i/yy^^\y^ ^  state  of  facts,  claim,  at  the  hands  of  the  chancellor,  his  injunction. 
(U*^j_^  A,  *^u>^*'/  -^^  ^^  ^"  admitted  principle,  that  in  partnerships,  and  joint  stock 
^*A-T\;c  jt^.  ^j associations,  they  cannot  by  a  vote  of  the  majority  change  or  alter 
r^^~\  ^■'^^\^  V'^'^^  (their  fundamental  articles  of  copartnership  or  association,  against  the 
,  r>^   l^^     />         /will  of  the  minority,  however  small,  unless  there  is  an  express  or  im- 

A"^  (plied  provision  in  the  articles  themselves  that  they  may  do  it.     It  is 

,  -        I  equally  well  settled,  that  a  court  of  chancery  will,  upon  the  application 
^.^   '"     ^,^^'  I  of  an  individual  member  of  a  partnership,  or  joint  stock  association, 

.y^'^''^^ ^    *f-'  jrestrain,  by  injunction,  the  majority  from  using  the  funds  or  pledging 

A -'"^^  /the  credit  of  the  partneiship  or  association  in  a  business  not  warranted, 

^y]*^"^^^  t  and  not  within  the  scope  of  their  fundamental  articles  of  agreement. 

'^  '  ^'    Ljr^  Courts  of  equity  treat  such  proceedings  by  a  majorit}',  as  a  fraud  upon 

3>I*  _x ,  the  other  members,   which  they  will  neither  sanction  or  permit.     To 

*^*     T''^       'V  prevent  the  commission  of  fraud,  b}'  injunction,  has  been  one  of  the 

yy/i  I    /J/-'-'       V          earliest  and  most  appropriate  heads  of  equity  jurisdiction,  as  well  as  to 
iV^-*^'      A,-<^'th>  relieve  against  it,   when  committed. 

o^^        Af^  It  was  well  conceded,  in  the  argument  on  the  defense,  that  if  the  cor- 

A.      ^V-     /  poration  had  been  about  to  proceed  to  a  construction  of  the  contem- 

t^^  .        y'  plated  extension  without  the  act  of  1850,  it  would  have  been  a  proper 

yyiJ''^''^  ^-  case  for  an  injunction.    The  only  question  which  can  be  open  to  debate 

'  is,  as  to  wliat  shall  be  the  effect  of  the  act  of  1850,  and  a  subsequent 

adoption  of  the  act  by  the  corporation,  upon  the  individual  rights  of  a 
shareholder  who  does  not  assent  to  its  adoption?  If  bound  by  it,  tiiere 
is  no  equity  in  this  bill.  It  is,  and  must  be  admitted,  that  the  legisla- 
ture has  no  constitutional  power,  unless  it  be  reserved  in  the  grant,  to 
change  or  alter  an  act  of  incorporation  without  consent,  and  thereby 
cast  upon  the  company  new  and  additional  obligations,  or  take  from 
them  rights  guaranteed  under  the  original  charter.  And  indeed  this 
the  legislature  have  not  attempted  to  do.  It  is  also  equally  true  that 
it  is  a  part  of  the  law  of  corporations,  that  they  act  according  to  the 
voice  of  tlie  majority,  lint  it  is  to  be  remembered,  that  this  is  not  a 
Buit  in  which  the  plaintiff  seeks  to  protect  hiuiself  in  any  corporate 
right,  but  in  his  own  individual  right,  growing  out  of  the  fact  of  his 
having  become  a  corporator  by  his  subscription  and  its  payment,  to  the 


STEVENS   V.    RUTLAND   AND   BURLINGTON   RAILROAD   CO.         457 

capital  stock  of  the  compan}'.  One  of  an  aggregate  corporation  may 
contract  with  the  company,  as  well  as  a  third  person ;  and  the  rights  of 
the  individual  so  contracting  are  no  more  distinct  and  independent  in 
the  one  case  than  in  the  other.  The  plaintiff,  hy  his  subscription,  as- 
sumed to  pay  to  the  corporation,  and  only  for  the  purpose  specified  in  f\ 
the  charter,  its  amount,  according  to  the  assessments  ;  and  there  was  jj 
at  the  same  time  a  trust  created,  and  an  implied  assumption  on  the 
part  of  the  corporation,  to  apply  it  to  that  object,  and  none  other. 
The  corporation  also  assumed  upon  themselves  to  account  to  this  cor- 
porator for  his  share  of  the  dividends,  when  this  road  should  be  com- 
pleted and  put  in  operation,  and  for  liis  share  of  capital  stock,  though 
not  in  vuviero.  The  charter,  in  this  case,  gives  to  the  state  the  right 
to  purchase  out  the  road  of  the  corporation,  after  a  given  number  of 
years,  upon  certain  terms  therein  specified.  The  relation  between  each 
original  shareholder  and  the  corporation  is  the  same.  The  obligation 
of  the  contract  between  tlie  legislature  and  the  corporation,  after  an 
acceptance  of  the  charter,  is  no  more  sacred  than  that  which  is  created 
between  the  corporation  and  the  individual  corporator.  Does  any  one 
suppose  the  legislature  could,  without  the  consent  of  parties,  absolve  a 
corporator  from  liabilit}'  on  his  subscription  to  the  corporation,  or  K^  ' 
modif}'  it?  and  can  they  do  the  reverse  of  it?   'l^o  v 

It  is  conceded  that  there  is  a  class  of  alterations  in  a  charter,  which 
the  corporation  may  obtain  and  adopt,  that  would  not  so  essentially 
change  the  contract  as  to  absolve  the  corporator  from  his  subscription, 
or  give  him  a  right  to  complain  in  a  court  of  justice,  in  case  he  had 
previously  paid  it.  AVhere  the  object  of  the  modification  or  alteration' 
of  the  charter  is  auxiliary  to  the  original  object  of  it,  and  designed  to 
enable  the  corporation  to  carry  into  execution  the  ver}-  purpose  of  the 
original  grant,  with  more  facility  and  more  beneficially  than  they  other- 
wise could,  the  original  corporator  cannot  complain  ;  and  I  should  ap- 
prehend it  would  make  no  difference  with  the  rights  of  a  corporation, 
in  such  a  case,  though  he  could  show  that  the  charter,  as  amended,  was 
less  beneficial  to  the  corporators  than  the  original  one  would  have  been. 
The  ground  upon  which  such  amendments  bind  the  corporator,  I  deem  to 
be  his  owni  consent.  When  he  becomes  a  corporator  by  his  signing  for 
a  portion  of  the  capital  stock,  he  in  effect  agrees  to  the  by-laws,  rules, 
and  votes  of  the  company,  and  there  is  an  implied  assent,  on  his  part, 
with  the  corporation,  that  the}'  may  apply  for,  and  adopt  such  amend-/  ^ 
ments  as  are  within  the  scope,  and  designed  to  promote  the  execution! 
of  the  original  purpose;  and  he  signs,  and  the  corporation  receive  hisl 
subscription,  subject  to  such  implied  contingenc}' ;  and  if  we  regard  it 
in  the  nature  of  a  license,  only,  it  would  not  alter  tlie  principle.  Both 
parties  having  acted  upon  it,  it  would  not  be  countermandable. 

Eut  suppose  the  object  of  the  alteration  is  a  jundjjg^rUal_change  in 
the  originaf  purpose,  and  designed_to  superadd  to  it  something  which 
is  l^yond  and  aside  of  it  ;_does  the  same  principle  aj^jDly  ?^,piAfter  cit- 
ing ^nd  commenting  on  various  cases,  the  last  of  which  is  Hartford 


't). 


458         STEVENS   V.    RUTLAND   AND   BURLINGTON   RAILROAD   ©C 

&  N.  H.  R.  Co.  V.  Croswell,  5  Hill,  385,  the  learned  Chitnc^Xof  pro- 
ceeds •]  Chief  Justice  Nelson,  in  his  opinion,  la3-s  down  thivj  general 
proposition,  "  that  corporations  can  exercise  no  power  over  the  corpo- 
rators, beyond  those  conferred  by  the  charter  to  which  they  have  sub- 
scribed, except  on  the  condition  of  their  agreement  or  consent." 

This  is  a  sound  proposition.  The  consent  or  assent  may,  however, 
be  implied  in  a  class  of  cases,  as  has  already  been  stated,  where  the 
amendment  is  not  regarded  as  fundamental,  and  can  be  brought  within 
the  scope  of  the  original  purpose  of  the  association  ;  and  this  is  going 
to  the  ver}'  verge  of  the  powers  of  the  corporation.  It  is  difficult,  and 
would  be  unwise,  to  attempt  to  la}'  down  any  general  rules  to  determine 
in  what  precise  cases  the  assent  of  the  corporator  should  be  implied, 
and  in  what  not.  It  is  sufficient  for  the  present  purpose  to  sa}',  that 
his  assent  cannot  be  implied,  in  a  case  like  the  present,  from  a  majority 
vote.  Courts  ma}'  differ,  and  doubtless  will,  in  regard  to  what  alter- 
ations shall  be  sufficient  to  constitute  a  fundamental  change.  But  in 
the  present  case,  I  think,  on  this  point  there  can  be  but  one  opinion. 
The  termini  of  the  road,  as  fixed  by  the  charter,  are  Burlington,  and 
some  point  on  the  west  bank  of  Connecticut  River,  in  the  county  of 
Windsor  or  Windham.  The  capital  stock  is  one  million  of  dollars,  with 
a  right  in  the  corporation  to  increase  it  to  an  amount  sufficient  to  com- 
plete said  road,  and  furnish  the  necessary  apparatus  for  conveyance. 
The  supplementary  act  of  1850  purports  to  authorize  the  corporation, 
within  three  years,  to  construct  and  extend  their  railroad  from  the 
terminus  in  Burlington,  to  some  point  in  Swanton,  in  the  county  of 
Franklin,  a  distance  of  about  thirty  miles ;  and  the  act  provides  that 
in  the  construction  of  the  road,  they  shall  have  all  the  rights  and  privi- 
leges, and  be  subject  to  all  the  liabilities,  contained  in  their  original 
charter,  and  the  acts  in  addition  to  it. 

The  franchise  granted  to  this  compan}^  was  territorial ;  and  an  ex- 
tension of  the  termini  necessarily  is  an  extension  of  the  franchise.  It 
cannot  remain  the  same  thing  in  substance,  until  it  can  be  established 
that  a  part  is  equal  to  the  whole.  Besides,  the  compan}'  may  nicreaso 
the  capital  stock  to  such  additional  sum  as  shall  be  necessar}'  to  con- 
struct the  extension. 

The  statute  of  1850  is  little  less  in  effect,  if  anything,  than  an  at- 
tempt to  create  in  a  summary  manner,  and  by  the  wa}'  of  reference,  a 
new  corporation,  and  to  transfer  all  the  old  corporators  to  it.     If  all 
the  corporators  had  assented  to  this  transfer,  it  was  well  enough.     The 
^  '^     '^  ^      change  in  the  purpose  was  not  more  fundamental  in  the  case  from  the 
^  y^    ^     J6ih  of  Hill  than  in  this.     It  is  not  necessar}-  that  thejbusiness  should 
^Ay^l*'^/^^    I  be  changed,  in  kind,  to  change  the_original  purpose.     If  this  is  not  a 
^L'^yV^fl   C    I  change  in  purpose,  it  would  not  be  to  extend  the  road  in  one  direction 
^  _   J     y"^  ^  'I  to  Canada  line,  and  in  the  other  to  Massachusetts  line  ;  and  there  would 
fi/^y^  /^^  ^^  limits  to  the  control  which  the  corporation  might  acquire  over  the 

yl  X  (individual  corporators,  and   tliis,  too,   without  their  consent,   except 

/what  arises  from  the  confines  of  legislative  authority. 


STEVENS   V.    RUTLAND   AND   BURLINGTON   RAILROAD   CO.         459 


The  change,  thenj^in_tlie  charter  beingjundamental  andjbe  corpora^ 
tion  not  being  able  to  bind  the  plaintiff  b}-  a  majority  vote,  what  must 
be  tlie  result?  If  Tie  had  been  sued  for  an  assessment  upon  his  stock, 
Ee~rnight  have  claimed  that  he  was  absolved  from  all  liabilit}'  upon  the 
acceptance  of  the  amendment.  And  is  not  this  reasonable  ?  Shall  it 
be  said  that  the  legislature  and  the  corporation  have  power  to  embark 
this  corporator  in  a  speculation  to  which  he  has  never  consented?  If 
it  can  be  done  in  one  case  it  can  in  another.  But  having  paid  his  funds 
into  the  corporation,  he  has  a  right  in  chancery  to  compel  a  faithful 
performance  of  the  trust  by  the  corporation,  in  conformity  to  the  origi- 
nal charter,  and  to  keep  them  within  its  purview.  No  one  can  suppose 
that  upon  the  payment  of  his  subscription,  the  personal  identity  of  the 
plaintiff  was  merged  in  the  corporation,  or  that  he  ceased  to  have  dis-j 
tinct  and  independent  rights.  In  Rex  v.  Eastern  Counties  Railway 
Compan}',  1  Eng.  Railway  Cases  509,  the  King's  Bench  issued  a  man- 
damus, upon  the  application  of  a  minority',  against  the  comi^n}',  direct- 
ing them  to  proceed  in  the  construction  of  a  railroad  which  had  been 
chartered  between  two  points,  tlie  corporation  having  stopped  short  of 
one  of  the  termini,  and  voted  to  go  no  further. 

In  the  case  before  us,  it  must  follow,  if  the  plaintiff  is  not  bound  by 
the  conjoined  effect  of  the  act  of  1850,  and  a  majority  vote  of  the  cor- 
poration, the  defendants  can  stand  on  no  better  ground,  than  a  volun- 
tary association,  who  are  about  to  go  beyond  and  aside  of  their  original 
articles,  against  the  will  of  a  minority.  This,  in  effect,  was  conceded 
in  the  argument.  There  was  nothing  improper  in  the  passage  of  the 
act  of  1850,  though  upon  the  application  of  a  portion  of  the  directors 
of  the  compan}',  as  stated  in  the  bill.  No  attempt  is  made  by  the 
legislature  to  impair  the  obligation  of  an}'  contract  between  themselves 
and  the  corporation,  or  to  cast  upon  the  company  any  new  and  addi- 
tional burthens  without  their  consent.  There  was  no  attempt  to  impair 
any  contract  arising  under  the  prior  charter,  between  the  corporation 
and  the  corporator  as  an  individual,  or  disturb  any  vested  right  in 
either.  The  act  is  not  mandatory;  and  there  is,  in  fact,  an  implied 
condition  annexed  to  it,  that  it  is  to  be  accepted  by  all  whose  individual 
and  corporate  interests  are  to  be  affected  by  it,  before  it  shall  become 
operative.  But  suppose  this  act  had  been  mandatory  upon  the  corpo- 
ration and  the  several  stockholders,  to  build  this  extension  in  the  road 
within  three  years ;  would  not  all  cry  out  against  its  palpable  injus- 
tice? Suppose,  instead  of  this,  the  legislature  had  left  it  optional  with 
the  corporation  to  accept  or  reject  the  act  of  1850,  and  had  provided, 
that  in  case  of  the  acceptance  of  the  amendment  by  the  corporation,  it 
should  bind  the  corporators  who  dissented  from  it,  or  did  not  assent 
to  it,  and  this  too,  in  their  individual  rights;  would  there  not  be  the 
same  reason  to  cry  out  against  it?  Would  it  not,  by  its  carrying  a 
stockholder  into  an  enterprise  which  he  had  never  consented  to,  and 
changing  the  principles  of  liability  between  the  corporation  and  the 
individual  corporator  from  what  they  were  under  the  origiual  compact, 


460        STEVENS   V.    EUTLAND   AND   BURLINGTON   RAILROAD   CO. 


z 


h 


Impair  and  disturb  vested  rights  under  it?  I  have  no  hesitation  in  say- 
ing, that,  in  my  opinion,  it  would  be  bej'ond  the  pale  of  the  constitu- 
tional authority  of  the  legislature. 

In  Ellis  V.  Marshall,  2  Mass.  269,  it  was  held  that  no  man  could  be 
made,  by  act  of  legislation,  a  member  of  an  aggregate  corporation 
without  his  personal  consent ;  and  the  same  principle  would  seem  to 
apply  when  he  is  asked  to  remain  and  become  a  corporator  under  a 
supplementary  act,  to  be  attached  to  and  become  a  part  of  the  charter, 
where  that  which  it  is  proposed  to  superadd  is  vital,  and  constitutes  a 
fundamental  change  in  the  charter,  which  is  but  the  constitution  of  the 
company. 

[The  learned  Chancellor  here  discussed  various  authorities,  includ- 
ing Ware  v.  Grand  Junction  Water  Co.,  2  Russell  and  Mylne,  461. 
In  reference  to  this  case,  he  said  (inter  alia) : 

''  I  apprehend,  that  the  views  expressed  by  the  Lord  Chancellor  in 
that  case,  if  sound,  miist  rest  upon  one  of  two  grounds ;  either  that 
the  change  asked  for  in  the  charter  was  not  a  fundamental  one,  or 
else  upon  the  ground  of  the  transcendent  powers  of  a  British  parlia- 
ment. ...  It  is  evident  that  Lord  Brougham  .  .  .  grounds  himself 
upon  the  sovereign  and  uncontrollable  powers  of  the  parliament.  .  .  . 
But  with  us,  no  legislature  can  transcend  the  bounds  of  the  constitu- 
tion."] 

The  Rutland  and  Burlington  Railroad  Company  is  but  a  private 
corporation,  so  far  as  the  stockholders  are  concerned ;  though  as  it 
regards  the  powers  of  the  legislature  to  authorize  the  taking  of  private 
property  for  public  use,  it  may  be  said  to  be  a  qua  public  corporation. 
The  stock  is  owned  by  individuals  who  compose  the  corporation,  and 
from  which  they  design  to  derive  a  profit;  and  they  manage  the 
business  in  view  to  their  own  interest;  and  it  does  not  become  a 
public  corporation  because  the  public  interests  may  be  incidentally 
promoted  by  it.  In  principle  it  is  like  a  turnpike,  a  canal,  or  bridge 
charter ;  Ten  Eyck  v.  Delaware  and  Raritan  Canal  Company,  3  Harr. 
(^.  J.)  200.  I  think  it  is  obvious  beyond  a  reasonable  doubt,  upon 
principle  and  authority,  that  the  plaintiff  is  not  bound  in  his  indi- 
vidual rights  as  a  cor])orator,  by  force  of  the  act  of  1850  and  the 
majority  vote  of  the  corporation,  without  his  individual  assent.  In 
the  case  of  public  corporations,  as  in  towns,  counties,  &c.,  a  different 
rule  may  obtain.  The  distinction  between  private  and  public  associ- 
ations and  corporations  has  been  well  settled  since  the  days  of  Lord 
CoKi-:.     CCoke  Little.  181,  b.) 

In  case  of  public  associations  and  corporations  the  public  good  re- 
quires that  the  voice  of  the  majority  should  govern,  and  hence  the 
power  is  more  favorably  expounded  than  when  created  for  private 
purposes;  and  it  would  seem  that  public  convenience  required  the 
adoption  of  such  a  rule.  But  in  case  of  private  associations  and  cor- 
poratioiTS  it  is  not  the  doctrine  that  a  majoritycaiTbind  the  nvinon  ty 
in  a  matteFbeyond  and  aside^  their  original  articles  of  association, 


STEVENS  V.  RUTLAND   AND   BURLINGTON  RAILROAD   CO.         461 

or  charter  of  incorporatioii,^ unlessjtjbe  by  special_agreement  giving 
suchj)ower,  which  must  be  a  part  of  the  ori^inaL  association. 

If,  in  a  case  like  the  present,  the  majority  cannot  bind  the  minority, 
it  is  plain  that  there  is  an  equity  in  this  bill,  and  that  the  defendants 
can  stand  in  no  better  situation  than  if  tliey  had,  by  a  vote  of  the 
company,  proceeded  to  build  the  extension,  and  to  apply  the  funds 
and  credit  of  the  corporation  to  that  purpose,  without  any  additional 
act  of  the  legislature. 

This  doctrine  of  Lord  Chancellor  Eldon  [in  Natusch  v.  Irvlng'\ 
necessarily  grows  out  of  the  doctrine  that  it  is  the  business  of  courts 
of  justice  to  enforce  the  contracts  of  parties,  not  to  make  them.  To 
give  to  courts  not  only  the  power  to  enforce,  but  also  the  power  to 
make,  or  even  modify  in  one  iota  a  contract  fairly  made,  would  be 
the  rankest  despotism. 

The  ground  assumed  is,  that  tlais  corporation  had  the  funds  of  the 
oiigiiial  stockholders  for  an  object  distinctly  defined  in  the  original 
charter,  and  that  the}'  cannot  be  allowed  to  apply  them  to  any  other 
purpose  whatever,  without  the  consent  of  the  stockholders,  and  that  to 
do  it  would  be  a  breach  of  trust. 

In  regard  to  the  expediency  of  bringing  this  bill,  the  chancellor  can- 
not, and  has  no  right  to  judge.  The  orator  has  the  constitutional  and 
sole  right  of  determining  this  matter  ;  and  if  he  thinks  it  expedient,  we 
must  acquiesce  in  it ;  and  no  plea  of  the  public  good  or  inequality 
of  interests  involved  can  justify  the  chancellor  in  denying  to  the  orator 
a  right  which  is  clearly  accorded  to  him  by  well  established  chancery 
principles.  The  pubHc  good  is  best  promoted  by  an  impartial  adminis- 
tration of  justice  according  to  the  right  of  the  case  ;  and  courts  can- 
not measure  the  equality  or  inequality  of  interests  in  the  litigant  parties 
and  make  that  a  basis  for  a  decision,  notwithstanding  what  has  been 
urged  in  the  argument. 

Where  it  is  clearly  shown  that  a  corporation  is  about  to  exceed  its 
powers,  and  to  apply  their  funds  or  credit  to  some  object  beyond  their 
authority,  it  would,  if  the  purpose  of  the  corporation  was  carried  out, 
constitute  a  breach  of  trust ;  and  a  court  of  equity  cannot  refuse  to 
give  relief  by  injunction.  See  Agar  v.  The  Regent's  Canal  Company, 
Cooper's  Eq.  77  ;  The  River  Dun  Navigation  Company-  v.  North  Mid- 
land Railwa}'  Companj',  1  Eng.  Railway  Cases  153-4. 

It  cannot  justify  the  chancellor  in  refusing  to  exercise  the  juris- 
diction of  chancery  because  the  defendants  may  claim  the  right  to 
proceed  under  color  of  the  act  of  1850.  It  is  a  settled  principle  that 
the  circumstance  of  the  defendant's  acting  under  color  of  law,  simply, 
can  form  no  justification.  The  question,  after  all,  will  be:  does  the 
law  justify  the  act  which  is  being  done,  or  threatened  to  be  done  ? 
Oshorn  v.  The  Bank  of  the  United  States.  9  Wheaton,  738.  If  a  law 
is  unconstitutional  it  can  give  no  authority.  If  the  power  it  confers 
is  abused  or  exceeded,  the  person  acting  under  the  color  of  law  is  a 


M 


462         STEVENS  V.  RUTLAND  AND  BURLINGTON  RAILROAD  CO. 

\  wrong  doer.  In  the  case  at  bar  the  corporation  had  no  power  to  build 
ithe  extension  under  their  original  charter ;  and  the  act  of  1850  is  not 
minding  upon  the  orator  without  his  consent. 

The  injunction  must  therefore  be  allowed,  but  only  so  far  as  to  re- 
strain the  defendants  until  the  further  order  of  the  chancellor  from 
applying  the  present^Jimds  of  the  corporation,  or  their^income  from 
t_he4)reserit,j:Dad,  either  directly  or  indirectly  to  the  purpose^ol~1btrild- 
ing  said  extension  in  said  road,  or  to  pay  land  damages  and  other 
expenses  which  may  be  contingent  upon  the  building  of  it ;  and  also 
from  using  or  pledging,  directly  or  indirectly,  the  credit  of  the  corpo- 
ration in  effecting  the  object  of  the  extension  ;  and  at  the  same  time 
the  company  will  be  left  at  liberty  to  build  the  extension  with  any 
new  funds  which  they  may  see  fit  to  obtain  for  that  specific  object. 

Though  this  is  but  an  interlocutory  decree,  made  upon  the  plaintiff's 
equitable  rights  as  disclosed  in  the  bill,  still  it  having  been  twice 
argued,  and  it  being  a  case  of  considerable  interest  and  importance,  I 
have  deemed  it  proper  to  publish,  somewhat  at  length,  the  grounds  of 
my  opinion.  "To  err  is  human;"  and  if,  upon  more  mature  consid- 
eration, the  conclusion  of  my  own  mind  shall  be  found  to  be  unsound, 
and  not  in  accordance  with  principle  and  authority,  I  rejoice  that  they 
may  be  corrected  by  a  superior  tribunal.^ 

After  the  above  decision  was  announced,  and  before  the  injunction 
was  issued,  the  defendants  proposed  to  file  bonds  to  indemnify  the 
plaintiff  against  all  damages  which  he  might  sustain  by  reason  of  the 
extension ;  upon  which  the  chancellor  suggested,  that  he  did  not  deem 
it  competent  for  him  to  make  contracts  for  the  parties  ;  and  that  upon 
the  authority  of  the  case  of  Natusch  v,  Irving  et  cd.,  it  could  make  no 
difference,  if  filed,  in  the  result."^ 

1  The  case  was  not  carried  lo  a  higher  court.  —  Ed. 

2  In  Forrester  v.  Boston  tf  Montana,  (fc.  Co.,  A.  d.  1898,  21  Montana,  544,  the  minority 
stockholders  of  a  Montana  corporation  sought  to  enjoin  the  ratification  of  a  transfer  of  th'i 
entire  corporate  property  to  a  foreign  corporation,  in  consideration  of  the  latter  corporation 
delivering  its  entire  stock  to  the  former  corporation  and  assuming  all  its  liabilities.  By 
the  agreement  of  transfer,  the  stockholders  in  the  Montana  corporation,  who  did  not  choose 
to  accept  shares  in  the  foreign  corporation  in  exchange  for  their  present  shares,  were  en- 
titled to  receive  from  the  foreign  corporation  $170  for  each  share  not  exchanged. 

Upon  the  hearing  of  the  order  to  show  cause  why  an  injunction  pendente  lite  should  not 
issue,  the  defendants  offered  a  bond  in  the  penal  sum  of  $50,000,  conditioiu'd,  in  substance, 
that  if  the  defendants  shall,  when  requested  by  plaintiffs,  purchase  from  them  the  200 
shares  owned  by  plaintiffs  at  the  market  i)rice  tliereof  and  pay  any  damages  that  might  be 
sustained  by  them  because  of  any  action  that  might  be  taken  at  the  meeting  of  the  stock- 
holders called  to  ratify  the  transfer,  the  obligation  should  be  void,  but  otherwise  to  be  in 
force.  The  defendants  further  offered  to  execute  a  bond  in  such  form,  or  with  such  con- 
ditions, in  such  amount,  and  with  such  sureties,  as  the  court  might  designate,  in  lieu  of  the 
bond  so  offered,  if  it  were  deemed  in  any  wise  insufficient.  The  District  Court  declined  to- 
.•iccept  such  bond,  and  granted  the  injunction  order.  Tlie  defendants  appealed  from  the 
order  granting  the  injunction.     The  opinion  on  this  branch  of  the  case  was  as  follows:  • 

IMooTT,  J.,  pp.  551,  552.  "The  court  did  not  err  in  refusing  to  accept  the  bond  or 
inidertaking  tendered  bv  defendants.  See  Cook,  Stock  &  S.  §  502  ;  Stevens  v.  Railroad 
r,,.,  29  Vt.  545;  Railroad  Co.  v.  CoUivs,  40  Ga.  582;  Tomlbixon  v.  Railirny  Co.,  35  Ch.  Div. 
175;  Thomp.  Corp.  §  345.  Section  870  of  tiie  (Jode  of  Civil  Procedure  confers  upon  the 
Kourt  a  discretionary  power  to  vacate  an  injunction  granted  ad  interim,  or  pendente  lite, 
Where  the  alleged  wrong  or  injury  is  reparable  and  capable  of  being  adcquatel}-  conipea- 


f 


s 


,  < 


^ 


>J\ 


ENGINE  CO. 


|pMIE^/^.j<J>p^Q^  ENGINE 

n    X     C.    V^  r^^  ^®'^^J^  ^!i?^c;e  kand,  302. 


CO. 


i'/^>    Z^*'^^ 
/k  '-"a^ 


Bill  in  Equity  to  res\;rain  a  sale  of  the  property  of  a  corporation,'^<v\ 
ordered  by  a  vote  of  the  majority  of  the  stockholders,  brought  by  a 
minority  stockholder.     The  facts  are  stated  in  the  opinion.     Heard  on 
bill,  answer,  and  replication.     Bill  dismissed. 

Stiness,  J.     The  complainant,  a  stockholder,  seeks  to  restrain  the .. 
respondent  corporation  from  disposing  of  its  property.     The  company  ^ 
is  doing  business  under  an  extension  by  its  creditors,  in  the  terms  ofj^,^'^,' 
Avhich  an  installment  becomes  due  in  November  next.     It  is  agreed 
that  this  cannot  be  met,  and  that  the  company  will  be  unable  to  go  on 
in  business  because  the  creditors  refuse  a  further  extension.     In  view 
of  these  facts,  an  arrangement  has  been  made  to  form  a  new  company,  iji^ ^o^ 
in  which  creditors  holding  extension  notes  will  take  preferred  stock*'^^/'^ -^.    ^- 
to  the  extent  of  one-half  of  their  claims,  while  other  subscribers  will  >^.J     y/*     ' ' 
furnish  enough  cash  to  pay  for  the  plant  and  provide  a  working  capi- >  '^,  '        . 
tal.     The  terms  of  the  proposed  sale  give  to  the  present  stockholders      '  ^ 

$70,000  over  and  above  the  indebtedness  of  the  company,  amount- 
ing to  about  $228,000,  making  a  total  payment  of  about  $298,000. 
The  estimates  of  the  value  of  the  property  vary  from  $327,000  to 
$397,000,  the  latter  being  the  complainant's  estimate  ;  but  it  does  not 
appear  that  either  party  has  reason  to  expect  that  either  sum  would  ^    L 
be  realized  at  a  forced  sale.     This  is  not  a  sale  in  which  the  other    t^^' 
stockholders  are  to  gain  any  advantage  beyond  the  privilege,  which  is 
also  offered  to  the  complainant,  of  taking  his  proportionate  amount/  '^ . 
of  cash  or  its  equivalent  stock  in  the  new  company,  as  he  may  prefer.  ^ y*' 

It  is  in  effect  a  cash  sale  to  strangers,  approved  by  stockholders  f^^y 
representing  3,675  shares  against  75  held  by  the  complainant.    While  j^^ 
this  majority  cannot  affect  any  rights  to  which  he  is  entitled,  it  tends 
to  show  a  fair  price.     It  is  a  well-known  result,  to  which  courts  of 
justice  cannot  be  blind,  that  large  plants  of  this  kind  are  often,  if  not 


as  the  court  mav 


rated  for  in  money,  upon  defendant's  executing  such  an  undertakin 

re(iuire.  We  do  not  think  the  court  abused  its  discretion.  As  counsel  well  say,  if  plain-,  ^^  '^ 
tiffs  were  clearly  entitled  to  an  injunction  in  this  case,  the  district  court  would  not  have  ,  /l  ' 
been  justified  in  accepting  an  undertaking  in  lieu  of  the  injunction,  which  would  be  licen-L«/*' 
sing  the  commission  of  a  wrong  not  susceptible  to  compensatory  damages.  Although  the.//^  •  V 
present  value  of  the  shares  held  by  plaintiffs  may  be  accurately  determined  by  a  judgment,  ' 
and  the  profits  by  way  of  future  dividends  on  their  shares  that  might  accrue  from  the 
Montana  Company  predicted  with  approach  to  reasonable  certainty,  yet,  if  the  transfer 
and  the  vote  of  the  shareholders  in  attempted  ratification  thereof  be  ultra  vires  as  to  them, 
then  it  is  manifest,  upon  the  plainest  principles  of  law,  that  no  court  may  rightly  compel 
them  to  dispose  of  their  shares  in  invito.  Tomkinson  v.  Railway  Co.,  supra,  Beach.  Inj. 
§§  295,  296;  Mills  v.  Railway  Co.,  supra.  If,  as  matter  of  law,  the  proposed  transfer  was 
shown  to  be  ultra  vires  the  corporation,  plaintiffs  were  entitled,  as  of  right,  to  the  injunc^ 
lion;  and  in  such  event,  were  a  bond  accepted  and  injunction  refused,  the  fact  would  seem 
apparent  that  the  court  had  decided  that  plaintiffs'  property  could  not  be  taken  without 
their  consent,  and  at  the  same  time  had  permitted  it  to  be  done,  —  an  inconsistency  need- 
ing no  comment."  —  Ed. 


f- 


464  PHILLIPS   V.   PKOVIDENCE   STEAM   ENGINE   CO. 

usually,  sold  at  a  great  sacrifice  in  case  of  a  forced  sale.  We  should 
not  have  to  go  outside  of  the  records  of  our  own  court  to  find  proof  of 
this  fact.  A  sale  being  necessary,  the  question  is  how  shall  it  be 
made.  The  prayer  of  the  bill  is  that  a  receiver  may  be  appointed  ; 
that  the  business  may  be  wound  up  and  the  company  dissolved ;  and 
the  argument  is  that  the  sale  of  the  effects  should  be  at  public  auction. 
The  question,  then,  is  whether  the  complainant  is  entitled  to  such  a 
decree. 

There  is  a  difference  of  opinion  as  to  the  power  of  a  corporation  to 
sell  its  entire  property  and  thus  practically  to  retire  from  business. 
Some  courts  hold  that  it  may  be  done  by  the  consent  of  all  the  stock- 
holders (Am.  &  Eng.  Ency.  L.  2  ed.  vol.  7,  p.  734,  note  1),  and  others 
hold  that  it  may  be  done  by  a  majority.  Ditto,  notes  2,  3,  and  4.  All 
of  the  authorities  cited  in  note  1,  however,  do  not  hold  that  the  con- 
sent of  all  the  stockiiolders  is  necessary,  e.  g.  Treadwell  v.  SaUshiiry, 
7  Gray,  393 ;  Wilson  v.  Miers,  100  Eng.  Com.  Law,  248,  et  al.  But 
the  editor  adds  :  "  There  seems  to  be  no  doubt  that  it  may  do  so  when 
it  is  no  longer  able  to  profitably  continue  its  business." 

We  think  that  this  is  the  correct  rule.  It  has  been  recognized  in 
this  State.  Hodges  v.  iV.  E.  Screw  Co.,  1  R.  I.  312,  350.  In  Wilson 
V.  PropWs  Central  Bridge,  9  R.  I.  590,  Brayton,  C.  J.,  said :  "  No  case 
has  been  cited,  and,  in  view  of  the  diligence  of  counsel  in  this  case, 
we  may  say  there  is  no  case  which  holds  that  where  the  purpose  of 
the  incorporation  could  not  be  accomplished,  the  business  contem- 
plated could  not  be  carried  on  ;  where  the  capital  had  been  exhausted 
in  endeavors  to  go  on,  having  no  means  to  go  further  ;  a  company  thus 
laboring  under  burdens  which  they  could  no  longer  bear,  could  not 
release  themselves  by  a  surrender  of  their  franchise  to  the  State  which 
granted  and  which  was  willing  to  receive  it,  and  that  by  a  majority. 
This  is  not  only  for  their  benefit,  but  it  is  a  necessity,  and  it  would 
be  hard  indeed  if  one  stockholder  could  by  his  dissent  prevent  such 
relief  against  the  prayer  of  all  other  members  of  the  company."  In 
Peubody  v.  Westerly  Water  Works,  20  E.  I.  176,  a  necessary  limita- 
tion to  this  rule  was  recognized  in  the  words  :  ''The  action  of  the 
company  was  taken  by  a  vote  of  more  than  1,100  out  of  a  total  of 
1,350  shares.  There  is  no  proof  of  unfairness,  oppression,  or  fraud  in 
such  action.  The  case  as  presented  is  simply  that  of  a  stockholder 
wlio  differs  from  a  large  majority  of  his  fellow  stockholders  as  to  the 
expediency  of  a  sale." 

/      The  principle  upon  which  these  cases  rest  is  that  a  corporation  may 

1  dispose  of  its  property  by  a  majority  vote,  in  cases  which  are  free 

I  from  unfairness,  oppression,  and  fraud.     Against  wrongs  of  this  kind 

Vequity  will  interfere.     To  this  effect  are  Lawman  v.  Lebanon  R.  R., 

ViO  Pa.  St.  42  ;   Treadioell  v.  Salishnry,  7  Grny,  393  ;  Leathers  v.  Janney, 

41  La.  Ann.  1120;  Seivell  v.  East  Cape  May  Co.,  50  N.  J.  Eq.  717; 

Sargent  v.  Webster,  13  Met.  497  ;    Warfi.eld  v.  Marshall,  72  la.  666 ; 

Wilson  V.  Miers,  100  Eng.  Com.  Law,  348 ;  see  also  Miner's  Ditch  Co. 

V.  Zellerbach,  37  Cal.  543. 


PHILLIPS  V.    PROVIDENCE   STEAM  ENGINE   CO.  465 

The  complainant  does  not  charge  improper  conduct,  but  simply  that 
he  considers  the  price  inadequate  and  unjust;  and  hence  he  prays  for 
a  receiver  and  a  sale  of  the  property  by  auction.  Ordinarily  when  a 
court  orders  a  sale  it  can  only  be  done  by  auction.  A  court  cannot 
negotiate  a  private  sale,  and  it  orders  an  auction  as  the  fairest  chance 
for  all  parties  to  bid  and  buy.  But  when  the  parties  in  interest  have 
negotiated  a  sale  which  is  fair  to  all  concerned,  and  there  is  nothing 
to  show  that  a  larger  price  may  reasonably  be  expected,  it  does  not 
follow  that  an  auction  sale  would  be  ordered.  This  question  was  con- 
sidered in  Quidnick  Co.  v.  Chafee,  13  R.  I.  402,  in  which  the  trustee 
had  an  offer  for  the  entire  property,  approved  by  nearly  all  the  cred- 
itors. Then  other  parties  intervened,  agreeing  to  bid  the  amount 
named  at  auction,  and  the  court  ordered  a  sale  by  auction.  In  the 
present  case  there  is  no  evidence  that  anybody  is  willing  to  give  as 
much  as  the  offer  proposed,  or  that  there  is  any  reason  to  suppose 
that  it  will  bring  as  much  or  more.  The  only  testimony  put  in  by  the 
complainant  is  that  the  tools  will  probably  bring  more  than  they  are 
valued  at  by  the  company,  while  as  to  the  bulk  of  the  property,  the 
real  estate,  &c.,  there  is  no  evidence  of  market  value.  Moreover,  the 
complainant  does  not  show  that  he  desires  to  bid  upon  the  property 
himself,  or  that  he  knows  of  any  one  who  would  bid  at  a  sale.  Inj 
this  absence  of  evidence  that  a  larger  total  might  be  expected  from  an/  ^ 
auction  sale  we  see  no  reason  to  disturb  the  agreement  already  madeJ  ^^ 
which,  upon  the  testimony  given,  seems  to  be  fair. 

The  complainant  relies  strongly  on  Mason  v.  Pewahic  Co.,  133  U.  S. 
50.  In  that  case  the  court  had  appointed  a  master  to  value  the  pro- 
perty, which  he  reported  to  be  nearly  $500,000.  A  majority  of  the 
company  had  arranged  a  sale  to  themselves  at  $50,000.  Naturally,  in 
view  of  such  gross  inadequacy,  the  court  ordered  a  sale  by  auction. 
The  case  was  very  different  in  its  details  from  the  case  before  us. 

In  Wilson  v.  Proph's  Central  Bridge,  9  R.  I.  590,  the  city  of  Pro< 
vidence  had  control  of  the  corporation  and  had  sold  the  corporate 
property  to  itself.  The  court  restrained  the  city  from  taking  posses- 
sion and  ordered  a  sale  by  auction.  That,  too,  was  a  different  case 
from  this  one. 

The  court  is  bound  to  look  to  the  interests  of  all  parties,  and  espe-i 
cially  to  protect  the  rights  of  a  minority  from  oppression  and  fraud./ 
But  where,  as  in  this  case,  no  such  thing  is  charged,  and  nothing  is  ^ 
shown  to  lead  to  the  belief  of  a  better  total  price,  the  complainants 
makes  no  case  for  interference.  To  show  that  movable  tools  may  be 
sold  at  a  price  somewhat,  but  not  largely,  higher  than  that  at  which 
they  are  scheduled,  is  quite  a  different  thing  from  showing  that  the 
plant  as  a  whole  would  sell  for  more  than  the  price  offered.  To  set 
aside  the  sale  under  these  circumstances  would  be  to  risk  a  certaintv 
for  an  uncertainty,  without  any  testimony  on  which  to  base  a  hope  of 
benefit  to  the  stockliolders  from  such  interference.  We  see  no  reason 
for  such  a  step  in  the  dark. 

BUI  dismissed. 


1^' 


ELYTON  LAND   CO. 


?g3?^^" 


ELYTON   LAND 


DDWDi:] 


1896.     113  Alabama,  177.1 


l^    Bill  in  equity  filed  by  Annie  Dowdell,  the  owner  of  five  shares  in 
'^  the  Elyton  Land  Company,  for  the  purpose  of  annulling  a  convey- 
ance of  its  property  by  that  corporation  to  the  Elyton  Company,  and 
also  of  annulling  a  mortgage  executed  by  the  latter  company  to  secure 
certain  bonds. 

ft^ome  years  before  the  conveyance  the  Elyton  Land  Company  hav- 
.mig  on  hand,  as  profits,  a  large  amount  of  notes,  had  issued  dividend 
'■^certificates  to  the  amount  of  $1200  per  share.  These  certificates  had 
subsequently  been  paid  for  in  bonds  of  the  company,  denominated 
"  Dividend  Trust  Bonds."  The  plaintiff  had  disposed  of  her  bonds. 
Her  rights  as  a  bondholder  are  not  involved  in  this  litigation,  but  only 
her  rights  as  a  shareholder. 

The  Elyton  Land  Company,  under  its  charter  and  amendments,  was 

authorized  to  buy  laud  and  sell  lots  ;  to  borrow  and  lend  money ;  to 

guaranty  indebtedness  ;  to  build,  rent,  lease,  and  use  buildings  ;  to 

issue  bonds  in  amount  not  to  exceed  five  millions  of  dollars;    and 

lO^take  stock  in  other  corporations. 

n  1893,  the  Elyton  Company  was  incorporated,  with  authority  to 
engage  in  many  enterprises  not  included  in  the  original  or  amended 
"[j^  charter  of  the  Elyton  Land  Co.     The  fourth  section  of  the  act  incor- 
porating the  Elyton  Co.  enacts,  "  that  said  corporation  may  purchase 
i    'the  property,  real,  personal,  and  mixed,  of   the  Elyton  Land  Com- 
C^  .^pany  :  provided  that  such  sale  is  made  under  the  laws  now  in  force, 
-^id  nothing  in  this  act  shall  be  construed  to  impair  or  in  any  manner 
whatsoever  to  affect  the  rights  of  any  stockholder  of  the  Elyton  Land 
Company."  .  .  . 

At  a  regular  meeting  of  the  stockholders  of  the  Elyton  Land  Com- 
pany, a  majority  of  the  stockholders  voted  to  sell  its  entire  assets  to 
^^    the  Elyton  Company.     The  terras  of  the  sale  were,  that  the  Elyton 
jL^     A, ^Company  should  pay  all  the  liabilities  of  the  Elyton  Land  Company  ; 
.^'      Ji^./J  fir*        and  issue  |2,500,000  bonds,  $1,796,000  of  which  were  to  be  issued  to 
e/^y  -  y^    ^       the  holders   of  the  dividend  trust  bonds  in  payment  thereof;  and  in 
^^y    n^^      .       addition  issue  10  shares  of  its  stock  to  each  holder  of  1  share  of  stock 
in  the  Elyton  Land  Co.    Thereupon  the  Elyton  Land  Company  trans- 
ferred all  its  property  to  the  Elyton  Company.     The  latter  issued  tlie 
bonds  provided  for,  and  executed  a  mortgage  to  secure  them.     The 
stipulated  amount  of  stock  was  also  issued,  and  was  delivered  to  such 
of  the  stockholders  as  were  willing  to  receive  it  in  exchange  for  the 
stock  held  by  them  in  the  Elyton  Land  Company.     No  other  arrange- 
t  or  provision  was  made  to  pay  the  stockholder  in  the  Elyton 
^  '  ^i^     JLand  Company  for  his  share,  except  to  accept  the  stock  in  the  Elyton 


<v» 


'%-r^. 


1  Statement  abridged. 


Arguments  omitted.  — Edi 


ELYTON  LAND  CO.   V.   DOWDELL.  467 

Company.  It  is  alleged  in  the  bill,  and  not  traversed  in  the  plea,  that 
complainant  was  not  present,  was  not  represented,  and  had  no  notice 
of  the  meeting  of  the  directors  of  the  Elyton  Land  Company  at  which 
it  was  resolved  to  sell  its  property  to  the  Elyton  Company.  Imme- 
diately after  the  consummation  of  the  transaction  between  the  two 
corporations,  complainant  filed  her  bill. 

To  the  bill,  the  respondent  filed  a  plea  and  answer  in  support  of  the 
plea.  The  plea  set  forth  the  history  of  the  ''  Dividend  Trust  Bonds  ; " 
alleged  that  they  were  valid  obligations  of  the  Elyton  Land  Company ; 
and  that  the  plaintiff,  having  accepted  her  proportion  of  the  bonds 
with  full  knowledge  of  the  facts,  is  estopped  to  deny  that  they  are 
binding  obligations  of  the  Elyton  Land  Company. 

The  court  ruled  that  the  plea  was  insufiicient  as  a  defense  to  the 
bill.     Appeal. 

Alex.  T.  London,  and  Tompkins  &  Troy,  for  appellants. 

Gordon  Macdonald  and  Smith  &  Weatherley,  contra. 

CoLEMAx,  J.     [After  stating  the  case.]  .  .  . 

.  .  .  We  do  not  doubt  the  right  of  complainant  to  relief,  so  far  as 
the  defense  is  rested  upon  the  plea.  In  the  first  place,  by  its  charter, 
The  Elyton  Company  was  authorized  to  purchase  the  property  of  The 
Elyton  Land  Company,  "  provided  that  such  sale  is  made  under  the 
laws  now  in  force,  and  nothing  in  this  act  shall  be  construed  to  im- 
pair, or  in  any  manner  whatsoever  to  affect  the  rights  of  any  stock- 
holder of  The  Elyton  Land  Company."  At  the  time  of  the  sale  and 
transfer  of  its  property,  The  Elyton  Land  Company  was  solvent,  a 
going  corporation,  and  its  stock  was  very  valuable.  Its  duties  and 
powers  were  fixed  by  its  charter,  and  its  business  evidently  man- 
aged with  great  skill  and  success,  for  the  benefit  of  its  shareholders. 
The  Elyton  Company  by  its  charter  was  authorized  to  engage  in 
many  enterprises  not  within  the  scope  of  the  powers  of  The  Elyton 
Land  Company.  A  shareholder  in  the  latter  might  not  be  willing 
to  become  a  shareholder  in  the  other.  By  the  sale  and  transfer  of 
the  property,  The  Elyton  Land  Company  divested  itself  of  all  its 
property  and  capacity  to  continue  the  business  for  which  it  was  organ- 
ized. If  the  sale  stands,  the  owner  of  stock  in  The  Elyton  Land 
Company  is  compelled  to  accept  the  stock  of  the  new  corporation,  or 
hold  stock  in  a  corporation  without  capital  assets.  We  la}^  no  stress 
on  the  argument,  that  by  its  amended  charter.  The  Elyton  Land  Com- 
pany is  authorized  "  to  take  stock "  in  other  corporations.  It  was 
certainly  never  intended  by  that  provision,  to  authorize  The  Elyton 
Land  Company  to  effect  its  own  dissolution  by  a  sale  of  all  its  assets, 
and  ''  take  the  stock "  of  another  company  in  payment  for  distribu- 
tion to  the  shareholders  or  any  shareholder,  without  the  consent  and 
contrary  to  the  preference  of  the  shareholder.  But  it  is  too  clear 
for  argument,  that  the  two  million  shares  of  stock  of  The  Elyton 
Company  were  to  be  issued  to  The  Elyton  Land  Company,  as  a  mere 
conduit  to  the  shareholder  of  The  Elyton  Land  Company,  and  not  to 


468  MORRIS  V.  ELYTON  LAND  CO. 

be  held  and  owned  as  capital  assets  of  The  Elyton  Land  Company. 
It  may  be  that  a  private  business  corporation  may  sell  out  its  entire 
property  by  and  with  the  consent  of  less  than  all  its  stockholders, 
for  the  purposes  of  paying  its  debts,  or  for  the  purposes  of  dissolu- 
tion and  settlement,  but  when  this  is  the  purpose,  it  must  be  clearly 
understood,  and  the  terms  and  conditions  of  the  sale  must  be  within 
the  contractual  relations  between  the  corporation  and  its  creditors  or 
1  shareholders.     There  can  be  no  presumption  that  a  creditor  or  stock- 
\  holder  of  the  dissolved  corporation  will  accept   in  payment  of  his 
Idemand,  anything  but  money.     He  cannot  be  required  to  do  so  arbi- 
Itrarily.     While  the  plea  shows  the  consent  and  ratification  of  the 
complainant  to  the  issue  of  the  certificate  of  twelve  hundred  dollars 
to  the  shareholder  for  each  share  of  stock,  and  its  subsequent  pay- 
'  ment  by  a  dividend  bond,  it  does  not  show  consent  or  ratification  of 
the  sale  of  the  property  and  the  execution  of  the  mortgage.     It  is 
^manifest  that  the  whole  plan  of  organization  of  The  Elyton  Company, 
was  in  the  interest  of  those  who  held  the  dividend  bonds,  without 
reference  to  the  interest  of  the  stockholder.     These  bonds  at  first 
maturing  within  three  or  four  years  were  a  lien  or  charge  only  upon 
$2,400,000  of  its  promissory  notes,  leaving  all  its  other  property  unin- 
cumbered.    By  the  arrangement,  the  dividend  bonds,  amounting  to 
only  $1,796,000,  secured  by  a  lien  upon  f  2,400,000  of  notes,  were  con- 
verted into  gold  bonds,  running  thirty  years,  and  were  secured  by  a 
mortgage  upon  all  the  property^owned  by  The  Elyton  Land  Company. 
The  bonded  indebtedness  was  increased  over  a  half  million  dollars. 
The  Elyton  Company,  from  the  pleading,  did  not  own  a  dollar  of  capi- 
tal other  than  that  acquired  by  the  purchase  from  The  Elyton  Land 
Company. 

The  facts  set  up  in  the  plea  do  not  present  an  estoppel  as  to  the 
complainant  whatever  may  be  their  effect  upon  the  dividend  bond- 
holders, and  the  other  stockholders,  who  aided  in  carrying  out  the 
arrangement,  or  have  since  ratified  it.  —  Kean  v.  Johnson,  9  N.  J. 
Eq.  401 ;  N.  0.  &c.  M.  B.  Co.  f.  Harris,  fl  Miss.  517. 

V     'ViX^v/    ^  r>.   ^  Dhyr&i  of  City  Court  affimied. 


/^  A^RRI^^  LAND   QO.etal. 

Bill  in  equity,  by  Mrs.  Susie  M.  Morris,  a  stockholder  in  the  Elyton 
Land  Company,  brought  for  the  same  purpose  as  the  bill  in  Ehjton 
Land  Co.  V.  Do v dell,  .supra,  p.  400.  The  plaintiff  was  an  infant  at 
the  time  of  the  transactions  complained  of. 

I  Onl)'  so  much  of  the  report  is  given  aa  relates  to  a  single  point.  Arguments 
•mjtted.  —  Ed. 


MORRIS   V.    ELYTOX   LAND   CO.  469 

Plaintiff  applied  for  the  appointment  of  a  receiver. 

On  the  submission  of  the  cause  upon  the  application  for  a  receiver, 
the  chancellor  decreed  that  the  transaction  assailed  by  the  bill  was 
not  binding  as  to  the  complainant  who  was  a  non-assenting  share- 
holder of  the  Elyton  Land  Company,  but  that  the  relief  to  which  she 
was  entitled  was  the  payment  of  the  value  of  her  shares  of  stock  in 
said  Elyton  Land  Company ;  and  he  directed  that  the  respondents 
pay  into  the  court  $12,000  to  await  the  final  hearing  of  the  cause,  to 
be  held  as  security  for  the  satisfaction  of  the  final  decree  ;  further 
decreeing  that  unless  they  did  so  within  the  time  named,  a  receiver 
would  be  appointed  without  further  notice.  The  required  deposit 
was  made,  and  thereafter  the  chancellor  entered  a  decree  denying 
the  appointment  of  a  receiver,  and  refusing  to  extend  to  this  cause 
the  existing  receivership  in  cause  No.  2104,  which  was  pending  in  the 
same  court.  From  this  decree  the  complainant  appeals,  and  assigns 
the  rendition  thereof  as  error. 

Cabaniss  &  Weaklet/,  for  appellant. 

Alex.  T.  London,  and  Thomas  G.  Jones,  contra. 

Per  Curiam.  [After  reaffirming  the  decision  in  Elyton  Land  Co. 
V.  Dowdell,  113  Ala.  177  ;  supra,  p.  466.] 

We  think  there  can  be  no  doubt  of  the  proposition,  that  a  court  of 
chancery  can  and  will  undo  an  act,  which  is  ultra  vires,  as  well  as 
prevent  the  same  by  injunction.  There  is  an  equity  of  rescission  as 
well  as  of  prevention.  2  Spelling  on  Corp.  §  615  ;  City  of  Chicago  v. 
Cameron,  120  111.  447  ;  City  of  Knoxvllle  v.  R.  R.  Co.,  supra  ;  Byrne's 
Case,  65  Conn.  336 ;  Elyton  Land  Co.  v.  Dowdell,  supra. 

The  shareholder's  suit,  when  brought,  is  for  the  benefit  of  the  cor- 
poration and  all  shareholders.  It  is  not  the  suit  of  the  shareholder 
for  his  individual  interest.  The  relief  granted  is  the  same,  as  if  the 
corporation  sued.  —  4  Thompson,  Corp.,  §  4491  ;  2  Pomeroy's  Eq., 
§  1095  ;  1  Morawetz,  Corp.,  §  262  ;  Mount  v.  Radford  Tnist  Co.  et  ah, 
5  Am.  &  Eng.  Corp.  Cases  (x.  s.),  92. 

It  would  necessarily  and  logically  follow  from  this  principle  that  a/ 
moneyed  compensation  to  the  complaining  shareholder  for  the  value 
of  his  stock  could  not  against  his  objection  be  decreed  as  his  relief. 
To  do  so  would  be  nothing  more  nor  less  than  compelling  the  share- 
holder to  sell  his  stock,  which  a  court  of  equity  has  not  the  power  to 
do.  That  it  would  be  to  the  benefit  of  the  corporation  and  all  other 
shareholders  in  it,  to  let  the  transaction  stand  and  compel  the  dissen- 
tient to  accept  compensation  for  his  stock,  is  an  argument  that  rests 
upon  no  higher  grounds  than  that  of  expediency.  In  the  administra- 
tion of  justice  by  the  courts,  principle  should  never  be  sacrificed  at 
the  altar  of  expediency.  —  Forrester  v.  Boston  &  Montana,  &c.,  Co., 
sujjra  ;  Kean  v.  Johnston,  sujiva  ;  Mills  v.  R.  R.  Co.,  supra  ;  Stevens 
V.  R.  R.  Co.  et  al,  29  Vt.  545. 

The  application  for  a  receiver  was  heard  on  the  bill  as  amended 


'h 


470  BARTHOLOMEW   V.   DERBY   RUBBER   CO. 

and  exhibits,  and  answers  of  respondents,  and  upon  affidavits  filed  in 
support  of  the  bill  and  answers.     Upon  the  undisputed  facts  in  the 

!case,  we  are  of  the  opinion  that  the  application  for  a  receiver  should 
have  been  granted,  and  that  the  receivership  in  cause  No.  2104  pend- 
ing in  said  chancery  court  should  have  been  extended  to  this  cause. 
From  the  action  taken  by  the  chancery  court,  it  is  evident  that  the 
chancellor  was  of  the  opinion  that  upon  the  facts  the  complainant  was 
entitled  to  a  receiver  in  the  absence  of  a  deposit  by  the  respondents 
with  the  register  of  the  court  of  $12,000  as  a  security  for  the  com- 
plainant by  way  of  compensation  for  her  stock  in  the  event  of  her 
recovery  upon  a  final  hearing.  But  in  this  alternative  provision,  the 
learned  chancellor  misconceived  the  character  of  the  complainant's 
suit  as  well  as  the  nature  of  relief  to  which  she  was  entitled.  For 
the  suit,  though  brought  in  her  name,  was  in  legal  contemplation  and 
effect  a  suit  by  the  corporation,  and  the  relief,  if  any  had,  would  be  a 
recovery  for  the  corporation.  That  the  case  is  a  proper  one  for  the 
extension  of  the  receivership  upon  the  conceded  facts  is  shown  by  the 
following  authorities :  Beach  on  Eeceivers,  §§  88,  789 ;  Gluck  & 
Becker  on  Eeceivers,  42,  §  16 ;  High  on  Eeceivers,  §  292 ;  Ala.  Nat. 
Bank  v.  Mari/  Lee  C.  &  B.  Co.,  108  Ala.  288  ;  Bridgeport  Dev.  Co.  v. 
Tritsch,  110  Ala.  274  ;  Scott  v.  Ware,  65  Ala.  174  ;  Stevens  v.  Davison, 
18  Gratt.  819  ;  Ponca  Mill  Co.  v.  Ifikesell,  8  Am.  &  En^.  Corp.  Cases, 


18  Gratt.  819  ;  Ponca  Mill  Co.  v.  jy^ikesell,  »  Am.  &  l^ng.  uorp. 
(^.  s.),  740.  V  'A/Y 


cause 


^*^'\^."'''  (v^  'Ir  fl>>^SuiT  by  minority  stockholders  of  a  manufacturing  corporation,  to 
f^^-^  ^  j^  *  f^J^%/Compel  the  surrender  and  cancellation  of  a  lease  of  its  plant  to  Loe- 
<^Y^^'  ^^ h        (A*  "^enthal.     The  directors  voted  to  make  the  lease,  and  gave  notice  of  a 

jl^  AT  ^  y  ^f*^ecial  stockholders'  meeting  to  confirm  their  action.  The  action  of 
\     y/^      )        the  directors  was  approved  by  all  the  stockholders  present  at  the 

T^}  .  ^    p^  \K  <  meeting. 


'     ,    .         rr     \.\  \  meeting. 
nj^  y^  ,  M  The  term  of  the  lease  thus  confirmed  was  for  one  year,  with  a  privi- 

»^\^.-'  <■  \^ n  0-^,.  J^ge  upon  the  part  of  the  lessee  to  renew  the  lease  from  year  to  year, 
Q^ji^  /*  ^'^^^■^0^  ^  period  not  exceeding  nine  years,  upon  the  same  rent  and  con- 
■ff^  .  S  "^t^^flitions.  The  lease  also  provided  that  at  the  expiration  of  any  year 
A  ^^  ,  the  lessee  might  purchase  the  property  if  he  chose,  at  a  price  to  be 
.      )y      i*^,  ^determined  upon  by  an  appraisal  made  in  conformity  to  the  mode 


-       y^    y^^        therein  designated. 
^  A  "i-fr*         ',y^(*    Other  facts  are  stated  in  the  opinion. 

^'  ^^  .   j^  J/*       The  respondents  demurred  to  the  complaint. 
(}/*^\<V      Av'*^  *^    y»  "*  -.--  1  Statement  abridged.    Arguments  omitted.  —  Ed. 


BARTHOLOMEW  V.    DERBY  RUBBER  CO.  471 

Edwin  B.  Gager  and  Wm.  S.  Downs,  for  the  respondents  Loewen- 
thai  et  al. 

V.  Mtmger,  for  the  petitioners. 

Andrews,  C.  J.  The  plaintiffs  are  a  minority  of  the  stockholders 
of  the  Derby  Rubber  Company.  They  ask  that  a  certain  contract 
called  a  lease,  between  the  said  company  and  the  other  defendants,  be 
set  aside  and  declared  to  be  void.  The  record  shows  that  this  con- 
tract was  made  by  the  directors  of  the  company ;  that  it  was,  before 
delivery,  submitted  to  a  meeting  of  the  stockholders  duly  called  for 
that  purpose,  and  that  by  a  unanimous  vote  of  the  stockholders  pre- 
sent at  that  meeting  and  holding  a  majority  of  all  the  stock,  it  was 
affirmed  and  ratified.  The  plaintiffs,  although  duly  notified  of  said 
meeting  and  the  purposes  for  which  it  was  to  be  held,  voluntarily 
remained  away. 

If  the  contract  was  really  ultra  vires  of  the  corporation,  the  plain- 
tiffs may  claim  that  it  should  be  set  aside.     The  contract  contains  an 
option  to  the  lessee  to  become  the  purchaser  of  the  property  at  a  price 
to  be  fixed  by  a  sort  of  arbitration.     The  complaint  avers  that  it  is 
the  intention  of  the  directors  and  the  majority  stockholders,  in  case 
the  option  is  used,  to  divide  the  money  received  among  all  the  stock- 
holders and  wind  up  the  affairs  of  the  corporation.     As  a  conditional 
contract  to  sell  the  property,  this  agreement  is  not  questioned ;  nor 
could  it  well  be  questioned.     It  is  competent  for  any  business  corpo- 1 
ration  to  sell  its  property,  pay  its  debts,  divide  its  assets  and  wind  upf  /V- 
its  affairs.   Especially  is  this  so  if  the  corporation  is  in  an  embarrassed' 
condition.     It  is  as  a  lease  for  ten  years  without  a  sale,  that  the  con- 
tract is  said  to  be  idtra  vires.     We  speak  of  the  contract  hereafter  as 
a  lease.    The  sole  question  then  is  :  Was  the  vote  ratifying  the  lease, 
and  so  the  lease  itself,  xdtra  vires  and  void  ?    H  c" 

We  are  inclined  to  think  the  lease  was  not  void.  The  lessee  is  to 
continue  the  same  business  which  the  corporation  was  organized  to 
carry  on.  The  lease,  therefore,  is  not  a  change  in  the  business,  but 
only  a  change  in  the  management  of  the  business.  The  financial  con- 
dition of  the  corporation  is  now  depressed,  and  its  business  cannot  be 
made  profitable  under  its  own  management,  for  want  of  capital.  Ad- 
ditional capital  is  not  available.  But  neither  the  directors  nor  the 
majority  stockholders  have  so  far  lost  confidence  in  the  concern  as  to 
be  willing  peremptorily  to  wind  up  its  affairs.  The  lease  was  entered 
into  as  the  best,  perhaps  the  only,  means  of  carrying  the  corporation 
over  this  period  of  depression,  and  in  the  meantime  obtaining  some 
income  for  the  stockholders.  If  a  sale  takes  place  it  is  certain  that 
the  property  will  be  worth  more  in  operation  than  if  left  idle.  Such 
leases  have  repeatedly  been  sustained  by  the  courts  of  equity. 

The  case  of  Feather stonh an gh  v.  Lee  Moor  Porcelain  Clay  Co.,  L.  R. 
1  Eq.  318,  326,  was  like  the  one  in  hand,  in  this  :  Minority  stock- 
holders asked  to  have  a  lease  of  the  entire  property  of  the  corporation 
set  aside.     That  company  was  incorporated  for  "  the  working,  pre 


472  BARTHOLOMEW   V.   DERBY   RUBBER  CO. 

paration,  and  sale  of  porcelain  clay,"  with  power  to  combine  "mining 
operations  "  with  the  original  business.  After  a  period  of  unsuccess- 
ful working,  a  majority  of  the  stockholders  voted  to  and  did  lease  the 
whole  of  the  works  and  buildings  of  the  company  for  the  period  of 
twenty-one  years.  It  was  held  that  this  was  a  valid  lease,  not  beyond 
the  power  of  the  company  to  make.  The  Vice-Chancellor,  Sib  Wil- 
liam Page  Wood,  in  giving  the  opinion,  said :  "  It  appears  to  me  that 
I  should  be  controlling  improperly  the  effect  of  this  deed,  if  I  did  not 
allow  this  company  to  do  that  act  which  through  the  medium  of  their 
directors  they  have  done.  .  .  .  Have  the  company  by  this  act  which 
they  intend  to  carry  into  effect,  .  .  .  either  on  the  one  hand  abandoned 
their  purposes,  ...  or  on  the  other  hand,  exceeded  their  purposes  ? 
Have  they  done  either  one  or  the  other  ?  It  appears  to  me  they  have 
not  abandoned  the  purposes  of  the  company.  They  have  granted  a 
lease  for  twenty-one  years,  and,  so  far,  they  have  agreed  to  take  a  rent 
for  their  property  instead  of  working  it  themselves,  and  taking  the 
profit.  At  the  end  of  twenty-one  years  they  are  to  have  the  whole  of 
the  property  back,  and,  as  it  appeared  to  them  (that  is  the  true  way 
to  put  it,  for  they  are  the  sole  judges  on  that  part  of  the  case),  they 
would  have  it  back  in  a  more  profitable  condition.  .  .  .  They  have  not 
exceeded  their  powers,  because  nobody  can  contend  that  parting  with 
their  property  for  a  certain  time  is  exceeding  their  powers,  beyond 
this,  that  during  all  that  time  they  are  not  carrying  on  the  business. 
But,  as  to  that  view,  I  apprehend  that  it  is  perfectly  competent  for  a 
meeting  (i.  e.,  of  the  stockholders)  to  say :  '  China  clay  is  in  a  very 
depressed  state  —  the  market  is  very  bad  —  and  we  agree  it  is  better 
not  to  work  it  for  two  or  three  years.'  That  would  be  entirely  within 
their  functions,  and  they  would  not  be  said,  in  that  respect,  to  have 
abandoned  their  work,  or  to  have  exceeded  the  functions  allowed 
them."     The  bill  was  dismissed  with  costs. 

In  Simpson  v.  Westminster  Palace  Hotel  Co.,  8  H.  L.  Cas.  712,  718, 
a  company  was  established  "  for  the  erection,  finishing,  and  mainten- 
ance of  a  hotel,  .  .  .  and  the  doing  all  such  things  as  are  incidental 
or  otherwise  conducive  to  the  attainment  of"  that  object.  The  direct- 
ors of  the  company  let,  for  a  stipulated  period  of  five  years,  to  the 
head  of  a  government  department  for  the  business  of  his  oftice,  a  large 
part  of  the  hotel.  There  was  evidence  that  this  use  would  be  advan- 
tageous to  the  company  in  its  intended  business.  This,  too,  was  a  bill 
by  minority  stockholders  asking  that  the  lease  might  be  declared 
invalid.  It  was  held  that  the  arrangement  was  valid.  In  the  House 
of  Lords,  the  Lord  Chancellor  (Lokd  Campbell)  said  :  "  From  the 
large  rent  immediately  to  be  received  by  the  company  for  the  occupa- 
tion of  the  one  hundred  and  sixty-nine  rooms  by  the  India  Board ; 
from  tlie  monopoly  to  be  enjoyed  by  the  company  in  supplying  so 
many  persons  with  refreshments  ;  and  from  the  fashionable  reputation 
to  be  conferred  on  the  hotel  by  this  association,  the  opinion  expressed 
by  the  majority  of  the  stockholders,  that  the  arrangement  is  beneficial 


BARTHOLOMEW   V.   DERBY   RUBBER   CO.  473 

to  them,  is  likely  to  be  verified.  This  anticipation  would  not  be  suffi* 
cient  if  the  original  undertaking  had  been  abandoned,  or  if  there  was 
any  extension  of  the  original  undertaking;  but  as  there  is  neither 
abandonment  nor  extension  of  the  original  undertaking,  and  the  ar-i 
rangement  may  assist  instead  of  obstructing  the  prosecution  of  the 
original  undertaking,  I  must  advise  your  Lordships  to  afl&nn  the  decree' 
appealed  against." 

In  Temple  Grove  Seminary  v.  Cramer,  98  N.  Y.  121,  a  company  iri' 
corporated  as  an  academy,  or  seminary  of  learning,  was  held  not  to 
have  exceeded  its  powers  by  leasing  one  of  its  buildings  during  the 
vacations  for  a  boarding-house.  See  also  Lafond  v.  Deems,  81  N.  Y. 
507.  In  Brown  v.  Winnisbn'met  Co.,  11  Allen,  326,  a  company  char- 
tered as  a  ferry  company  let  one  of  its  vessels  not  needed  in  its  ferry 
business  to  be  used  in  another  business.  This  was  held  not  to  be  an 
ultra  vires  contract.  See  also  Cif>/  Hotel  v.  Dickinson,  6  Gray,  586 ; 
French  v.  Quincy,  3  Allen,  9  ;  Lyndehorough  Glass  Co.  v.  Mass.  Glass 
Co.,  Ill  Mass.  315 ;  Calloway  Mining,  etc.,  Co.  v.  Clark,  32  Mo.  305 ; 
Watts' s  Appeal,  78  Pa.  St.  370  ;  Dupee  v.  Boston  Water  Power  Co., 
114  Mass.  37. 

We  have  considered  this  case  on  the  assumption  that  the  action  of 
the  directors  and  the  majority  stockholders  was  done  in  good  faith 
and  in  the  honest  belief  that  they  served  the  best  interests  of  all  con- 
cerned. If  fraud  had  been  charged  a  very  different  case  would  have 
ljeenj)resented^  Counsel  for  the  plaintiffs  says  in  his  brief  that  the 
lease  was  fraudulent  on  its  face.  But  fraud  is  not  charged  in  the 
complaint.  Fraud  is  never  to  be  presumed.  While  fraud  may  in 
some  cases  be  inferred  from  the  facts,  it  is  never  to  be  inferred  unless 
it  is  charged;  and  then  only  where  the  facts  and  circumstances  indi- 
cate clearly  that  fraud  has  been  committed. 

The  Superior  Court  is  advised  that  the  complaint  is  insufficient, 
and  to  sustain  the  demurrer. 

In  this  opinion  the  other  judges  concurred.^ 

1  "  The  remaining  errori?  complained  of  .  .  .  may  be  considered  together,  namely,  that 
the  directors  of  the  corporation,  plaintiffs,  had  no  power  to  make  the  lease  sued  on.  It  is 
supposed  that  a  company  chartered  for  the  purpose  of  manufacturing  and  refining  oil  can- 
not lease  its  entire  property,  and  so  defeat  the  very  purpose  for  which  its  charter  was 
granted.  But  corporations,  unless  expressly  restrained  by  the  act  which  establishes  them, 
or  some  other  act  of  assembly,  have,  and  always  have  had,  an  unlimited  power  over  their 
respective  properties,  and  may  alienate  and  dispose  of  the  same  as  fully  as  any  individual 
may  do  in  respect  to  his  own  property.  Hence  an  insolvent  corporation  may  make  a  | 
general  assignment  for  the  benefit  of  its  creditors,  and  this  power  may  be  exercised  by  the 
directors,  unless  special  provision  to  the  contrary  is  made  in  the  charter.  Dana  v.  Bank 
of  United  States,  5  Watts  &  Serg.  223.  li  they  can  alienate  absolutely,  they  may  lease, 
which  is  but  a  partial  or  temporary  alienation.     Omne  majus  continet  in  se  minus." 

Sharswood,  J.,  in  Ardesco  Oil  Co.  v.  North  American  <^c.  Co.,  A.  d.  1870,  66  Pa.  State, 
375,  pp.  381,  382.  —  Ed. 


474 


PARSONS  V.    TACOMA   SMELTING  AND   EEFINTNG   CO. 


A- 


'ARSONS  V.  TACOMA  SMELTING  AND  EEFINING  CO. 

1901.     Supreme  Court  of  Washington,  65  Pacific  Reporter,  765.1 

Appellant    Parsons,    original  plaintiff,   brings    suit   as    a   stock- 

K    [^  <A      y  holder  of  the  Tacoma  Smelting  and  Refining  Company  against  the 

^'  yyjS  corporation  and  its   trustees,   and  the  Tacoma  Smelting  Company. 

Q^"*'     iV.         ,  -Parsons  and  certain   other   stockholders  who  have   intervened  and 

r       \.   v/     ^^  united  with  him  as  plaintiffs,  pray  for  the  cancellation  of  a  lease  exe- 

y  c^     .Vn    /\.    cuted  by  the  Tacoma  Smelting  and  Refining  Company  to  the  Tacoma 

Smelting  Company. 

jThe  Tacoma  Smelting  and  Refining  Company  was  incorporated  in 

ISot.     It  purchased  a  smelting  plant  and  carried  on  business.     In 

/^  Avi^98,  a  proposition  to  lease  all  its  plant  and  properties  to  a  new  cor- 

rjT    poration,  called  Tacoma  Smelting  Company,  was  submitted  by  the 

y^       trustees  to  a  meeting  of  the  stockholders,  and  was  then  approved  by 

^     fty^ a  majority  of  all  the  stockholders.     Before  this  meeting  a  majority 

^J^      of  the  stock  in  the  old  corporation  had  been  purchased  by  the  new 

,^  k/r    corporation ;  and  a  large  portion  of  this  stock,  represented  by  Rust 

as  trustee,  was  voted  on  at  the  stockholders'  meeting. 

A  lease  for  ten  years  was  executed  Dec.  6,  1898.  It  included  all 
the  properties,  smelting  plant,  buildings,  machinery,  and  all  property 
of  every  description,  whether  real,  personal,  or  mixed,  belonging  to  the 
Tacoma  Smelting  and  Refining  Company,  and  also  included  a  provi- 
sion for  purchasing  all  ore  and  finished  products  and  supplies  then  on 
hand,  at  its  market  value,  to  be  thereafter  inventoried  and  appraised, 
and  for  which  $30,000  was  afterwards  paid  in  settlement  of  the 
lessor's  liabilities.  The  lessee  also  covenanted  that  within  six  months 
it  would  expend  at  least  $30,000  in  making  improvements  and  better- 
ments on  the  smelting  plant;  that  it  would  pay  $5,000  per  annum 
rental,  together  with  taxes,  insure  the  property,  and  at  the  end  of  the 
term  return  the  property  in  as  good  condition,  wear  and  tear  excepted, 
as  when  received. 

At  the  time  of  executing  the  lease,  the  old  corporation  owed  about 
$50,000  for  borrowed  money,  and  it  had  no  funds  on  hand.  Other 
facts  as  to  the  condition  of  the  old  corporation  are  stated  in  the  opinion. 
Reavis,  C.  J.  [After  stating  the  facts  ;  and  holding  that  there  was 
not  a  legal  quorum  of  trustees  present  at  the  meeting  of  the  board 
when  a  resolution  was  adopted  in  favor  of  leasing  the  property.] 

The  objects  of  the  incorporation  of  the  Tacoma  Smelting  &  Refin- 
ing Company  are  stated  in  its  articles  to  be  the  building,  acquiring, 
owning,  and  constructing  and  operating  of  works  and  buildings  for 
lie  purpose  of  milling,  reducing,  smelting,  and  refining  gold  and  sil- 
ver ores,  purchasing  and  handling  of  such  ores,  advancing  moneys 

J  Statement  abridged  from  opinion.  Only  so  mucli  of  tiie  report  is  given  as  relates  to  a 
lingle  point.  —  Ed. 


^ 


PARSONS  V.   TACOMA   SMELTING   AND   REFINING   CO.  475 

thereon,  and  acquiring,  purchasing,  owning,  and  operating  of  such 
appliances  and  adjuncts  as  may  be  necessary  or  convenient  for  the 
prosecution  of  the  business  ;  the  purchasing,  owning,  and  acquiring  of 
mines  and  all  other  lands  that  may  be  necessary  or  convenient  in  oper- 
ating said  business  ;  and  generally  to  do  all  other  acts  which,  in  the 
judgment  of  the  trustees,  may  be  proper  or  essential  to  the  success- 
ful carrying  on  of  the  purposes  and  objects  of  the  corporation.  It  is 
apparent  that  no  express  power  to  lease  all  th^jproperty  of  the  cor- 
poration^is  contained^in  tjie  a,rticl£s,  The'articles  of  incorporation,  as 
observed,  axe  a  contract.  Each  individual  stockholder  assumed  the 
liability  of  the  payment  of  his  subscription  to  the  capital  stock  in  money 
or  money's  worth,  and  the  corporation  engages  to  carry  on  the  business 
for  which  it  is  organized.  Its  business  is  managed  by  the  board  of  trus- 
tees, but  always  within  the  fundamental  limitations  of  the  articles  of 
incorporation.  .  .  .  The  stockholders  have  equal  rights  to  participate 
in  the  profits  of  the  business  according  to  the  value  of  the  stock  owned 
by  each,  and  each  stockholder  is  entitled  to  the  protection  of  his  charter 
rights.  He  may  insist  that  the  business  be  conducted  according  to  the 
articles  ;  and,  while  the  wishes  of  the  majority  of  the  stockholders 
are  potent  in  the  administration  of  all  the  business  of  the  corporation, 
and,  where  exercised  without  fraud  or  oppression,  are  controlling  upon 
the  minority,  yet  the  action  of  the  majority  cannot^  prevailwhere  it 
impairs  the  contract  right  of  a  stockholder.  The  reasons  urged  for 
the  necessity  of  the  lease  in  question  are  that  the  Tacoma  Smelting  & 
Refining  Company  was  unable  to  procure  capital  to  conduct  its  busi- 
ness efficiently ;  that  it  had  liabilities  which  were  pressing,  and  had 
no  available  funds  to  make  payment.  It  may  be  well  to  suggest  an 
inquiry  into  the  condition  of  the  corporation  at  the  time  the  proposal 
to  lease  the  property  was  made.  It  had  a  plant  of  considerable  value. 
It  apparently  exceeded  in  value  the  liabilities,  and,  while  the  amount 
is  not  definitely  shown,  it  appears  that  a  large  portion  of  the  subscrip- 
tions to  the  capital  stock  had  not  been  paid.  Mr.  Eust  testified  that 
some  of  the  subscribers  to  the  capital  stock  had  been  requested  to 
advance  capital  to  conduct  the  business,  but  that  no  such  advance- 
ments had  been  made.  It  is  nowhere  intimated  that  the  board  of 
trustees  had  attempted  to  exercise  its  appropriate  powers  to  collect 
the  unpaid  subscriptions  to  the  capital  stock.  In  fact,  it  would  seem, 
from  the  reasons  suggested  in  the  resolution  adopted  by  the  majority 
of  the  stockholders,  that  they  did  not  desire  this  capital  stock  to  be 
drawn  upon  in  the  prosecution  of  the  corporate  business.  It  cannot 
be  concluded  from  the  record  before  us  whether  other  action  by  the 
board  of  trustees  might  not  keep  the  corporation  a  going  concern, 
and  enable  it  to  perform  the  objects  of  its  organization.  It  may  be' 
implied  from  the  testimony  that  a  cogent  reason  for  the  action  of  the 
trustees  was  the  enlargement  of  the  smelting  business  by  the  organ- 
ization of  a  new  corporation,  which  should  include  within  it  the  pro- 
moters and  members  of  several  large  mining  companies,  so  that  the 


1^ 


476  PAESONS  V.  TACOMA   SMELTING   AND   EEFINING   CO. 

1  product  of  those  mines  could  be  brought  to  the  smelter,  and  a  much 
larger  business  established.  The  promoters  of  the  new  corporation 
and  of  the  lease  evidently  desired  to  secure  control_ofJhe_sixuiLiiUiie 
old  conrpanyT  The  acceptance  of  the  lease  seems  to  have  been  upon 
condition  that  the  new  company  acquire  a  majority  of  the  stock.  It 
islirged  that  under  the  circumstances  surrounding  the  transaction  the 
trustees  had  the  power  to  execute  the  lease.  The  authorities  cited  by 
counsel  for  respondents  have  been  examined,  and  those  most  pertinent 
will  be  considered. 

[The  learned  Judge  here  commented  on  Bartliolomew  v.  Rubber  Co., 
69  Conn.  521  ;  Hennessy  v.  Mulileman,  57  N.  Y.  Supp.  854  ;  Ardesco 
Oil  Co.  V.  North  American  Oil  &  Min.  Co.,  66  Pa.  State,  375 ;  and 
Plant  V.  Ice  Co.,  103  Georgia,  666.     The  opinion  then  proceeds.] 

But,  on  the  other  hand,  there  are  well-adjudged  cases  holding  that 
a  lease  of  all  the  property  of  a  corporation  cannot  be  made.  That  the 
stockholders  cannot  make  such  lease  is  ruled  in  Copeland  v.  Gaslight 
Co.,  61  Barb.  60.  In  Small  v.  Matrix  Co.  (Minn.)  47  N.  W.  797,  the 
Minneapolis  Company  leased  its  property  to  the  Electro  Matrix  Com- 
pany to  carry  on  the  same  business  and  the  lease  was  ratified  by  a 
majority  of  the  stockholders.  The  court  observed  :  ''We  do  decide 
that  such  a  surrender  of  the  property,  and,  so  far  as  possible,  of  the 
functions,  of  a  corporation,  in  order  that,  while  it  is  to  still  continue 
in  existence,  its  business  may  be  carried  on  by  another  corporation, 
to  which  such  transfer  is  made,  would  violate  the  rights  of  a  non- 
assenting  stockholder  arising  from  the  contract,  implied,  if  not  ex- 
jiressed,  in  the  creation  of  such  an  organization,  and  he  would  be 
entitled  to  have  such  acts  restrained  by  injunction."  The  same  de- 
claration is  made  in  Black  v.  Canal  Co.,  24  N.  J.  Eq.  455.  In  Byrne, 
V.  Manufacturing  Co.  (Conn.)  31  Atl.  833,  a  corporation  was  organized 
for  the  purpose  of  succeeding  to  and  carrying  on  the  business  of  an 
insolvent  corporation.  The  court  declared  that  this  could  not  be  done  ; 
that  such  a  transfer  would  be  sustained  only  when  the  purpose  was  a 
bona  fide  winding  up  of  the  business  of  the  existing  corporation,  and 
that  any  dissenting  stockholder  could  maintain  an  action  to  enjoin 
such  a  disposition  of  the  corporate  property.  A  distinction  m.ay  be 
observed  between  a  sale  of  all  the  property  and  a  lease  of  all  the 
property.  In  that  of  a  sale  no  further  liability  rests  upon  the  stock- 
iiolder.  The  corporation  is  in  fact  discontinued.  In  that  of  the 
lease  the  business  is  discontinued,  and  the  profits  derived  by  the 
lessee,  but  the  stockholders'  obligations  may  continue.  Under  our 
statutes  the  corporate  existence  is  limited  in  time.  This  was  not 
usual  in  the  older  cases.  And,  further,  section  4275,  1  Ballinger's 
Ann.  Codes  &  St.,  contains  the  complete  procedure  for  the  dissolution 
of  the  corporation  at  the  will  of  two-thirds  of  the  stockholders. 
These  statutes  apparently  contemplate  the  conduct  of  the  business 
for  whifh  the  corporation  is  organized  through  its  own  appointed 
agencies,  or,  at  the  choice  of  two-thirds  of  the  stockholders,  a  dissolu- 


BLACK  V.  DELAWARE   AND   RARITAN  CANAL   CO.  477 

tion.  It  is  true,  an  insolvent  corporation  may  make  an  assignment 
for  the  benefit  of  its  creditors  against  the  will  of  a  non-consenting 
stockholder,  and  probably  any  appropriate  proceedings  in  equity 
might  be  taken  to  relieve  a  failing  corporation  by  such  disposition  of 
its  property  as  should  be  equitable,  which  did  not  violate  any  con- 
tractual relations  of  the  stockholders.  It  is  concluded  upon  the  whole 
recordpresented  here  that  the  lease  in  controversy  is  voidable  at  the 
suit  of  a  uoivconsenting  stockholder^ 

[It  was  then  held,  that  the  new  corporation  had  no  right  to  pur- 
chase shares  in  the  old  corporation  for  the  purpose  of  controlling  its 
property  and  business.     The  opinion  concludes.] 

It  appears  that  the  appellants  are  entitled  to  have  the  lease  ad- 
judged void,  and,  further,  that  the  stock  of  the  Tacoma  Smelting  «& 
Retining  Company  owned  by  the  new  company  shall  not  be  used  in 
voting  at  stockholders'  meetings  in  the  old  company.  The  judgment 
is  reversed,  with  direction  to  the  superior  court  to  adjudge  the  lease 
void,  and  that  it  be  cancelled,  and  that  the  Tacoma  Smelting  Company 
be  enjoined  from  voting  the  stock  held  by  it  in  the  Tacoma  Spieltj, 
&  Refining  Company.^ 


Dunbar,  Fullerton,  and  Anders,  JJ.,  concur.         ^^     /f^     z/O- 


Uy.y^ 


i/^': 


,x 


Van   Syckel,   J.,  in  BLACK  v.  DELAWARE  jA^^D  rIrITAN 

CANAL   CO. 

1873.    24  N(,io  Jersey  Equity,  455,  pp.  464-466. 

[The  questions  arose  upon  a  bill  filed  to  enjoin  the  United  Compa-  y^'ir 
nies  of  New  Jersey  from  executing  a  lease  of  their  roads  and  canal   ' 
to  the  Pennsylvania  Railroad  Company  for  the  term  of  999  years.] 

Van  Syckel,  J.  .  .  .  The  certificate  for  stock  declares  that  the 
holder  is  entitled  to  a  certain  number  of  shares  of  the  capital  stock, 
which  consists  of  the  corporeal  works  and  property,  with  valuable 
franchises  to  be  used  by  the  corporation  for  their  profit,  by  the  taking 
of  tolls  and   fares  ;    with  the  right  to  acquire  and  dispose  of  such 

1  "It  has  been  suggested  that  a  power  of  sale  must  include  the  power  to  exchange,  be- 
cause the  greater  includes  the  less;  but  no  such  comparison  can  properly  be  made,  as 
neither  includes  the  other,  and  neither  is  part  of  the  other.  In  the  event  of  a  sale,  pro- 
perly and  fairly  conducted,  whether  by  public  auction,  by  sealed  bids,  or  by  any  other 
method  calculated  to  produce  the  best  result  attainable,  each  of  the  stockholders  has  an 
(•(]ual  right  to  become  the  purchaser  of  the  whole  or  any  part  of  the  corporate  assets,  each 
IS  equally  interested  in  obtaining  the  highest  price  for  the  common  property,  and  each  is 
entitled  to  an  equal  pro  rata  share  of  the  proceeds  ;  but  if  the  holders  of  any  number  of 
shares,  however  large,  be  authorized  to  exchange  the  corporate  assets  for  the  capital  stock 
of  a  foreign  corporation,  the  law  furnishes  no  measure  by  which  to  determine  the  prudence 
or  wisdom  of  the  exchange  or  to  test  the  fidelity  of  those  clothed  with  the  power  and 
charged  with  the  dutj'  incident  to  such  proceedings." 

PiGOTT,  J.,  in  Forrester  v.  Boston  ij-  Montana  cj-c.  Co.,  A.  d.  1898,  21  Montana,  54^ 
p.  6G2.  — Ed. 


478  BLACK   V.   DELAWARE   AND   RARITAN   CANAL  CO. 

property  as  may  be  essential  in  the  legitimate  exercise  of  their  func- 
tions, under  the  management  and  control  of  directors,  of  which  any 
corporator,  by  and  with  the  consent  of  the  requisite  number  of  his 
\  associates,  may  be  one.  The  prospect  of  increased  gains,  consequent 
upon  the  growth  of  population,  and  added  business,  is  a  valuable  in- 
,cident  also  to  the  ownership  of  the  stock.  Such  are  the  rights  vested 
in  the  stockholder  under  the  law  and  by  virtue  of  his  engagement 
with  his  associates,  before  the  lease  is  effected. 

After  the  lease  takes  effect,  his  company  is  denuded  of  all  these 
corporeal,  substantial  properties,  its  structure  for  the  next  nine  hun- 
dred and  ninety-nine  years  is  totally  altered,  and  instead  of  what  he 
before  possessed,  he  would  be  compelled  to  accept  an  annual  rent, 
/C-  fixed  without  his  concurrence,  and  secured  by  the  personal  responsi- 
bility of  the  corporate  lessee ;  for  pending  the  term,  which  is  perpetual 
for  all  practical  purposes  according  to  our  allotted  years,  the  visible, 
tangible  assets  would  be  dissipated  and  decayed.  The  right  of  re-entry 
'can  scarcely  be  entitled  to  the  name  of  security. 

The  shareholder  would  still  have  the  paper  upon  which  his  certifi- 
cate is  printed,  but  in  place  of  the  earnings,  he  must  be  content  with 
a  share  of  tlie  reserved  rental  in  a  corporation  possessed  of  the  single 
faculty  of  maintaining  its  organization  for  the  distribution  of  such 
rent,  stripped  of  all  the  franchises  for  the  exercise  of  which  it  was 
founded.  Without  his  consent,  and  against  his  protest,  he  would  lose 
his  share  in  the  old  thing,  and  be  forced,  as  an  unwilling  captive, 
A  into  a  new  and  wholly  different  venture.  A  statement  of  the  con- 
xfj  sequences  which  necessarily  flow  from  this  project,  demonstrates  the 
futility  of  attempting  to  establish  it  without  legislative  consent. 

Equity  looks  at  the  substance  of  things,  and  not  at  mere  names. 
For  all  substantial,  practical  purposes,  a  lease  for  nine  hundred  and 
ninety-nine  years  is  a  conveyance  in  fee.  It  would  carry  us  to  a 
period  as  distant  in  the  future,  as  the  time  of  Alfred  the  Great  is 
remote  in  the  past,  and  if  our  courts  should  permit  corporations, 
without  legislative  authority  first  had,  to  make  any  disposition  of 
their  entire  franchises  that  a  controlling  interest  miglit  determine 
upon,  the  private  rights  of  minorities  would  be  no  more  secure  against 
invasion  now,  than  they  were  in  those  semi-barbarous  days. 

It  may  ajso  be  considered  as  settled,  that  a  corporation  cannot  lease 
or  dispose  of  any  franchise  needful  in  the  performance  of  its  obliga- 
C-  tlons  to  the  state, 'w[thout_legislative  consent.  Kor  is  the  difficulty 
avoided  by  the  proposition  that  a  corporate  body,  by  and  with  the 
assent  of  a  majority  of  the  corporators,  may  abandon  their  business. 
Even  if  this  was  true,  upon  such  dissolution,  the  franchises  could 
not  be  transferred,  but  would  revert  to  the  sovereignty  from  which 
they  were  derived,  and  the  shareholders  would  become  partners  or 
joint  owners  in  the  assets,  and  for  their  share  in  such  assets,  they 
could  not  be  compelled  to  accept  an  annual  rent  for  nine  hundred  and 
ninety-nine  years 


DOW  V.   NORTHERN   R.  B. 


H/^ 


H^ 


Doe,   C.   J.,   IN   DOW  v.  NOKTHERN '  R.  R.   et  al 

1887.     67  New  Hampshire,  1. 

[Upon  a  bill  in  equity,  by  minority  stockholders  of  the  Northern 
Railroad,  seeking  to  enjoin  the  operation  of  the  Northern  Railroad  by 
the  Boston  &  Lowell  Railroad  under  a  lease  for  99  years,  approved/      j^  i, 
by  a  two-thirds  vote  of  the  stockholders.]  /ly 

Doe,  C.  J.  .  .  .  The  lease  of  the  Northern  to  the  Lowell  is  an  at-  *  /v^v^ 
tempt  to  compel  the  plaintiffs,  dissenting  stockholders  of  the  Northern, 
to  exchange  for  ninety-nine  years  all  their  interest  in  the  Northern 
for  an  annuity,  secured  by  a  right  of  entry,  practically  equivalent  to  a 
mortgage  enforceable  by  strict  foreclosure.  The  possibility  of  a  noH' 
payment  of  the  annuity,  and  a  resumption  of  the  carrier  business  by 
the  Northern,  has  no  bearing  on  the  question  of  the  validity  of  the 
exchange  of  that  business  for  the  annuity.  This  question  is  to  be  de- 
cided on  the  possibility  and  the  presumption  that  the  Northern  will 
have  no  occasion  to  resort  to  its  security.  The  circumstance  that  the 
money  to  be  received  by  the  Northern  is  divided  into  many  sums,  due 
at  different  times,  is  immaterial.  The  law  of  the  case  is  what  it  would 
be  if  the  price  paid  for  the  estate  of  ninety-nine  years  had  been  paid 
in  a  single  sum  before  the  purchaser  took  possession  of  the  road,  and 
the  security  given  were  merely  for  the  performance  of  covenants  not 
relating  to  the  payment  of  the  price.  The  payment  of  the  whole  price 
in  one  sum,  and  the  division  of  it  among  the  Northern  stockholders, 
would  leave  them  members  of  their  corporation  and  owners  of  an 
estate  in  remainder.  Instead  of  being  a  step  in  a  process  of  dissolv- 
ing the  Northern  company  and  winding  up  its  affairs,  the  lease  requires 
that  company  to  "keep  up  and  preserve  its  organization."  Whether 
each  stockholder's  share  of  the  price  of  the  estate  sold  is  paid  to  him 
in  one  sum  at  one  time,  or  in  many  sums  at  many  times,  the  sale  of 
the  road  for  ninety-nine  years  is  not  a  provision  for  the  Northern 
company's  working  the  road,  which  by  the  terms  of  the  sale  is  to  be 
worked  during  that  time,  not  by  the  Northern  and  the  Lowell  as  joint 
principals,  nor  by  the  Lowell  as  agent  of  the  Northern,  but  by  the 
Lowell  for  the  Lowell  as  sole  principal. 


As  agents,  the  majority  can  do  whatever  is  necessary  to  carry  on,i 
for  their  principal,  the  principal's  business  of  a  common  carrier  be- 1 
tween  Concord  and  Lebanon.     Within  limits,  they  can  select  the  mode  ( 
and  means  of  executing  their  agency.     The  lease,  instead  of  being  a 
mode  or  means  of  their  carrying  on  that  business  for  their  principal, 
transfers  it  to  another  principal  for  ninety-nine  years,  and  transfers 
their  principal  to  the  vocation  of  a  landlord  and  rent-receiver,  which 
is  not,  in  kind  or  degree,  the  same  business  as  carrying  passengers 
and  freight.      The  legal  scope  of  their  employment   is  within  the 


h 


480  DOW   V.   NORTHERN   R.    R. 

bounds  of  their  principal's  business,  or,  at  most,  those  bounds  and  a 
proceeding  for  winding  up  that  business,  and  dissolving  their  principal. 

The  retirement  of  the  Northern  company  from  the  industrial 
activity  of  common  carriers  to  the  leisure  of  mere  rent-receivers  was 
a  change  in  the  object  of  the  partnership.  The  legal  character  of 
the  change  did  not  depend  upon  the  circumstance  that  the  partners 
never  intended  to  perform  all  their  mental  and  manual  labor  in  per- 
son. The  labor  now  done  and  the  tolls  now  received  on  the  road  are 
not  theirs. 

"...  Because  the  corporators  may,  with  the  consent  of  the  state, 
by  the  vote  of  a  majority  or  two  thirds  in  interest,  abandon  their  en- 
terprise, sell  out  their  property,  and  return  his  share  of  the  proceeds 
to  each  stockholder,  it  does  not  follow  that  by  the  same  authority  the 
works  may  be  leased  to  be  carried  on  and  conducted  by  others,  the 
corporation  continuing  to  exist.     The  right  to  elect  the  directors,  by 
whom  the  business  is  to  be  managed,  is  a  provision  in  the  charter 
which  the  state  or  a  majority  cannot  interfere  with ;  it  is  a  contract. 
/  The  true  question  on  that  point  here  is,  whether  the  making  of  this 
A  lease  and  contract  is  an  exercise  of  the  power  of  managing  the  busi- 
)  /ness  and  concerns  of  the  corporation  conferred  in  the  charter,  such  as 
(/can  be  used  by  consent  of  a  legal  majority  of  corporators,' without  that 
I  of  all."     Zahriskie,  Chancellor,  in  Black  v.   Canal  Co.,  22  N.  J.  Eq. 
130,  407.     See,  also,  22  N.  J.  Eq.  405,  408,  415,  416  ;  Zahriskie  v. 
Railroad,  18  N.  J.  Eq.  183. 

By  their  charter-contract  all  the  stockholders  of  the  Northern  Eail- 
road  agreed  that  their  partnership  business  should  be  the  transporta- 
tion of  passengers  and  freight  on  their  road,  including  certain  inci- 
dental enterprises  contributing  to  the  transaction  of  that  business. 
They  formed  the  partnership  for  no  other  private  purpose  than  the 
benefit  to  be  derived  from  their  performance  of  this  contract,  legally 
altered  as  it  may  be,  under  legislative  permission,  by  their  express  or 
implied  assent.  No  alteration  has  authorized  a  part  of  the  company 
to  suspend  the  company's  performance  of  the  contract  by  transferring 
their  road  and  business  to  other  principals  for  ninety -nine  years.  The 
plaintiffs  have  not  acquiesced  in  the  transfer  and  suspension,  but  have 
objected  seasonably,  and  presumably  in  good  faith,  for  the  purpose  of 
protecting  their  Northern  shares.  The  lease  violates  the  partnership 
contract,  and  takes  from  the  plaintiffs  an  equitable  estate  of  ninety- 
nine  years  without  their  consent,  and  without  prepayment  of  the  value 
.  of  the  estate  taken.  Wliatever  names  are  used  to  designate  the  trust 
land  agency  of  the  corporate  partnership  and  the  relation  existing  be- 
\tween  each  stockholder  and  the  company,  he  has  some  remedy  for 
Itheir  breach  of  the  contract.  ''  Wherever  there  is  a  legal  right  vested 
/in  a  party,  he  must,  in  some  court,  have  the  means  of  enforcing  that 
(right."     Adley  v.  Whitstahle  Co.,  19  Ves.  Jr.  304,  305. 


BOW  V.   NORTHERN   R.   R.  481 

Tlie^j)rivate  property  of  the  Northern  company,  subject  to  a  public 
right  of  transportation,  is  held  in  trust  by  the  corporation, foi'  the 
benefit^of  the  stockholders.     Tlifij^rporation  is  trustee,  holding  the     >n 
legal  title.     The  stockholders  are  the  beneficiaries,  holding  the  equi-    (j"^ 
table   interest.     "  The  jurisdiction  to  enforce  performance  of  trusts 
arises^where  property  has  been  conferred  upon  and  accepted  by  one 
person  on  the  terms  of  using  it  for  the  benefit  of  another."     Adams 
Eq.  26.     The__£ule  is,  that_the  equitable  ownership  includes  aJ,e^aX_ 
right  to  a  performance  of  the  trust  whicji  can  be  spgcifically  enfoitied 
in  a  court  of  equity]^  and  the  authorities  do  not  recognize  a  breach  of 
coj^ora^te  trust  as  aii_gxception  to  the  jaile. 

An  injunction  against  the  lease  as  a  breach  of  the  iSTorthern  trust  is, 
in  effect,  a  decree  that  the  trustee  specifically  perform  the  charter- 
contract  and  the  trust  declared  in  it.  In  the  bill,  the  plaintiffs  ask 
that  the  Northern  company  and  their  directors  be  ordered  to  resume 
the  control,  management,  and  operation  of  the  Northern  road.  A  de- 
cree for  the  plaintiffs,  whether  affirmative  or  negative  in  form,  would 
run  against  the  trustee,  —  not  a  mere  imaginary  person,  but  the  whole 
body  of  stockholders,  whose  performance  of  their  corporate  trust  is 
performance  of  their  partnership  contract.  Whether  the  plaintiffs' 
rights,  accruing  from  the  contract,  are  called  contractual  or  fiduciary, 
they  are  subject  to  the  general  rule  that  inequitable  performance  is 
hot  specifically  enforced  when  recoverable  damages  for  non-perform- 
ance are  an  ample  remedy.  The  equity  to  compel  specific  perform-! 
ance  of  contract  arises  where  an  agreement,  binding  at  law,  has  been] 
infringed,  and  the  remedy  at  law  by  damages  is  inadequate.  Adams/ 
Eq.  77 ;  Story  Eq.,  ss.  716,  717,  717  a  ;  Fry  Spec.  Perf.,  s.  40  ;  Pom. 
Spec.  Perf.,  s.  3  ;  Southern  Express  Co.  v.  Railroad,  99  U.  S.  191,  200 ; 
Eckstein  v.  Downing^  N".  H.  248;  Black  v.  Canal  Co.,  22  N.  J.  Eq. 
130,  399.  But  the  adequacy  of  a  compensatory  suit  on  a  broken  con- 
tract does  not  always  depend  upon  the  breach  being  financially  inju- 
rious to  the  plaintiff.  A  breach  that  would  be  pecuniarily  beneficial 
to  him  may  be  of  such  a  nature  in  other  respects  that  nothing  short 
of  prevention  will  be  just.  If  the  price  fixed  by  a  written  executory 
agreement  for  the  sale  of  a  farm  is  more  than  the  value,  that  fact  is 
not  an  answer  to  a  bill  brought  by  the  purchaser  against  the  vendor 
for  specific  enforcement  of  the  agreement.  The  purchaser,  financially 
benefited  by  the  violation  of  his  legal  right,  would  be  financially  in- 
jured by  resorting  to  the  remedy  of  a  suit  for  nominal  damages. 
"  Compensation  in  damages,  measured  by  the  difference  in  price  as 
ascertained  by  the  market  value  and  by  the  contract,  has  never  been 
regarded  in  equity  as  such  adequate  indemnit}^  for  non-fulfilment  of  a 
contract  for  the  sale  or  purchase  of  land  as  to  justif}'  the  refusal  of 
relief  in  equity."  Jones  v.  Newhall,  115  Mass.  244,  248.  The  ven- 
dor's payment  of  the  difference  is  not  regarded  by  the  law  as  a  full, 
sufficient  reparation  for  the  purchaser  who  made  the  contract  **  on  a 


482  DOW   V.   NORTHERN   R.   B. 

particular  liking  to  the  land."  Buxton  v.  Lister,  3  Atk.  383,  384 ; 
Sto.  Eq..  s.  111.     The  damage  is  irreparable  in  the  legal  sense. 

A  written  contract  of  farming  partnership  may  be  specifically  en- 
forced by  an  injunction  against  its  violation  when  a  majority  of  the 
partners  make  an  unauthorized  attempt  to  turn  the  whole  partnership 
property  and  business  over  to  other  principals  for  ninety-nine  years 
in  exchange  for  an  annuity  or  other  investment.  On  the  question  of 
equity  jurisdiction,  the  mere  expediency  of  the  exchange  as  a  financial 
measure  would  be  as  immaterial  as  the  corporate  or  unincorporate 
form  of  the  partnership  organization.  The  recovery  of  one  dollar  by 
an  expenditure  of  one  hundred,  in  a  suit  at  law,  would  not  be  a  suf- 
ficient remedy  for  a  partner  objecting  to  the  illegal  change  of  his  busi- 
ness. Specific^ relief^  would  not  be  less  necessary  than  in  the  case  of  a 
refusal  to^erf  orm  a  written  agreeiiient  for  the  sale  of  land. 

Performance  of~the  NorthefnT  charter-contract^would  not  be  ren- 
dered inequitable  in  law  by  the  mere  fact  of  non-performance  being 
more  beneficial  to  the  stockholders.  The  plaintiffs'  equitable  right  to 
be  principals  in  the  common-carrier  business  between  Concord  and 
Vermont,  according  to  their  contract,  would  not  be  barred  by  a  finding 
that  it  would  be  better  for  them  to  exchange  that  business  for  the 
occupation  of  a  lessor,  or  the  business  of  a  road  running  from  Concord 
to  Maine  or  Massachusetts.  They  have  not  agreed  that  their  partners 
may  take  them  from  the  stipulated  position  of  principals  in  the  work 
of  carrying  passengers  and  freight  between  Concord  and  Lebanon,  and 
give  them  any  other  vocation  in  which  a  court  or  jury  may  think  they 
,  would  be  more  profitably  and  judiciously  employed.  Their  expulsion 
for  ninety-nine  years  from  the  Northern  carrier  business,  in  violation 
of  their  partnership  contract,  is  a  case  in  which  the  general  principle 
'of  equity  gives  an  injunction,  and  the  evidence  shows  no  exceptional 
I  reason  for  withholding  the  specific  relief  necessary  to  prevent  their 
[wrongful  exclusion  from  their  chosen  employment. 


steinway's  petition.  4 


^ 


% 


b^ 


483 


CHAPTER  XIII. 

STOCKHOLDER'S    EIGHT    TO    INSPECT 
RECORDS  AND  PAPERS. 


CORPORATE 


In  re  STEINWAY'S   PETITION. 


fj 


1^ 


1899.  159  New  York,  250.     (  NlV  • 

[Petition,  by  Henry  W.  T.  Steinway,  for  an  inspection  of  the  books 
and  records  of  the  Steinway  &  Sons  corporation.  I  ^v' 

The  Appellate  Division  of  the  Supreme  Court  granted  the  petition, 
with  certain  regulations.      An  appeal  was  taken  from  this  decision.. 

The  facts  are  stated  in  the  opinion.] 

Edward  C.  James  and  G.  W.  C'otterill,  for  appellants.  ^liyl 


Jr^' 


The  method  prescribed  by  the  statute  creating  this  corporation,  and  \]^     '3'      \  j^ 
by  the  general  statutes  and  rules  and  practice  of  the  courts,  for  the  '    A    ^,«>^    il^''^ 
examination  of  the  corporate  books  by  a  stockholder  is  exchisive,  andr^wl '    ^  r  x^^ ffi 
is  inconsistent  with  the  right  claimed  in  this  case  to  examine  the    ^(^      ^^  ji-^ 
books  of  account  [citing  authorities].     The  law  allows  no  general.  \d^     '^  i^c^      fi^ 
right  to  a  stockholder  to  inspect  the  books  of  the  corporation.     In-^^^  ,  ijVV"  -^z 
spection  can  only  be  ordered  in  aid  of  a  suit  brought  or  defended  ^^^^         ^^     ^ 
[authorities].     Assuming  that  the  jurisdiction  in  cases  of  this  kind  is  i'^  \\^      -^    ^ 
discretionary, that  discretion  is  not  arbitrary, but  is  governed  by  legal  \}^* 
rules,  and  was  not  properly  exercised  by  the  Appellate  Division  in      . 
this  case.  .  .  .  ^    n  /r  ^ 

Wheeler  H:  Peckham  and  Edward  B.  Hill,  for  respondent.  C  ^  /■     ^«/^ 

Vann,  J.  Steinway  &  Sons,  once  a  copartnership,  became  a  cor- 
poration in  1876  under  the  General  Manufacturing  Act  of  1848,  and 
the  relator  has  been  a  stockholder  therein  ever  since.  He  now  holds 
1,440  shares  of  its  stock  of  the  par  value  of  $144,000,  out  of  a  total 
of  20,000  shares  of  the  value  of  $2,000,000,  but  with  an  actual  value 
much  in  excess  of  that  sum.  He  has  not  been  an  officer  of  the  cor- 
poration since  1881,  and  he  has  had  no  means  of  knowing  much 
about  the  management  of  its  affairs  since  1892,  when  he  was  given  an 
opportunity  to  examine  the  books.  Since  then  he  has  been  substan- 
tially ignorant  as  to  all  the  details  of  the  management,  and  has  had  no 


484  steinway's  petition. 

access  to  the  books  or  records.  Learning  of  certain  practices  that  he 
considered  improper,  on  April  12tli,  1894,  and  March  27th,  1895,  he 
made  protests  in  writing  to  the  company,  but  no  attention  was  paid 
to  them.  On  the  6th  of  April,  1896,  he  made  a  written  request  for 
leave  to  examine  the  books,  but  receiving  no  reply,  on  the  15th  of 
that  month  he  wrote  requesting  information,  proper  in  character,  upon 
certain  subjects,  and  to  this  communication  he  received  an  answer 
from  the  secretary,  dated  April  23d,  1896,  written  in  behalf  of  the 
board  of  trustees,  virtually  refusing  the  information  asked  for  on  the 
ground  that  the  relator  intended  to  use  it  in  "  hostility  to  the  interest 
of  the  stockholders."  On  the  5th  of  April,  1897,  he  endeavored  to 
ascertain  certain  material  facts  at  the  annual  meeting,  but  without 
success,  and  thereupon  he  requested  the  officers  and  directors  to  afford 
his  accountants  and  attorneys  access  to  the  books  of  account,  vouchers 
and  records  of  the  company  for  the  years  1892  to  1896,  inclusive,  for 
the  purpose  of  examining  the  same.  Keceiving  no  reply,  on  the  8th 
of  May,  1897,  he  served  a  written  request  upon  the  treasurer  for  a 
statement  in  writing,  under  oath,  of  the  affairs  of  the  company,  em- 
bracing a  particular  account  of  all  its  assets  and  liabilities  for  each  of 
the  several  fiscal  years  from  1892  to  1896,  inclusive,  and  in  response 
to  this  he  received  a  general  statement  placing  the  assets  at  more  than 
three  millions  of  dollars,  but  distributed  into  only  fourteen  items, 
eight  of  which  were  over  $100,000  each.  The  liabilities  included  but 
eight  items,  three  of  which  were  the  capital  stock,  the  surplus  and  the 
profit  of  1896.  This  was  the  first  information  as  to  the  company's 
affairs  which  the  petitioner  had  been  able  to  obtain  in  five  years,  ex- 
cept that  he  once  saw  the  balance  sheet  and  inventory  of  January, 
1893.  Since  1891  the  dividends  declared  bj'-  the  company  have  dwin- 
^  [died  in  amount.  In  1896  the  dividend  was  only  five  per  cent,  but 
Q  1  never  before  since  1883  had  less  than  ten  per  cent,  and  sometimes  as 
much  as  eighteen  and  twenty  per  cent,  been  divided  in  dividends. 

The  relator  claimed  in  his  petition  for  a  writ  of  mandamus  to  per- 
mit inspection  of  the  books,  that  the  officers  of  the  corporation  were 
engaged  in  an  attempt  to  form  an  English  stock  company  for  the  con- 
trol of  its  business,  with  the  design  of  selling  their  shares  of  the 
capital  stock,  or  exchanging  them  for  a  much  greater  amount  of 
shares  in  the  English  company,  and  that  efforts  had  been  made  by  the 
stockholders  and  officers  to  induce  him  to  sell  his  stock  at  $250  a 
share  ;  but,  as  he  insisted,  it  was  impossible  for  him  to  fix  upon  any 
price  without  an  opportunity  to  investigate  the  condition  of  the  com- 
pany. He  specified  various  acts  which  he  alleged  to  be  improper  on 
■  the  part  of  the  officers,  such  as  the  payment  of  exorbitant  rentals, 
carrying  on  a  banking  business,  allowing  unusual  rates  of  interest, 
/  inventorying  the  assets  too  low,  and  paying  the  trustees  salaries  with 
no  equivalent  in  services. 

The  opposing  affidavits  contain  a  large  amount  of  matter  relating 
to  aggravating  conduct  on  the  part  of  the  relator  in  the  past,  and 


steinway's  petition. 


485 


alleging  improper  motives  and  ulterior  aims  on  his  part.  Many  gen- 
eral allegations  of  the  petition  were  denied  in  licec  verba,  without  stat 
ing  the  real  facts.  The  president  and  other  officers  of  the  corporation 
denied  the  allegations  of  improper  conduct  on  their  part  and  claimed 
that  the  relator  wished  to  force  them  to  buy  him  out  at  an  extrava- 
gant price.  As  no  alternative  writ  was  issued  and  the  relator  pro- 
ceeded to  argument  upon  his  petition  and  the  opposing  affidavits,  his 
right  to  a  peremptory  writ  depends  upon  the  conceded  facts,  the  same 
as  if  he  had  demurred  to  the  allegations  of  the  defendants.  (Feojple  ex 
rel.  City  of  Buffalo  v.  N.  Y.  C.  &  H.  R.  R.  R.  Co.,  156  N.  Y.  570; 
Matter  of  Haehler  v.  New  York  Prodiice  Exchange,  149  N.  Y.  414 ; 
People  ex  rel.  Corrigan  v.  Mayor,  etc.,  149  N.  Y.  215  ;  People  v.  R.,  TV. 
&  0.  R.  R.  Co.,   103  N.  Y.  95 ;  Code  Civ.  Pro.  §  2070.) 

While  many  of  the  facts  alleged  in  the  petition  were  denied,  enough 
were  left  undenied  to  present  a  case  for  the  exercise  of  judgment  and 
discretion  on  the  part  of  the  Supreme  Court,  provided  it  has  power  in 
any  case  not  expressly  covered  by  statute,  to  authorize  the  inspection, 
wholly  or  in  part,  of  the  books  of  a  manufacturing  corporation,  upon 
the  application  of  a  stockholder. 

The  Special  Term  denied  the  application  of  the  relator  for  a  per- 
emptory writ  of  mandamus  commanding  the  officers  of  the  corporation 
to  exhibit  certain  of  its  books  and  papers  to  him,  but  upon  appeal  to 
the  Appellate  Division  the  order  of  the  Special  Term  was  reversed  by 
a  divided  vote,  and  the  prayer  of  the  petition  granted,  with  certain 
regulations  as  to  the  time,  place,  and  manner  of  exhibiting  the  books  . 
and  papers.  The  Appellate  Division  allowed  an  appeal  to  this  court,  p  |\ 
and  certified  the  following  question  for  decision  :  "  Has  the  Supreme 
Court  the  power,  upon  the  petition  of  a  stockholder,  to  compel  by 
mandamus  the  corporation  to  exhibit  its  books  for  his  inspection  ?  "   ' 

The  relator  does  not  claim  that  the  power  in  question  has  been  con- 
ferred upon  the  court  by  statute,  but  he  insists  that  it  is  a  part  of  its 
inherent  power.  This  position  involves  an  inquiry  into  the  origin 
and  extent  of  the  authority  of  the  Supreme  Court  and  its  power  of 
visitation,  or  of  examining  into  the  affairs  of  corporations  according 
to  the  common  law. 

[The  learned  Judge  held,  that  the  present  Supreme  Court  of  Xew 
York  has  all  the  powers  of  the  English  Court  of  King's  Bench  and 
the  Court  of  Chancery  as  they  existed  in  1775 ;  except  as  modified  by 
the  State  Constitution  or  Statutes.] 

The  right  of  a  corporator,  who  has  an  interest  in  common  with  the 
other  corporators,  to  inspect  the  books  and  papers  of  the  corporation, 
for  a  proper  purpose  and  under  reasonable  circumstances,  was  recog- 
nized by  the  Courts  of  King's  Bench  and  Chancery  from  an  early  day, 
and  enforced  by  motion  or  mandamus,  but  alwa3's  with  caution  so  as 
to  prevent  abuse.  (Rex  v.  Fraternity  of  Hostmen,  2  Str.  1223  and 
note  ;  Gery  v.  HojyJcins,  7  IMod.  129,  case  175  ;  Richards  v.  Pattinson, 
1  Barnes'  Notes  of  Cases,  156 ;   Young  v.  Lynch,  1  Sir  W.  Blackstone? 


^ 


486  STEIN  way's   petition. 

27 ;  The  King  v.  Shelley,  3  D.  &  E.  141 ;  The  King  v.  Babh,  3  D.  & 
E.  579,  580 ;  The  King  v.  Merchant  Tailors'  Company,  2  B.  &  A.  115 ; 
In  re  Burton,  L,  J.  [312,  B.]  62 ;  In  re  West  Deven  Mine,  L.  R.  [27 
Ch.  Div.]  106.)  Lord  Kenyon,  in  rendering  judgment  in  The  King  v. 
Babb,  assumed  "  that  in  certain  cases  the  members  of  a  corporation 
may  be  permitted  to  inspect  all  papers  relating  to  the  corporation." 
In  Gery  v.  Hopkins  the  court,  on  granting  the  order  to  produce,  said : 
"  There  is  great  reason  for  it,  for  they  are  books  of  a  public  company 
and  kept  for  public  transactions,  in  which  the  public  are  concerned, 
and  the  books  are  the  title  of  buyers  of  stock  by  act  of  Parliament." 
In  Rex  V.  Fraternity  of  Hostmen,  the  reporter  states  that  the  court 
said :  "  Every  member  of  the  corporation  had,  as  such,  a  right  to  look 
into  the  books  for  any  matter  that  concerned  himself,  though  it  was 
in  a  dispute  with  others." 

The  following  cases  arose  in  this  state,  but  the  most  of  them  are 
not  strictly  in  point,  as  they  rest  mainly  upon  statutory  authority, 
which  does  not  extend  to  the  case  in  hand  [citing  authorities.] 

The  courts  of  other  states  compel  the  officers  of  corporations  to 
allow  stockholders  to  examine  the  books  upon  due  application  for  a 
proper  purpose. 

In  Lewis  v.  Brainerd  (53  Vt.  520)  the  court  said :  "  The  shareholders 
in  a  corporation  hold  the  franchise  and  are  the  owners  of  the  corpo- 
rate property,  and  as  such  owners  they  have  the  right,  at  common  law, 
to  examine  and  inspect  all  the  books  and  records  of  the  corporation  at 
all  seasonable  times,  and  to  be  thereby  informed  of  the  condition  of 
the  corporation  and  its  property." 

In  Huylar  v.  Cragin  Cattle  Co.  (40  N.  J.  Eq.  392,  398)  it  was  said : 
"  Stockholders  are  entitled  to  inspect  the  books  of  the  company  for 
proper  purposes  at  proper  times,  and  they  are  entitled  to  such  inspec- 
tion, though  their  only  object  is  to  ascertain  whether  their  affairs 
have  been  properly  conducted  by  the  directors  or  managers.  Such  a 
right  is  necessary  to  their  protection.  To  say  that  they  have  the 
right,  but  that  it  can  be  enforced  only  when  they  have  ascertained,  in 
some  way  without  the  books,  that  their  affairs  have  been  mismanaged, 
or  that  their  interests  are  in  danger,  is  practically  to  deny  the  right 
in  the  majority  of  cases.  Oftentimes  frauds  are  discoverable  only  by 
examination  of  the  books  by  an  expert  accountant.  The  books  are 
not  the  private  property  of  the  directors  or  managers,  but  are  the 
records  ofJj]j?jr_transa!cErQns_asJ;rii5tees  forJJTej|o?ikh614ers7" 

In  Commonwealth  v.  Phoenix  Iron  Co.  (105  Pa.  St.  Ill,  116),  the 
rule  was  laid  down  that,  "unless  the  charter  provides  otherwise,  a 
shareholder  iu  a  trading  corporation  has  the  right  to  inspect  its  books 
and  papers  and  to  take  minutes  from  tliem  for  a  definite  and  proper 
purpose  at  reasonable  times.  The  doctrine  of  the  law  is  that  the 
books  and  papers  of  the  corporation,  though  of  necessity  kept  in  some 
one  hand,  are  the  common  property  of  all  the  stockholders."  Upon 
a  second  appeal  in  the  same  case,  sub  nom.  Fhcenix  Iron  Company  v. 


steinway's  petition.  487 

Commonwealth  (113  Pa.  St.  563,  572),  the  court  said :  "  Under  the 
circumstances  mentioned  for  the  purposes  stated,  we  are  of  opinion 
that  according  to  our  ruling  when  the  case  was  here  before,  the  re- 
lator is  clearly  entitled  to  an  examination  of  the  books  and  papers  of 
the  company.  Such  a  right  is,  of  course,  not  to  be  exercised  to  gratify 
curiosity,  or  for  speculative  purposes,  but  in  good  faith  and  for  a 
specific  honest  purpose,  and  where  there  is  a  particular  matter  in 
dispute  involving  and  affecting  seriously  the  rights  of  the  relator  as  a 
stockholder.  ...  A  stockholder  in  a  trading  corporation  must  cer- 
tainly have  some  rights  which  a  board  of  directors  should  respect. 
Sellers  (the  relator)  was  not  bound  to  accept  the  mere  statement  of 
the  board,  whether  under  oath  or  otherwise,  as  to  the  contents  of  the 
books,  etc.  He  had  a  right  to  a  reasonable  personal  inspection  of 
them,  and  with  the  aid  of  a  disinterested  expert  might  make  such  ex- 
tracts as  were  reasonably  required  in  the  preparation  of  the  bill  he 
purposed  to  bring.  The  relator,  we  think,  has  a  clear  right  under  the 
writ  and  return  to  the  relief  he  asks,  and  it  is  plain  that  he  has  no 
specific  legal  remedy  for  the  enforcement  of  that  right ;  and  the  exist- 
ence of  a  supposed  equitable  remedy  is  not  a  ground  for  refusing  the 
mandamus." 

In  Cockburn  v.  Union  Bank  of  Louisiana  (13  La.  Ann.  289,  290), 
the  court,  in  granting  a  mandamus  requiring  the  officers  of  a  corpora- 
tion to  allow  access  by  a  stockholder  to  the  books,  said :  "  A  stock- 
holderJD^  corporation  possesses  all  his  individualrights  except  so.' 
far  as  he  is  deprived_of^jthem  by  the  charter  or  the  law  of  the  land  ; 
as  long  then  asjthe^charter  or  the  rules  and  by-laws  passed  in  con- 
formity thereto,  and  the  law,^^jiot  restrict  his  individual  rights,  he 
possesseFThem  in  full  and  can  demand  to  exercise  them.  It  cannot 
bejlenied_that  it  is  the  rightj)f  every  one  to  see  that  hisjyopertyjs 
well  managed  and  to  have  access  to  the  proper  sources  of  knowledge 
in_thisj;^pe^"  The  same  court  in  a  like  case  declared  that  a  stock- 
holder in  a  trading  corporation  "  has  in  the  very  nature  of  things,  and 
upon  principles  of  equity,  good  faith  and  fair  dealing,  the  right  to 
know  how  the  affairs  of  the  company  are  conducted,  whether  the 
capital  of  which  he  has  contributed  so  large  a  share  is  being  pru- 
dently and  profitably  employed  or  otherwise.  ...  In  order  to  comply 
with  this  call  and  to  vote  understandingly,  it  was  certainly  requisite 
for  the  relator  to  know  the  condition  of  the  affairs  and  business 
operations  of  the  company  and  be  enabled  from  this  knowledge  to  act 
for  the  best  interests  of  the  stockholders  and  of  the  compan3\"  {State 
of  Louisiana  v.  Bienville  Oil  Works  Co.,  24  La.  Ann.  204,  208 ;  see, 
also,  Stone  v.  Kellogg,  46  N.  E.  Kep.  [111.]  222  ;  Stettauer  v.  X.  Y.  & 
Scranton  Con.  Co.,  42  N.  J.  Eq.  46 ;  People  v.  Walker,  9  Mich.  328 ; 
State  V.  Bergeyithal,  72  Wis.  314.) 

The  elementary  works  unite  in  holding  that  a  corporator  has  the 
right  in  question,  and  that  mandamus  is  a  proper  remedy.  Mr.  Wait, 
in  his  work  on  Insolvent  Corporations,  after  reviewing  the  authorities, 


Q 


488  STEINWAYS   PETITION. 

says :  "  It  will  be  apparent  from  an  examination  of  these  authorities 
that  the  rule  in  favor  of  a  stockholder's  right  of  inspection  and  in- 
vestigation of  corporate  books  and  papers  is  becoming  very  broad  and 
general."  (§  504.)  But  while  the  learned  author  recognizes  the  rule, 
he  insists,  and  we^  agree"witirEm,  that~anTnspection  should  "  not_be 
graii1^ed_to_facili^^  schemes  orjto^gratify  idle  curiosity." 

He  declares  that  "  mandamus  is  the  most  complete  and  effective  form 
of  redress  available  to  a  stockholder  or  party  in  case  of  a  denial  of  the 
right  of  inspection."  (§  516.)  Mr.  Cook,  in  discussing  the  question, 
says  that  "  the  stockholders  of  a  corporation  had,  at  common  law,  a 
right  to  examine,  at  any  reasonable  time  and  for  any  reasonable  pur- 
pose, any  one  or  all  of  the  books  and  records  of  the  corporation.  This 
rule  grew  out  of  an  analogous  rule  applicable  to  public  corporations 
and  to  ordinary  copartnerships,  the  books  of  which,  by  well-established 
law,  are  always  open  to  the  inspection  of  members."  (2  Cook  on 
Corporations,  §  511.) 

"  The  prevailing  doctrine  in  the  United  States  is  said  to  permit  an 
incorporator  the  same  freedom  in  examining  the  books  of  the  company 
as  a  partner  has  with  respect  to  the  books  of  his  firm,  but  the  right 
only  extends  to  such  documents  as  are  necessary  to  the  stockholder's 
particular  purpose.  .  .  .  Statutes  giving  the  shareholders  of  corpora- 
tions the  right  to  inspect  the  corporate  books  have  been  passed  in 
many  of  the  American  states  and  in  England.  These  statutes,  how- 
ever, do  not  supplant  the  common-law  right."  (1  Beach  on  Private 
Corp.  §  75.) 

Judge  Thompson,  in  his  work  on  Corporations,  says  :  "  One  of  the 
jjrivileges  incident  to  ownership  of  stock  in  a  corporation  is  that  of 
an  inspection  of  the  books  and  condition  of  the  company,  and  this 
privilege,  in  general,  becomes  a  f  iglit  when  the  inspection  is  sought  at 
proper  times  and  for  proper  purposes."  (§  4406.)  He  further  declares 
that  when  the  right  is  guaranteed  by  statute  the  motive  for  its  ex- 
ercise IS  TmniatenaTTbut  when  it~rests  upon  the  common  law  it  will 
not  bejillovg£ii-fQr-Sj3eculative  purposes,  the  gratifiLcation  of_curiosity , 
or  where  its  exercise  would  produce  ^reat  inconvenience.  (§§  4412- 
4^20:}  (SeeTalso,  Angell  &  Ames  on  Corp.  [9th"ed.y§  681 ;  Morawetz 
on  Corp.  §  473;  High's  Extraordinary  Legal  Ilemedies,  §308;  19  Am. 
&  Eng.  Ency.  of  Law,  231.) 

We  think  that,  according  to  the  decided  weight  of  authority,  a 
stockholder  has  the  right  at  common  law  to  inspect  the  books  of  his 
corporation  at  a  proper  time  and  place,  and  for  a  projjer  purpose,  and 
that  if  this  right  is  refused  by  the  officers  in  charge  a  writ  of  man- 
damus may  issue,  in  the  sound  discretion  of  the  coui-t,  with  suitable 
safeguards  to  protect  the  interests  of  all  concerned.  It  should  not  be 
issued  to  aid  a  blackmailer,  nor  withheld  simply  because  the  interest 
of  the  stockholder  is  small,  but  the  court  should  i)rocced  cautiously 
and  discreetly,  according  to  the  facts  of  the  particular  case.  To  the 
extent,  however,  that    an   absolute    right    is   conferred    by    statute, 


<,'> 


steinway's  petition. 


489 


nothing  is  left  to  the  discretion  of  the  court,  but  the  writ  should  issue 
as  a  matter  of  course,  although  even  then,  doubtless,  due  precautions 
may  be  taken  as  to  time  and  place  so  as  to  prevent  interruption  of 
business,  or  other  serious  inconvenience. 

The  appellants,  however,  insist  that  certain  statutory  provisions 
relating  to  the  subject  are  exclusive,  and  as  they  do  not  extend  to  the 
case  under  consideration,  that  the  Appellate  Division  had  no  right  tu 
grant  the  writ.  The  history  of  legislation  upon  the  subject  in  brief 
is  as  follows  :  By  the  General  Manufacturing  Act  of  1848  it  was  made 
the  duty  of  the  trustees  of  corporations  organized  under  it  to  keep  a 
transfer  book,  which  was  required  to  "  be  opened  for  the  inspection  of 
stockholders  and  creditors  of  the  company,"  substantially  every  busi- 
ness day  at  the  office  of  the  corporation.  (L.  1848,  ch.  40,  §  25.)  This 
section  was  subsequently  amended  so  as  to  require  the  treasurer  to 
make  a  statement  of  the  affairs  of  the  company  upon  the  request  of  per- 
sons owning  a  specified  percentage  of  the  capital  stock.  (L.  1854,  ch. 
201,  §  1 ;  L.  1862,  ch.  472,  §  1.)  The  Business  Corporations  Law  of  1875 
required  the  directors  of  corporations  organized  thereunder  "  to  cause 
to  be  kept  at  its  principal  office  or  place  of  business,  correct  books  of 
account  of  all  its  business  and  transactions,  and  every  stockholder  in 
such  corporation  shall  have  the  right  at  all  reasonable  times  by  him- 
self or  his  attorney  to  examine  the  records  and  books  of  account  of 
such  corporation."  (L.  1875,  ch.  611,  §  16.)  These  statutes  were  all 
repealed  in  1892  by  the  General  Corporation  Law.  (L.  1892,  ch.  687, 
pp.  1816-1819.)  During  the  same  year  the  Stock  Corporation  Law 
was  passed,  which  provides  that  every  stock  corporation  shall  keep  a 
stock  book,  which  "  shall  be  open  daily,  during  business  hours,  for  the 
inspection  of  its  stockholders  and  judgment  creditors,  who  may  make 
extracts  therefrom."  (L.  1892,  ch.  688,  §  29.)  It  also  requires  the 
treasurer,  upon  the  request  of  stockholders  owning  a  fixed  percentage 
of  the  capital  stock,  to  furnish  a  statement  of  all  its  assets  and  lia- 
bilities.    (Id.  §  52.) 

We  do  not  think  that  the  statute  now  in  force  is  exclusive,  or  that 
it  has  abridged  the  common-law  right  of  stockholders  with  reference 
to  the  examination^of^corporate  books.  By  enabling  a  stockholder  to 
get  some  ^jnf ormation  in  a  new  way,  it  did  not~Impiiedly  repeal  the 
common-law  rule  whichenabled  him  to^sret  other  information  in  an- 


""oEher  way,  for  the  courts  do  not  hold  the  common  law^obj^  repealed 
by'im^ncatimvujdessJihejTiJentijjn^^^  By^imply  providing 

aiTadditional  remedy  the  existing  remedy  was  not  jaken^way\  The 
statute  merely  strengthened  tEe^common-law  rule  with  reference  to 
one  part  thereof,  and  left  the  remainder  unaffected.  It  dealt  with  but 
a  single  book,  and  as  to  that  it  am})lified  the  qualified  right  previously 
existing,  by  making  it  absolute  and  extending  it  to  judgment  credi- 
tors. The  stock  book  has  no  relation  to  the  business  carried  on  by  a 
corporation,  and  the  change  was  doubtless  made  to  enable  stockhold- 
ers to  promptly  learn  who  are  entitled  to  vote  for  directors,  and  judg- 


490 


CINCINNATI   VOLKSBLATT   CO.   V.   HOFFMEISTER. 


ment  creditors  to  learn  who  are  liable  as  stockholders  for  a  failure  to 

comply  with  the  provisions  of  the  act.     The  statute  is  silent  as  to  the 

other  books,  and  provides  no  system  of  inspection  as  a  substitute  for 

the  right  of  examination  at  common  law.     The  provision  for  a  report 

from  the  treasurer  was  not  designed  to  take  away  an  old  right,  but  to 

give  a  new  one,  not  as  a  substitute  but  as  an  addition. 

/     We  think  that  the  common-law  right  of  a  stockholder  with  refer- 

/  ence  to  the  inspection  of  the  books  of  his  corporation  still  exists, 

I  unimpaired  by  legislation ;  that  the  Supreme  Court  has  power,  in  its 

\ound  discretion,  upon  good  cause  shown,  to  enforce  the  right,  and 

i;hat  such  power  is  a  part  of  its  general  jurisdiction  as  the  successor  of 

^he  courts  of  the  colony  of  New  York,  which  had  the  jurisdiction  of 

the  Court  of  King's  Bench  and  the  Court  of  Chancery  in  England. 

It  follows  that  the  order  appealed  from  should  be  affirmed,  with 
costs,  and  that  the  question  certified  should  be  answered  in  the  affirm- 
ative.    All  concur. 

Order  affirmed. 


HOFFMEISTER. 


CINCINNATI  VOLKSBLATT 


1900.    62  Ohio  State,  189.1 

Error  to  the  Superior  Court  of  Cincinnati. 

Hoffmeister's  petition  alleges  that  he  is  a  stockholder  in  the  Cin- 
cinnati Volksblatt  Company  ;  that  he  has  requested  the  corporation 
^-to  allow  him  to  inspect  its  books  and  records  and  to  fix  a  reasonable 
^  time  for  said  inspection  ;  but  that  the  corporation  has  refused  to  allow 
(him  to  inspect  the  books  and  records.  The  petition  prays  that  the 
defendant  be  enjoined  from  refusing  to  allow  him  to  inspect  its  books 
and  records.  A  demurrer  having  been  overruled,  the  defendant  filed 
an  answer ;  and  the  petitioner  in  his  reply  took  issue  with  new  matter 
alleged  in  the  answer.  Upon  trial,  the  court  found  the  issues  for  the 
plaintiff ;  that  he  is  entitled  to  inspect  any  of  the  books  and  records 
of  the  defendant  at  any  reasonable  time  ;  and  that  he  may  make  such 
inspection  by  himself,  or  by  agent,  bookkeeper  or  accountant ;  and 
may  take  copies  of  any  of  said  books  and  records.  Judgment  was 
entered  enjoining  defendant  from  preventing  the  inspection  and  tak- 
ing of  copies  as  aforesaid. 

Charles  W.  Baker,  for  plaintiff  in  error. 

Alfred  B.  Benedict  and  Jerome  D.  Creed,  for  defendant  in  error. 

Spear,  J.  [After  deciding  that  plaintiff  had  not  mistaken  his 
remedy.]  .  .  . 

2.  It  being  determined  that  the  action  was  properly  brought,  and 
that  the  court  had  jurisdiction,  is  the  petition  sufficient,  or  must  the 
1  Statement  abridged.    Arguments  omitted.  — Ed. 


CINCINNATI   VOLKSBLATT   CO.   V.  HOFFMEISTER.  491 

plaintiff,  before  he  can  have  standing  in  court,  set  out  what  his 
reasons  for  desiring  the  inspection  asked  are,  and  show  that  he  is 
actuated  by  proper  motives  and  in  the  pursuit  of  justifiable  ends  ? 
Such  is  the  contention  of  plaintiff  in  error.  The  statute  is,  section 
3254  :  "  And  the  books  and  records  of  such  corporation  shall  at  all 
reasonable  times  be  open  to  the  inspection  of  every  stockholder."/  -/l 
But  it  is  insisted  that  this  provision  is  not  intended  to  enlarge  the 
riglitTTjiit  js  a'lnere'affirmation  of  the  common  law  rule,  andjthatjthat 
rule  embodies  many  conditions,  among  them  that  the  stockholder 
must  allege  and  pl-ove^that  he  is  acting  in  good  faith.  "Without  stop- 
j)ing  to  discuss  the  extent  of,  and  the  limitations  upon,  the  rule  as 
established  by  the  common  law  (for  the  holdings  are  at  variance  upon 
it),  we  inquire  what  reason  there  is  for  saying  that  the  intent  of  the 
legislature  was  to  merely  affirm  the  common  law  rule  ?  If  that  had 
been  all,  why  take  the  trouble  to  legislate  on  the  subject  at  all  ?  ,Is_ 
it  not  mora-reasanable,  to  conclu^de  that  the  object  was  to  get  rid 
of  all  uncertainty  and  of  various  conditions,  whatever  they  were,  and 
establisTi  the  rightjl)y  a  rule,  clear,  direct,  simple,  and  practically 
without  qualification  ?  The  language  is  plain.  The  right  given  is 
clear!  One  condition,  and  one  only,  is  attached,  viz. :  that  the  right 
can  be  exercised  only  at  reasonable  times.     Ordinarily  the  motive,  or 


purpose,  of  the  party  who  is  in  the  exercise  of,  or  is  about  to  exercise, 
a  cleaf~regal  right,  is  unimportant.  Letts  v.  Kessler,  54  Ohio  St.  73, 
atTcT "author ities  cited ;  McDonald  v.  Smalley,  1  Pet.  620.  A  like  rule 
prevails  as  to  one's  pursuit  of  an  equitable  remedy.  Morris  v.  Tut- 
hill,  72  N.  Y.  575 ;  Davis  v.  Flagg,  35  N.  J.  Eq.  491 ;  Thompson  on 
Corp.,  sec.  4412,  and  authorities  cited.  No  reason  is  apparent  why 
the  rule  should  not  apply  to  the  case  at  bar.  We  are  of  the  opinion, 
that  where  a  suitor  demands  the  enforcement  of  a  clear  right  given 
him  by  law,  whether  the  remedy  be  legal  or  equitable,  his  motive  for 
such  action  is  not  a  proper  subject  for  judicial  investigation.  The 
petition  stated  a  cause  of  action  and  if  supported  by  the  evidence 
warranted  the  granting  of  equitable  relief. 

3.  Was  the  order  of  the  trial  court  too  broad  ?  The  finding  by 
the  court  of  all  the  issues  for  the  plaintiff  settles  the  questions  of 
fact  for  this  court,  but  it  is  not  improper  to  add  that  there  was  an 
entire  failure  to  show,  on  the  part  of  defendant,  that  the  plaintiff  was 
acting  from  the  improper  motives  charged  in  the  answer,  and  that  the 
evidence,  all  of  which  we  have  read  and  considered,  fully  justifies  the 
finding  in  favor  of  the  plaintiff.  So  that,  even  had  the  petition  been 
obnoxious  to  a  demurrer  in  failing  to  allege  a  proper  purpose  for  'the 
suit,  the  defendant,  having  obtained  a  full  hearing  on  the  charges 
stated  in  the  answer,  would  have  no  ground  of  complaint  on  account 
of  the  action  of  the  court  on  the  demurrer. 

The  contention  is  that  whatever  right  of  examination  the  statute > 
gives  is  a  personal  right,  and  must  be  exercised  by  the  stockholder 
in  person.     Since  when,  we  would  inquire,  has  it  been  the  law  that 


\^ 


492  CINCINNATI   VOLKSBLATT   CO.   V.   HOFFMEISTEE. 

one  who  has  given  him  a  clear  right  as  to  property  may  not  exercise 
it  by  any  proper  agent  ?  The  proposition  has  the  qnality  of  novelty, 
but  it  is  not  sound.  It  must  be  apparent,  on  reflection,  that  if  so 
circumscribed  a  limit  were  placed  on  the  right,  its  exercise  in  many 
instances  would  be  futile.  Foster  v.  White,  86  Ala.  467 ;  Mitchell  v. 
Rubber  Co.  (N.  J.),  37  Corp.  Cases,  42,  and  notes,  and  same  case  in  24 
Ap.  Kep.  407 ;  State  ex  rel.  v.  Bienville  Oil  Works,  28  La.  Ann.  204. 
Nor  is  the  right  limited  to  one  inspection.  It  is  an  incident  to 
ownership  of  stock,  and  may  be  exercised  at  any  reasonable  time  so 
long  as  the  relation  of  stockholder  subsists.  The  right  to  take  copies 
from  the  records  follows  as  an  incident  to  the  right  to  inspect.  It 
rests,  as  does  the  entire  right  to  examination  rest,  upon  the  broad 
ground  that  the  business  of  the  corporation  is  not  the  business  of  the 
officers  exclusively,  but  is  the  business  of  the  stockholders.  Phoenix 
Iron  Company  v.  Commonwealth,  113  Pa.  St.  563  ;  Mtitter  v.  By.  Co., 
L.  R.  38  Chy.  Div.  92. 

We  refrain  from  extended  discussion  of  the  questions  involved,  be- 
cause they  are  fully  and  ably  discussed,  and  the  authorities  cited  at 
large,  in  the  briefs  of  the  respective  counsel  which  precede,  and  to 
which  attention  is  here  directed.     [See  62  Ohio  State,  pp.  191-196.] 

AVe  would  add,  however,  that  the  rights  of  the  plaintiff  in  this  case 
are  based  upon  a  recognition  of  his  standing  as  an  integral  part  of  the 
corporation.     The  idea  that  the  corporation  is  an  entity  distinct  from 
the  corporators  who  compose  it,  has  been  aptly  characterized  as  "a 
nebulous  fiction  of  thought."    Much  learning  has  been  indulged  in  and 
much  space  occupied  by  text-writers  and  others  in  an  effort  to  differ- 
entiate the  essential  character  of  a  corporation  from  that  of  its  stock- 
holders, and  great  ingenuity  has  been  displayed  in  the  argument,  but 
fit  has  been  in  the  main  a  fruitless  metaphysical  discussion.     For  the 
/purpose  of  description  and  in  defining  corporate  rights  and  obliga- 
j  tions,  and  characterizing  corporate  action,  the  fiction  that  the  corpo- 
1  ration  is  an  artificial  person  or  entity,  apart  from  its  members,  may 
\be  convenient  and  possibly  useful,  but  in  the  opinion  of  the  writer 
the  argument  favoring  the  essential  separate  entity  of  the  corpora- 
tion fails,  and  it  is  believed  that  the  effort  has  resulted  in  misleading 
I  conceptions  and  in  much   confusion  of   thought   upon   the   subject. 
When  all  has  been  said  it  remains  that  a  corporation  is  not  in  reality 
a  person  or  a  thing   distinct  from  its  constituent  parts,  and  the  con- 
stituent parts  are  the   stockholders,  as   much  so  in  essence  and  in 
reality  as  the  several  partners  are  the  constituent  parts  of  the  part- 
nership.    Stripped  of  misleading  ve^rbiage,  the  corporation  is  a  device 
f createdjjy  law  whereby  an  aggregation  of  persons  who  may  avail 
'  themselvesof  its,pnvileges_byLQi:ganization,  are  permitted  to  use  their 
property  in__a_way  different  from  that_which  is  i)crmitted  toothers 
who_do  not  so  organize,  and  with  certain  special  advantages,  among 
which  are  a  measure  as  to  personal  liability^. for  debtSj  and  the  power 
to  perpetuate  The  organization^  denied  by^h^awJbo,alLothers.    With 


CINCINNATI   VOLKSBLATT   CO.  V.   HOFFMEISTEE.  493 

this  conception  of  a  corporation,  it  would  seem  to  follow  as  matter  of 
course,  that  the  property  of  a  corporation,  although  subject  under 
some  conditions  to  rights  of  creditors,  is,  in  the  last  analysis,  that  o£^ 
the  stockholders,  and  that  when  one  seeks  an  inspection  of  its  books, 
records,  or  prdp'erty,  he  is  in  reality  but  seeking  an  inspection  of  his 
own,  and  that  thiT^hould  be  accorded  fully,  freely,  and  at  all  times 
when  such  inspectionjwilLnot  unreasonably^  inconvenience  others  who 


have  like  interest^  iji^and  rights  to  the  property,  and  that  the  attempt 
to  unreasonably^  hamper  such  inspection,  by  officers,  managers,  or 
others,  is^an  unjust  exercise  of  power  and  one  which  courts  should 
not  sanction! 

Xor  can  the  officers  of  the  corporation,  or  the  other  stockholders, 
justly  complain.  They  have  chosen  this  method  of  investing  their 
means  and  conducting  the  business  for  personal  profit,  a  method 
which,  as  we  have  seen,  is  especially  favored  by  the  law,  and  they 
should  expect  to  endure  such  inconveniences,  and  such  chances  of 
exposure  of  management,  as  the  method  entails.  In  other  words,  it 
is  not  unreasonable  that  they  should  be  required  to  take  the  bitter 
with  the  sweet. 

No  error  is  found  in  the  judgments  of  the  courts  below,  and  they 
will  be 

Affirmed. 


i 


494 


SMITH   V.    HURD. 


CHAPTER  XIV. 

STOCKHOLDER'S  RIGHT  TO  BRING  SUIT  IN  REFERENCE 
^r-    ^TO   CORPORATE   MANAGEMENT,   OR  TO   PROTECT 
^        '  CORPORATE   INTERESTS. 

Jy  V^/SMITH  V.  HURD  et  \i^ 

'■•r  lSd7.     12  MetcaJf  {Mass.),  ^\  .. 

This  was  a  special   action   on   the   case,   by^  a  ^tockhol^ei_Qf  jfchg 
V         ^    Jo"  Ptioenix^Bank^against  the  dkefitors.     There  were  two  counts;   one 

0  oV      ir     (f/^    M  ^founded  in  non-feasance  of  official  duty,  the  other  in  misfeasance. 
)^  KJ\     .         ^^   ^  >      The  first  count  alleged  (inter  alia)  that  it  was  the  dut}'  of  the  direc- 
drs  to  direct  and  superintend  the  proceedings  of  the  officers,  and  to 
ixercise  reasonable  vigilance  in  seeing  that  the  property  of  the  bank 
was  not  lost,  wasted,  or  misused ;  but  that  the  directors  disregarding 
eir  duty,  and  contriving  together  to  injure  and  deceive  the  plaintiff 
tJi«reio,  neglected  to  give  reasonable  personal  attention  to  the  business 
i^fjf/ae   bank ;    and   negligently  permitted  the    whole   business    to   be 
'  anaged  by  the  president^    W3'man,   who  loaned   its   monies  on  in- 
sufficient securities,  used  certain  sums  himself,   and   made   loans  to 
jaidividual  directors  exceeding  the  limits  of  the  law  :  whereb}-  the  bank 
^  cai)ital  became  wholly'  lost,  and  plaintiff  was  made  liable,  under  the 
faw,  for  his  proportion  of  the  capital  lost  by  the  official  mismanage- 
ment of  the  directors,   and  further  liable  to  pay  large  sums  for  the 
redemption  of  the  bills  of  the  bank. 

The  second  count  alleged  {inter  alia)  that  the  directors,  disregard- 
ing their  duties,  and  contriving  together  to  injure  and  deceive  the  plain- 
tiff therein,  concurred  with  each  other  that  the  whole  business  should 
be  managed  by  the  president,  Wyman,  as  he  should  see  fit ;  and  that 
defendants  themselves  declared  dividends  when  there  were  no  profits, 
and  caused  false  returns  to  be  made  to  the  State  authorities,  by  which 
means  plaintiff  was  misled  and  induced  to  rely  on  the  security  of  hia 
investment.  And,  generally,  the  second  count  charged  as  acts  of  the 
defendants  (done  through  Wyman)  the  matters  which,  in  the  first 
count,  were  charged  as  negligences   and   permissions,   and  deduced 

*  Statement  abridged.    Arguments  omitted. —  Ed. 


/^      A^fy^Xc^        . 


^^^7r?^       ^t^uc-^  "^c^^^         ^^^^-^^V        :^t^i^.<><         ^^ 


ill' 


V: 


']U 


o^ 


G^ 


.^.       J^  '  V^ 


SMITH   V.    HURD. 


495 


therefrom  iu  like  manner  the  failure  of  the  bank,  and  the  special  dam- 
age to  the  plaintiff.  The  count  concluded  witii  an  averment  that 
defendants,  by  "  misconducting  the  business  of  said  bank,  as  aforesaid, 
so  vvilfull}',  deceitfully  and  fraudulently  mismanaged  the  business  and 
property  of  the  said  bank,  that  the  whole  capital  thereof  was  utterly 
lost  and  wasted." 

Defendants  demurred  to  the  declaration. 

£,  H.  Curtis  and  Ji.  Jiaud,  for  defendants. 

Gardiner  (Grreenleaf  wiih  him),  for  plaintiff. 

Shaw,  G.  J.  This  is  certainly  a  case  of  first  impression.  We  are 
not  aware  that  any  similar  action  has  been  sustained  in  England,  or  in 
any  of  the  courts  of  this  country.  It  is  founded  on  no  statute.  It  is 
an  action  on  the  case,  at  common  law,  brought  by  an  individual  holder 
of  shares  in  an  incorporated  bank,  against  the  directors,  not  includinfr 
the  president,  setting  forth  various  acts  of  negligence  and  malfeasance, 
through  a  series  of  years,  in  consequence  of  which,  as  the  declaration 
alleges,  the  whole  capital  of  the  bank  was  wasted  and  lost,  and  the 
shares  of  the  plaintiff  became  of  no  value.  The  circumstance  that  no 
such  action  has  been  maintained,  would  certainly  be  no  decisive  objec- 
tion, if  it  could  be  shown  to  be  maintainable  on  principle.  But  the 
fact,  that  similar  grievances  have  existed  to  a  great  extent,  and  in 
numberless  instances,  where  such  an  action  would  have  presented  an 
obvious  and  effective  remed}',  affords  strong  proof,  that  in  the  view  of 
all  such  suffering  parties,  and  their  legal  advisers  and  guides,  there 
was  no  principle  on  which  such  an  action  can  be  maintained. 

If  an  action  can  be  brought  by  one  stockholder,  it  may  be  brought 
b}-  the  holder  of  a  single  share  ;  so  that  for  one  and  the  same  default  of 
these  directors,  thirty-five  hundred  actions  might  be  brought.  If  it- 
may  be  sustained  by  proof  of  an  act,  or  series  of  acts,  of  carelessness, 
neglect,  and  breach  of  duty,  in  managing  the  affairs  of  the  bank,  by 
which  the  whole  value  of  the  stock  is  destroyed,  it  may,  on  the  same 
principle,  be  maintained  on  any  act  or  instance  of  such  negligence,  by 
which  the  shares  are  diminished  in  value  fiftv,  ten,  five,  or  one  per 
cent.  Still,  notwithstanding  these  consequences,  if  the  plaintiff  has  a 
good  right  of  action,  upon  recognized  and  sound  legal  principles,  his 
action  ought  to  be  sustained. 

But  the  court  are  of  opinion  that  the  action  cannot  be  maintained  ; 
and  that  on  several  grounds,  a  few  of  the  more  prominent  of  which 
may  be  alluded  to. 

1.   There  is  no  legal  privity,  relation,  or  immediate  connexion,  be- 
tween the  holders  of  shares  in  a  bank,  in  their  individual  capacity,  on 
the  one  side,  and  the  directors  of  the  bank  on  the  other.    The^directors 
are  notjhe  bailees,  the  factors,  agents  or  trustees  of  such  individually    .^^.^    >^ 
stockhojiiei-s.     Tlie   bank   is   a  corporation   and    l><>dy   politic,    having  j^-*!^ /k^V*^ 
a  separate  existence  as  a  distinct  person  in  law,  in  whom  the  whole  ,u^(^ 
stock  and  property  of  the  bank  are  vested,  and  to  whom  all  agents,  ^ 
debtors,  officers  and  servants  are  responsible  for  all  contracts,  express     ^i-       c 


h 


ft,/r/' 


^»^  V 

-f^*^ 

^'>^ 


n^  ..> 


<y 


ff^ 


496  SMITH   V.    HURD. 

or  implied,  "made  in  reference  to  such  capital,  and  for  nil  torts  and 
injuries  diminishing  or  impairing  it.  The  very  purpose  of  incorpora- 
tion is,  to  create  such  legal  and  ideal  person  in  law,  distinct  from  all 
the  persons  composing  it,  in  order  to  avoid  the  extreme  difficulty,  and 
perhaps  it  is  not  too  much  to  say  the  utter  impracticability,  of  such  a 
number  of  persons  acting  together  in  their  individual  capacities.  The 
practical  difficulty  would  be  nearly  as  great,  whether  it  were  held  that 
all  must  join  in  an  action  to  recover  damage  for  an  injury  to  the  com- 
mon propert}-,  or  that  each  might  sue  separately. 

The  stockholders  do,  indeed,  ordinarily  elect  the  directors ;  but  it  is 
las  parts  and  members  of  the  corporation,  in  their  corporate  capacit}', 
I  in  modes  pointed  out  by  the  charter  and  b3'-laws,  so  that  the  directors 
tare  the  appointees  of  the  corporation,  not  of  the  individuals.  Indeed, 
I  believe  there  is  a  provision  in  the  bank  charters  —  there  certainly 
was  formerly  —  which  is  equally  to  the  present  purpose  ;  namel}^  that 
the  Commonwealth  shall  be  at  liberty  to  add  a  certain  amount  to  the 
capital  of  various  banks,  and  appoint  a  proportional  number  of  direc- 
tors. Such  directors,  so  appointed,  pursuant  to  the  charter  regulating 
the  legal  organization  of  the  body,  would  stand  in  all  respects  on  the 
footing  of  directors  chosen  by  the  stockliolders.  If  these  were  liable 
to  the  action  of  individual  stockholders,  those  would  be,  in  like 
flj>&anner. 
Jf^  p,  2.  The  individual  members  of  the  corporation,  whether  they  should 
a]l  join,  or  each  act  severally,  have  no  right  or  power  to  intermeddle 
wjth  the  propert}'  or  concerns  of  the  bank,  or  call  any  officer,  agent  or 
servant- to  account,  or  discharge  them  from  any  liability.  Should  aU 
the  stockholders  join  in  a  power  of  attorne;^o^n3'  one,  he  could  not 
take  possession  of  any  real  or  personal  estate,  any  securitv  or  chose  iij 
a^tionjconlcTnot  collect  a  debt,  or^ischarge  a  claimi_or_release  dam- 
age arising  from  any  default ;  simply  because  they  are  not  tjjcjegal 
owners  of_jthe_j3rop.ertyj_and  damage  done  to  such  property  is  not  an 
injury  to  them.  Their  rights  and  their  powers  are  limited  and  well 
defined.  The}'  are  members  of  an  organized  body,  and  exercise  such 
powers  asjthe^rgaiiizatLon  of  the_in stiti i ti on  gi ves,lh£iii;__Stockholder9 
in  banks  have  a  separate  jjglit^to  dividends,  when  declared,  and  to  a 
HistributiA^share  of  the_C3j3itaL-Stockj,  JiLOiLy  remains  whcnjthe  chartef 
qfTh£]biink_isji.-arL^nd,.  and  its  debts  paid. 

I    3.    But  another  important  consideration  is,  that  the  injury  done  to 
-,     (ihe  capital  stock  l)y  wasting,   impairing,  and  diminishing  its  value,  is 

,  -  -Jj       \not,  in  tlie  first  instance,  nor  necessarily,  a  damage  to  the  stockholders. 

\/  jAll  sums  which  could,   in  any  form,   be  recovered  on  that  ground, 

would  be  assets  of  the  corporation,  and  when  collected  and  received  by 
directors,  receivers,  or  any  other  persons  entitled  to  receive  the  same, 
they  would  be  held  in  trust,  first  to  redeem  the  ])ills  and  pay  the  debts 
of  the  bank;  and  it  would  be  only  after  these  debts  were  paid,  and  in 
case  any  surplus  should  remain,  that  the  stocklioklers  would  be  entitled 
to  receive  any  thing.     It  is,  therefore,  an  indirect,  contingent  and  sub- 


SMITH   V.    IIUED. 


497 


ordinate  interest,  which  each  stockholder  has,  in  damages  so  to  be 
recovered  against  directors.  If,  upon  such  indirect,  contingent,  and 
remote  interest,  individual  stockholders  could  recover  for  the  defaults 
of  directors,  and  especialh',  as  is  alleged  in  this  case,  where  these 
defaults  have  been  so  great  as  to  sink  the  capital,  a  fortiori  would  the 
creditors  of  the  bank  individually  have  a  right  to  maintain  similar 
actions ;  because  their  claim  upon  the  funds,  being  prior  to  that  of 
stockholders,  would  be  somewhat  more  immediate  and  direct. 

In  the  same  connexion,  it  is  obvious  to  remark,  that  a  judgment  in 
favor  of  one  stockholder  would  be  no  bar  to  an  action  by  a  creditor, 
nor  a  judgment  by  both,  to  an  action  by  the  corporation. 

4.  But  it  is  said,  that  although  the  real  and  personal  estate,  the 
securities  and  capital  stock,  are,  in  legal  contemplation,  vested  in  the 
corporation,  yet  the  individual  has  a  separate  and  distinct  propert}- 
and  interest  in  his  particular  shares,  by  any  injury  to  which  he  may 
have  a  separate  damage.  To  some  extent,  it  is  true  that  he  has  a  sev- 
eral interest  in  his  shares  ;  but  it  is  to  be  taken  with  some  qualifica- 
tions. Strictl}'  speaking,  shares  in  a  bank  do  not  oonstitute  a  legal 
estate  and  property  ;  it  is  rather  a  limited  and  qualified  right  which  the 
stockholder  has  to  participate,  in  a  certain  proportion,  in  the  benefits 
of  a  common  fund,  vested  in  a  corporation  for  the  common  use  ;  it  is  a 
qualified  and  equitable  interest,  a  valuable  interest,  manifested  usually 
by  a  certificate,  which  is  transferable.  To  the  extent  of  this  separate 
and  peculiar  interest,  a  stockholder,  no  doubt,  might  maintain  his 
separate  and  special  action,  according  to  the  nature  of  the  wrong  done 
to  him  in  respect  to  it ;  as  trover  or  trespass,  for  the  conversion  or 
tortious  taking  of  his  certificate  ;  trespass  on  the  case  for  refusing  to 
make  a  transfer  on  a  proper  occasion  ;  assumpsit  for  a  dividend  de- 
clared, and  the  like.  But  an  injury  done  to  the  stock  and  capital,  by 
negligence,  or  misfeasance,  is  not  an  injury  to  such  separate  interest, 
but  to  the  whole  bod}'  of  stockholders  in  common.  Itjs  like  the  case 
oTa  common  nuisance,  where  one  who  suflTers  a  special jlamagejj2ecu- 
liar  to  "himself,  and  distinguishable  in  kind  from  that  w^hich  hj^  shares 
in  the  common  injury,  may  maintain  a  special  action.  Otherwise,  he 
cannot^  Co.  Lit.  56  a.  3  Steph.  N.  P.  2372.  Lansing  v.  Smith,  8 
Cow.  146. 

But  we  are  pressed  with  the  argument,  that  for  ever}'  damage  which 
one  sustains,  which  is  caused  by  the  wrongful  act  of  another,  he  oughf 
to  have  a  remedy.  This  is  far  from  being  universally  true.  Another 
maxim  in  regard  to  claims  for  damage  is,  causa  proxima,  non  remota, 
spectatur.  Thousands  of  instances  occur,  in  which  one  sustains  conse- 
quential and  incidental  damage  from  the  misconduct  of  another,  with- 
out a  remedy  at  law.  By  the  misconduct  of  the  officers  or  agents  of  a 
parish,  town,  county,  or  even  of  the  State  or  the  Union,  defalcations 
ma}'  take  place,  treasure  be  squandered  and  wasted,  and  all  the  mem- 
bers of  the  respective  aggregate  bodies  suffer  damage,  for  which  the 
law,  from  the  nature  of  the  case,  can  afiford  no  direct  remedy.    But  the 


^ 


498 


DODGE   V.    WOOLSEY. 


^ 


fVy 


9, 


true  answei*  to  the  objection  is,  that  stoekbolders  have  a  remedy^ 
tKeol'etic  one  indeed,  and~perhaps  often  inadequate,  in  the  power  of 
the  eor|)oration,  ui  its  corporate_capaeity,  to  obtain  redress  for  injuries 
done  to  tlie  common  properU",  by  tlie  recoyeryof  damages  ;  and  each 


i n dividual  stocliholder  has  his  remedy,  through  the  powers  thus  vest£d_ 
in  the  corporation,  for  the^ommon_benefil. 

On^tEe  whole,  the  court  are  of  opinion  that  the  demurrer  is  well 
taken,  and  that  the  action  cannot  be  maintained. 


^S    V*   1^^     18  Howard  (f7.  S.).  331.1 


woolsey; 


/     Appeal  from  the  U.  S.  Circuit  Court  for  the  District  of  Ohio. 

This  is  a  suit  in  equity  by  John  M.  Woolse}^  to  enjoin  the  collection 
of  a  tax,  assessed  by  the  State  of  Ohio,  on  the  Commercial  Branch 
Bank  of  Cleveland,  a  branch  of  the  State  Bank  of  Ohio.  The  de- 
fendants are  Dodge,  the  tax  collector,  the  directors  of  the  bank,  and 
the  bank  itself. 

Woolsey  avers  that  he  is  a  citizen  of  Connecticut,  that  he  is  the 
owner  of  thirty  shares  in  the  Branch  Bank  of  Cleveland,  that  Dodge 
and  the  other  defendants  are  all  citizens  of  Ohio,  and  that  the  Com- 
mercial Branch  Bank  is  a  corporation,  made  such  b}-  an  act  of  the 
egislature  of  Ohio.     He  alleges  that,  by  the  act  of  incorporation,  the 

on  its 
ation,  or 
subject. 
He  further  alleges  that  subsequent  changes  were  made  by  the  constitu- 
tion and  statutes  of  Ohio,  undertaking  to  tax  the  Bank  at  a  different 
and  more  burdensome  rate.     He  asks  the  Court  to  enjoin  Dodge  from 
collecting  by  distress  a  tax  which  has  been  assessed  against  the  Bank 
under  this  law  ;  contending  that  the  subsequent  statute  and  assessment 
are  in  violation  of  the  clause  in  the  U.  S.  Constitution,  which  prohibits 
■  States  from  passing  laws  impairing  the  obligation  of  contracts.     He 
.finally  declares  that,  as  a  stockholder  of  the  Bank,  he  had  requested 
measures,   b^-  suit  or  otherwise,  to  assert  the 
against  the  collection  of  what  he  believes  to  be 
an  unconstitutional  tax,  and  that  they  had  refused  to  do  so. 

Dodge  filed  an  answer,  in  which  he  denied  that  Woolsey  had  made 

^J  lany  application  to  the  directors  to  prevent  the  collection  of  the  tax. 

M^,.      liut  it  was  agreed  by  the  counsel  that  such  an  application  had   been 

*.       /   AT       1  Stateuicnt  abridged.     Only  so  much  of  the  case  is  given  as  relates  to  one  point. 


dZ-'^A  -'^  hJ^ ^fJ'''^  directors  to  take  meaj 
I jJA    rv^ty^^  franchises  of  the  Bank  aga 


'y^''^ 


0^ 


.(^' 


DODGE   V.    WOOLSEY.  499 

made ;  and  that  the  directors  replied  that,  though  concurring  in  the 
view  that  the  tax  was  illegal,  yet,  in  consideration  of  the  many  obstacles 
in  the  way  of  testing  the  law  in  the  Courts  of  the  State,  they  could  not 
consent  to  take  the  action  which  the}'  were  asked  to  take. 

Spalding  and  Pugh,  for  appellant. 

Stanberry  and  Vinton,  for  appellee. 

Wayne,  J.     [After  stating  the  case]. 

Upon  the  foregoing  pleadings  and  admission,  the  circuit  court  ren» 
dered  a  final  decree  for  the  complainant,  perpetuall}'  enjoining  the 
treasurer  against  the  collection  of  the  tax,  under  the  act  of  the  13th 
February,  1852,  and  subjecting  the  defendant.  Dodge,  to  the  payment 
of  the  costs  of  the  suit.  From  that  decision  the  defendant,  Dodge,  has 
appealed  to  this  court. 

His  counsel  have  relied  upon  the  following  points  to  sustain  the 
appeal : 

1.  The  complainant  does  not  show  himself  to  be  entitled  to  relief  in' 
a  court  of  chancer}-,  because  the  charter  of  the  bank  provides  that  its 
affairs  shall  be  managed  by  a  board  of  directors,  and  that  they  are  not/i\ 
amenable  to  the  stockholders  for  an  error  of  judgment  merely.  AndiM 
that  in  order  to  make  them  so,  it  should  have  been  averred  that  they 
were  in  collusion  with  the  tax  collector  in  their  refusal  to  take  legal 
steps  to  test  the  validity  of  the  tax. 

2.  It  was  urged  that  this  suit  had  been  improperly  brought  in  the 
circuit  court  of  the  United  States  for  the  district  of  Ohio,  because  it  is 
a  contrivance  to  create  a  jurisdiction,  where  none  fairl}'  exists,  b}'  sub- 
stituting an  individual  stockholder  in  place  of  the  Commercial  Bank 
as  complainant,  and  making  the  directors  defendants  ;  the  stockholder 
being  made  complainant,  because  he  is  a  citizen  of  the  State  of  Con- 
necticut, and  the  directors  being  made  defendants  to  give  countenance 
to  his  suit. 

3.  It  was  said,  if  the  foregoing  points  were  not  available  to  defeat 
the  action,  that  it  might  be  contended  that  the  defendant  was  in  the 
discharge  of  his  official  duty  when  interrupted  b}-  the  mandate  of  the 
circuit  court,  and  that  the  tax  had  been  properly  assessed  bj*  the  law  of 
the  State,  in  conformity  with  its  constitution,  of  the  1st  September, 
1851. 

We  will  consider  the  points  in  their  order.  The  first  comprehends 
two  propositions,  namely  :  that  courts  of  equit}-  have  no  jurisdiction 
over  corporations,  as  such,  at  the  suit  of  a  stockholder  for  violations  of 
charters,  and  none  for  the  errors  of  judgment  of  those  who  manage 
their  business  ordinaril}'. 

There  has  been  a  conflict  of  judicial  authority  in  both.  Still,  it  has 
been  found  necessarv,  for  prevention  of  injuries  for  which  common-law 
courts  were  inadequate,  to  entertain  in  equity  such  a  jurisdiction  in  the 
progressive  development  of  the  powers  and  effects  of  private  corpora- 
tions upon  all  the  business  and  interests  of  society. 

It  is  now  no  longer  doHbted,  either  in  England  or  the  United  States, 


500  DODGE   V.    WOOLSEY. 

that  courts  of  equity,  in  both,  have  a  jurisdiction  over  corporations,  at 
the  instance  of  one  or  more  of  their  members  ;  to  apply  preventive 
remedies  by  injunction,  to  restrain  those  who  administer  them  from 
doing  acts  which  would  amount  to  a  violation  of  charters,  or  to  prevent 
any  misapphcation  of  their  capitals  or  profits,  which  might  result  in 
lessening  the  dividends  of  stockholders,  or  the  value  of  their  shares,  as 
either  may  be  protected  b}'  the  franchises  of  a  corporation,  if  the  acts 
intended  to  be  done  create  what  is  in  the  law  denominated  a  breach  of 
trust.  And  the  jurisdiction  extends  to  inquire  into,  and  to  enjoin,  as 
the  case  ma}'  require  that  to  be  done,  any  proceedings  by  individuals, 
in  whatever  character  the}'  may  profess  to  act,  if  the  subject  of  com- 
plaint is  an  imputed  violation  of  a  corporate  franchise,  or  the  denial  of 
a  right  growing  out  of  it,  for  which  there  is  not  an  adequate  remedy  at 
law.  2  Russ.  &  Mylne  Ch.  R.,  Cunliffe  v.  Manchester  and  Bolton 
Canal  Company,  480,  ?i.;  Ware  v.  Grand  Junction  Water  Company,  2 
Russ.  &  Mylne,  470  ;  Bagshaw  v.  Eastern  Counties  Railway  Company, 
7  Hare  Ch;R.  114;  Angell  &  Ames,  4th  ed.  424,  and  the  other  cases 
there  cited. 

It  was  ruled  in  the  case  of  Cunliffe  v.  The  Manchester  and  Bolton 
Canal  Company,  2  Russ.  &  Mylne  Ch.  R.  481,  that  where  the  legal 
remedy  against  a  corporation  is  inadequate,  a  court  of  equity  will 
hiterfere,  and  that  there  were  cases  in  which  a  bill  in  equity  will  lie 
against  a  corporation  by  one  of  its  members.  "It  is  a  breach  of 
irust  towards  a  shareholder  in  a  joint  stock  incorporated  company, 
established  for  certain  definite  purposes  prescril)ed  by  its  charter, 
if  the  funds  or  credit  of  the  company  are,  without  his  consent,  diverted 
from  such  purpose,  though  the  misapplication  be  sanctioned  by  the 
votes  of  a  majority  ;  and,  therefore,  he  may  file  a  bill  in  equity  against 
the  company  in  his  own  behalf  to  restrain  the  company  by  injunction 
from  any  such  diversion  or  misapplication."  In  the  case  of  Ware  r. 
Grand  Junction  Water  Company,  2  Russell  &  Mylne,  a  bill  filed  by  a 
member  of  the  company  against  it.  Lord  Brougham  said :  "  It  is  said 
this  is  an  attempt  on  the  part  of  the  company  to  do  acts  which  they  are 
not  empowered  to  do  by  the  acts  of  parliament,"  meaning  the  charter  of 
the  company ;  "so  far  I  restrain  them  by  injunction."  "Indeed,  an 
investment  in  the  stock  of  a  corporation  must,  by  every  one,  be  con- 
sidered a  wild  speculation,  if  it  exposed  the  owners  of  the  stock  to  all 
sorts  of  risk  in  sujjport  of  i)lausible  projects  not  set  forth  and  au- 
thorized by  the  act  of  incori)oration,  and  which  may  possibly  lead 
to  extraordinary  losses."  The  same  jurisdiction  was  invoked  and 
applied  in  the  case  of  Bagshaw  v.  The  Eastern  Counties  Railway  Com- 
pany;  so,  also,  in  Coleman  w.  The  same  company,  10  Bcavan's  Ch. 
Rci)orts,  1.  It  appeared  in  that  case  that  the  directors  of  the  com- 
pany, for  the  purpose  of  increasing  their  traflic,  proposed  to  guarantee 
certain  profits,  and  to  secure  the  capital  of  an  intended  steam  packet 
company,  which  was  to  act  in  connection  with  the  railway.  It  was 
held,  such  a  transaction  was  not  within  the  scope  of  their  powers,  and 


DODGE   V.    WOOLSEY.  501 

they  were  restrained  by  injunction.  And  in  the  second  place,  that  in 
such  a  case  one  of  the  shareholders  in  the  railway  company  was  entitled 
to  sue  in  behalf  of  himself  and  all  the  other  shareholders,  except  the 
directors,  who  were  defendants,  although  some  of  the  shareholders  had 
taken  shares  in  the  steam  packet  company.  It  was  contended  in  this 
case  that  the  corporation  might  pledge,  without  limit,  the  funds  of  the 
company  for  the  encouragement  of  other  transactions,  however  various 
and  extensive,  provided  the  object  of  that  liability  was  to  increase  the 
traffic  upon  the  railway,  and  thereby  increase  the  traffic  to  the  share- 
holders. But  the  master  of  the  rolls,  Lord  Langdale,  said,  "  there  was 
no  authorit}'  for  anything  of  that  kind." 

But  further,  it  is  not  only  illegal  for  a  corporation  to  apply  its  capital  ' 
to  objects  not  contemplated  by  its  charter,  but  also  to  apply  its  profits. 
And  therefore  a  shareholder  ma}'  maintain  a  bill  in  equity  against  the 
directors  and  compel  the  compan}-  to  refund  any  of  the  profits  thus 
improperl}'  applied.  It  is  an  improper  application  for  a  railway  com- 
pany to  invest  the  profits  of  the  company  in  the  purchase  of  shares  in 
another  compan}'. 


0 


The  result  of  the  cases  is  well  stated  in  Angell  &  Ames,  paragraphs 
391,  393.     "  In  cases  where  the  legal  remedy  against  a  corporation  is 
inadequate,  a  court  of  equity  will  interfere,  is  well  settled,  and  there 
are  cases  in  which  a  bill  in  equity  will  lie  against  a  corporation  by  one 
of  its  members."    "  Though  the  result  of  the  authorities  clearly  is,  that 
in  a  corporation,  wlien  acting  within  the  scope  of  and  in  obedience  to 
the  provisions  of  its  constitution,  the  will  of  the  majority,  duly  ex-     f  Ji^ 
pressed  at  a  legally  constituted  meeting,  must  govern ;  yet  beyond  the     '' 
limits  of  the  act  of  incorporation,  the  will  of  the  majority  cannot  make 
an  act  valid  ;  and  the  powers  of  a  court  of  equity  may  be  put  in  motion       fh 
at  the  instance  of  a  single  shareholder,  if  he  can  show  that  the  cor- , 
poration  are  employing  their  statutory  powe^slfor  the  accomplishment 
of  purposes  not  within  tlie  scope  of  their  institution.     Yet  it  is  to  be 
observed,  that  there  is  an  important  distinction  between  this  class  of 
cases  and  those  in  which  there  is  no  breach  of  trust,  but  only  error  and] 
misapprehension,  or  simple  negligence  on  the  part  of  the  directors."  ... 

We  have  then  the  rule  and  its  limitation.  It  is  contended  that  this 
case  is  within  the  limitation ;  or  that  the  directors  of  the  Commercial 
Bank  of  Cleveland,  in  their  action  in  respect  to  the  tax  assessed  upon 
it,  under  the  act  of  April  18,  1852,  and  in  their  refusal  to  take  proper 
measures  for  testing  its  validity,  have  committed  an  '*  error  of  judg- 
ment merely." 

Now,  in  our  view,  the  refusal  upon  the  part  of  the  directors,  by  their  / 
own  showing,  partakes  more  of  disregard  of  duty,  than  of  an  error  of  /     cP 
judgment.    It  was  a  non-performance  of  a  confessed  official  obligation, 
amounting  to  what  the  law  considers  a  breach  of  trust,  though  it  may 
not  involve  intentional  moral  delinquency.    It  was  a  mistake,  it  is  true, 


502 


PEABODY   V.    FLINT. 


of  what  their  duty  required  from  them,  according  to  their  own  sense  of 
it,  but,  being  a  duty  by  their  own  confession,  their  refusal  was  an  act 
outside  of  the  obligation  which  the  charter  imposed  upon  them  to  pro- 
tect what  they  conscientiously  believed  to  be  the  franchises  of  the  bank. 
A  sense  of  duty  and  conduct  contrary  to  it,  is  not  "an  error  of  judg- 
ment merely,"  and  cannot  be  so  called  in  any  case.  It  amounted  to 
an  illegal  application  of  the  profits  due  to  the  stockholders  of  the  bank, 
into  which  a  court  of  equity  will  inquire  to  prevent  its  being  made. 

Thinking,  as  we  do,  that  the  action  of  the  board  of  directors  was  not 
"  an  error  of  judgment  merely,"  but  a  breach  of  duty,  it  is  our  opinion 
that  they  were  properly  made  parties  to  the  bill,  and  that  the  jurisdic- 
tion of  a  court  of  equity  reaches  such  a  case  to  give  such  a  remedy  as 
its  circumstances  may  require.  This  conclusion  makes  it  unnecessary 
for  us  to  notice  further  the  point  made  by  the  counsel  that  the  suit 
should  have  been  brought  in  the  name  of  the  corporation,  in  support  of 
which  they  cited  the  case  of  the  Bank  of  the  United  States  v.  Osborn. 
The  obvious  difference  between  this  case  and  that  is,  that  the  Bank  of 
the  United  States  brought  a  bill  in  the  circuit  court  of  the  United  States 
for  the  district  of  Ohio,  to  resist  a  tax  assessed  under  an  act  of  that 
State,  and  executed  by  its  auditor,  and  here  the  directors  of  the  Com- 
mercial Bank  of  Cleveland,  b}'  refusing  to  do  what  they  had  declared  it 
to  be  their  dutj'  to  do,  have  forced  one  of  its  corporators,  in  self- 
defense,  to  sue.  If  the  directors  had  done  so  in  a  State  court  of  Ohio, 
and  put  their  case  upon  the  unconstitutionality  of  the  tax  act,  because 
it  impaired  the  obligation  of  a  contract,  and  had  the  decision  been 
against  such  claim,  the  judgment  of  the  State  court  could  have  been 
re-examined,  in  that  particular,  in  the  supreme  court  of  the  United 
States,  under  the  same  authority  or  jurisdiction  b^^  which  it  reversed 
the  judgment  of  the  supreme  court  of  Ohio,  in  the  case  of  the  Piqua 
Branch  of  the  State  Bank  of  Ohio  v.  Jacob  Knoop,  treasurer  of  Miami 
county,  16  How.  369. 


Decree  of  Circuit  ^purt  a 
Catron,  J.,  Daniel,  J.,  and  Campbell 


PEABODY 


(T 


L,  JuvSiseentcd.  ;j)  .  /* 

/Ay/ 


t. 


-A 


/it 

1863.     6  Allen  (Mass.),  52.1 


Bill  in  equity,  brought  March  9,  1860,  by  two  stockholders  of  the 

^Lowell  and  Salem  Railroad  Company,  for  themselves  and  in  behalf  of 

V\'lthe  other  stockholders,  against  certain  directors  and   agents  of  said 

company,  and  of  the  Lowell  and  Lawrence  Railroad  Company,  whose 

1  ArcrumentH  omitted. —  Ed. 


PEABODY   V.    FLINT.  503 

railroad  connected  with  that  of  the  former  compan}',  and  others,  charg- 
ing various  acts  of  conspiracy  and  fraud,  b}'  wliich  the  interests  of  the 
stockholders  in  the  Salem  and  Lowell  Railroad  Company  were  preju- 
diced and  sacrificed,  for  the  benefit  of  the  Lowell  and  Lawrence  Rail- 
road Company ;  and  especiall}-  in  reference  to  false  and  fraudulent 
representations  and  practices  for  the  purpose  of  injuring  the  credit  of 
the  Salem  and  Lowell  Railroad,  and  enabling  them  to  issue  and  take 
its  bonds,  on  the  20th  of  August  1856,  secured  b}'  a  mortgage  of  prop- 
erty of  the  company,  at  prices  below  their  true  value  ;  and  also  in 
reference  to  a  contract  executed  on  the  1st  of  October  1858,  b}-  which 
the  Lowell  and  Lawrence  Railroad  Company  were  to  "do  and  perform 
all  the  transportation  of  persons  and  freight  upon  and  over  the  Salem 
and  Lowell  Railroad,"  and  to  pretended  settlements  made  between  said 
companies.  The  bill  also  set  forth  that,  since  the  plaintiffs  had  reason 
to  suspect  the  frauds  and  conspiracies  charged,  the}'  have  demanded 
explanations  of  the  defendants,  petitioned  the  general  court  for  an 
investigation,  and  endeavored  to  procure  the  election  of  directors  who 
would  cause  the  matters  to  be  investigated,  but,  being  in  a  minorit}-, 
have  failed  to  succeed.  The  defendants  filed  a  general  demurrer.  The 
plaintiffs,  at  the  argument,  moved  to  amend  their  bill  by  joining  the 
Salem  and  Lowell  Railroad  Company*  as  defendants. 

This  case  was  argued  in  Januarj'  1862. 

X  G.  Abbott  and  T.  Wentworth,  for  defendants. 

S.  H.  Phillips  and  J.  A.  Gillis  (  W.  P.  Webster  with  them,)  for 
plaintiffs. 

Chapman,  J.  The  bill  sets  forth  a  very  complicated  case.  A  full 
consideration  of  the  charges  of  fraud  which  it  contains  would  involve 
the  necessity  of  examining  the  various  legislative  acts  which  it  recites, 
and  the  contracts  and  dealings  which  it  sets  forth.  But  such  a 
discussion  is  unnecessary. 

The  principal  ground  of  demurrer  relied  on  by  the  defendants  is, 
that  the  plaintiffs  have  not,  and  never  had,  any  remedy  for  such  injuries        /* 
as  the}'  complain  of;  that,  conceding  the  truth  of  the  allegations  that 
the  directors  of  the  Salem  and  Lowell  Railroad  Company,  either  by , 
themselves  or  with  the  consent  and  connivance  of  a  majority  of  their 
stockholders,  combined,  either  among  themselves,  or  with  the  Lowell 
and  Lawrence  Railroad  Company  or  its  directors,  or  with  any  of  the ' 
other  defendants,  to  defraud  a  minority  of  the  stockholders  of  the  Salem 
and  Lowell  Railroad  Company,  and  in  pursuance  of  this  combination 
did  the  acts  alleged,  and  so  dealt  and  managed  as  to  destroy  the  value 
of  the  stock  as  set  forth,  yet  the  only  relief  which  the  minority  can  have 
is  the  very  imperfect  one  of  selling  out  their  stock  for  what  it  will  bring 
in  market.     This  doctrine  is  said  to  result  from  the  nature  of  corporate  i 
property,  which,  being  owned  absolutely  by  the  corporation,  is  under  I 
the  absolute  control  of  a  majority  of  the  stockholders,  and  of  such  I 
directors  as  they  choose  to  elect.     Their  decisions  and  acts,  it  is  said,  J 
are  final,  and  the  minority  are  bound  to  submit  to  them. 


/ 


504  PEABODY   V.    FLINT. 

Bat  this  doctrine,  if  correct,  would  place  the  propert}'  of  stockholders 
in  a  corporation  in  a  perilous  condition.      For  it  would  enable  the 
managers  of  one  corporation  to  get  the  control  of  another  by  the  pur- 
chase of  a  majority  of  its  stock  for  the  purpose,  and  then  to  manage  its 
affairs  in  such  subservience  to  the  interests  of  their  own  corporation, 
as  to  render  the  stock  of  the  minority  worthless,  and  avail  themselves 
of  its  value  without  compensation.      The  demurrer  concedes,  for  the 
purposes  of  this  discussion,  that  the  managers  of  the  Lowell  and  Law- 
rence Railroad  Compan}'  have  thus  acted  in  respect  to  the  minority  of 
stockholders  in  the  Salem  and  Lowell  Railroad  Compan}'.     It  requires 
no  great  sagacity  to  see  how  similar  frauds  ma}'  be  practised  in  behalf 
of  many  other  railroads  against  connecting  or  rival  roads,  so  that  a 
system  of  railroad  connections  ma}-  become  a  S3'stem  of  frauds.     If  it 
ma}^  be  practised  with  impunity  between  railroad  corporations,  it  ma3' 
also  be  practised  between  manufacturing  corporations,  and  a  managing 
majority  may,  at  their  pleasure,  sacrifice  the  interests  of  the  minoritj' 
for  the  benefit  of  another  corporation  owned  b}'  them.      The  same 
remark  is  true  in  respect  to  several  other  classes  of  business  corpora- 
tions.    The  question  thus  presented  is  of  great  importance,  because 
there  is  no  known  practicable  method  of  establishing  and  managing 
railroads   except  by  means  of  corporations  ;   and   many  other   great 
enterprises  and  branches  of  business  which  require,  for  their  successful 
prosecution,  a  large  and  permanent  investment  of  capital,  are  also 
usually  and  most  conveniently  established  and  managed  by  means  of 
corporate  organizations. 

This  doctrine  is  also  said  to  result  from  the  nature  of  corporations 
and  corporate  propert}',  as  stated  in  Smith  v.  Ilurd,  12  Met.  37L 
The  views  taken  in  that  case  are  unquestionably  correct ;  and  they 
apply  with  especial  force  to  that  class  of  corporations  whose  stock- 
holders have  little  more  power  than  to  elect  officers,  who,  when  elected, 
are  invested  by  law  with  the  sole  and  exclusive  power  of  managing  the 
concerns  and  business  of  the  corporation.  The  corporation  itself  is 
regarded  as  a  distinct  person  ;  and  its  property  is  legally  vested  in 
itself,  and  not  in  its  stockholders.  Asjndividuals,  they  cannot,  even  by 
joining  together  unanimously,  convey  a  title  to  it,  or  maintain  an  action 
at  law  for  its  possession,  or  for  damages  done  tojt.  Nor  can  they  make 
a  contract  that  shall  bind  it,  or  enforce  by  action  a  contract  that  has 
been  made  with  it.  The  artificial  person  called  the  corporation  must 
manage  its  affairs  in  its  own  name,  as  exclusively  as  a  natural  person 
manages  his  property  and  business.  The  officers,  though  chosen  by 
\;^te  of  the  stockholders,  are_not  their  agents,"  but  the  agents  of  the 
icorporation;  and  they  are  accountable  to  it  alone.  Therefore  one  or 
'more  of  the  stockholders  cannot  maintain  an  action  at  law  against  the 
officers  for  any  breach  of  official  duty  that  injures  the  corporate  prop- 
erty as  a  whole.  An  injury  done  by  the  directors  of  a  company  to 
an  individual  by  inducing  him  to  become  a  member  of  the  company 
by  means  of  false  representations  is  actionable,  because  it  is  an  injury 


PEABODY  V.    FLINT. 


to  him  and  not  to  the  company. 
But  the  interest  of  stockholders 


Gerhard  v.  Bates,  2  El.  &  Bl.  476 
as  stated  in  Smith  v.  Hard,  cited  Aly    ij^ 


above^merely  a  qualified  jmd  equital)le_intereaL- 

Bu^Jf_there  is  an_^urtahlejiiteregt,  there  must  result JVom  it  equi 
table^  relations  and  equitable_rjghts ;  and  these  rights  may  be  enforced 
by  equitable  remedies._    As   between   the   corporation  itself^  ajid  ^ts 
officers,  it  was  long  since  held  that  they  were  trustees,  and  that  a 
court  of  equity  would  hold  them  responsible  for  every  breacji  of  trust. 
'Charitable  IJorpm'ationx .  Sutton,  2  Atk.  400.     The  corporation  itself 
holds  its  property'  as  trustee  for  the  stockholders^  who  have  a  jointjnter- 
est  in^  all^  its  propertj'  and  eflfects,  and  each j)f  whom  is  related  to  itjis  V^^  j 
cestui  qiie_trust.    l^jie  corporation  ma3^jcall  its  officers  to  account  if  the}'   aJ  [j 
wilfully  abuse  their  trust,  or  misapply  the  funds  of  the  compan}^^  ajidjf  (  „  ^, 


it  refuses  to  sue,  or  is  stiU 


n^^^^}\ 

under  the  control  of  those  who  must 


made  defendants  in  the  suit,  the  stockholders  who  are  the  real  parties  o 
in  interest  may  file  a  bill  in  their  own  names,  making  the  corporation  a 
pa,rty  defendant ;  or  a  part  of  them  may  file  a  bill  in  behalf  of  them- 
selves and  all  others  standing  in  the  same  relation,  if  convenience 
requires  it.  Hobinson  v.  Smith,  3  Paige,  222,  and  cases  there  cited. 
See  also  the  other  authorities  cited  for  the  plaintiffs  on  this  point ; 
and  Hersey  v.  Veazie,  24  Maine,  9,  and  Smith  v.  Poor,  40  Maine,  415, 
cited  by  the  defendants. 

If  other  parties  have  participated  with  the  oflScers  in  such  proceedings, 
the}'  may,  according  to  the  established  principles  of  equit}-  pleading, 
be  joined  as  parties.  In  the  discovery  of  frauds,  and  in  furnishing 
remedies  to  parties  defrauded,  equity  does  not  suffer  technicalities  to 
stand  in  its  way,  but  seizes  upon  the  substance  of  the  case,  and  holds 
all  parties  to  their  just  responsibilit}',  following  trust  property  into  the 
hands  of  remote  grantees  and  purchasers  who  have  taken  it  with  notice 
of  a  trust,  in  order  to  subject  it  to  the  trust.  The  objection,  therefore, 
that  a  court  of  equity  has  no  power  to  furnish  a  remedy  in  a  case  of 
this  character,  is  untenable. 

But   there    is   another   objection   to   the   bill   which   must   prevail. | 
Equit}-  regards  diligence  as  one  of  its  important  elements ;  and  it  dis- 
countenances laches  as  inequitable ;  and  unreasonable  dela}'  to  prose 
cute  an  existing  claim  is  a  bar  to  a  bill  in  equity,  especially  when  the 
parties  cannot  be  restored  to  their  original  position,  and  injustice  ma^j 
be  done.      Veazie 
Cush.  252.     Fuller 
note  3. 

In  this  case  there  has  been  unreasonable  dela}'.  The  bill  was  sworn 
to  March  9,  1860.  The  mortgage  complained  of  was  executed  August 
20,  1856,  and  the  lease  to  the  Boston  and  Lowell  Railroad  Company, 
October  1,  1858.  The  'contracts  and  dealings  to  be  investigated  and 
readjusted  commenced  in  1850,  and  continued  till  the  execution  of  the 
mortgage,  and  even  to  the  execution  of  the  lease  in  1858.  Every 
day's  delay  increased  the  complication  and  the  difficulty  of  making  an 


-- --  -. /<v^ 

v.  Williams,  3  Story  R.  610.      Task  v.  Adams,  10  njjt%< 
y.  Melrose,  1  Allen,  166.     Story  on  Eq.  §  1520  and  ^     ' 


506  LAND,   &c.,   CO.   V.    McINTYEE. 

equitable  adjustment  of  them.  In  the  mean  time,  the  stock  in  the  cor- 
porations must  have  been  frequently  changing  hands,  and  there  are 
no  means  of  adjusting  the  equities  growing  out  of  such  changes.  A 
similar  remark  is  applicable  to  the  holders  of  the  bonds  secured  bj'  the 
mortgage.  The  nature  of  the  case  required  the  utmost  diligence,  in 
order  to  prevent  injustice.  Yet  the  plaintiffs  dela3'ed  more  than  three 
years  and  a  half  after  the  making  of  the  mortgage,  and  until  after  the}' 
had  sought  aid  from  the  legislature.  It  does  not  appear  that  the}'  had 
not  at  that  time  sufficient  knowledge  of  the  facts  to  enable  them  to 
prosecute,  or  that  they  have  since  gained  an}'  important  information  ; 
and  a  decree  such  as  they  now  seek  may  injuriously  affect  many  per- 
sons who  have  become  stockholders  or  bondholders  during  the  period 
of  this  delay.  For  this  reason  the  demurrer  is  sustained,  and  the  bill 
dismissed.'^ 


Marshall,  J.,  in  LAND,  &c.,  CO.  v.  McINTYRE. 

1898.     100  Wisconsin,  245,  pp.  256,  257. 


Marshall,  J.  .  .  .  "The  general  rule  is  that  where  a  cause  of  action 
exists  in  favor  of  a  corporation,  and  its  governing  body  refuses  to 
enforce  it,  any  member  thereof  may  do  so  by  suing  in  equity  in  behalf 
of  himself  and  all  others  similarly  situated.  .  .  .  The  purpose  of  the 
remedy  in  such  cases  is  not  to  interfere  with  the  exercise  of  legal  dis- 
cretion on  the  part  of  those  charged  with  the  primary  duty  of  enfor- 
cing corporate  rights,  but  to  furnish  relief  where  there  is  an  unjusti- 
fiable neglect  or  refusal  to  exercise  such  discretion.  Neither  is  the 
remedy  confined  to  the  one  which  the  corporation  may  invoke,  whether 
equitable  or  legal.  The  remedy  afforded  to  a  member  of  a  corporation 
is  necessarily  in  equity,  for  he  has  no  direct  interest  to  be  protected 

1  "Now  the  doctrine  of  laches  in  courts  of  equity  is  not  an  arbitrary  or  a  technical  doc- 
I trine.  Where  it  would  be  practically  unjust  to  give  a  remedy,  either  because  the  party 
has,  by  his  conduct,  done  that  wliich  might  fairly  be  regarded  as  equivalent  to  a  waiver  of 
it,  or  where  by  his  conduct  and  neglect  he  has,  though  perhaps  not  waiving  that  remedy, 
yet  put  the  other  party  in  a  situation  in  which  it  would  not  be  reasonable  to  place  him  if 
the  remedy  were  afterwards  to  be  asserted,  in  either  of  these  cases,  lapse  of  time  and  delay 
are  most  material.  But  in  every  case,  if  an  argument  against  relief,  which  otherwise 
would  be  granted,  is  founded  upon  mere  delay,  that  delay  of  course  not  amounting  to  a 
bar  by  any  statute  of  limitations,  the  validity  of  that  defence  must  be  tried  upon  principles 
substantially  equitable.  Two  circumstances,  always  important  in  such  cases,  are,  the  length 
of  the  delay  and  the  nature  of  the  acts  done  during  the  interval,  which  might  affect  either 
part}'  and  cause  a  balance  of  justice  or  injustice  in  taking  the  one  course  or  the  other,  so 
far  as  relates  to  the  remedy."  Lokd  Sklbounk,  in  Lindsay  Petroleum  Co.  v.  Heard,  L.  K. 
5  Privy  Council  Cases,  221,  pp.  230,  240  ;  and  see  errata  in  same  volume. 

Stockholders  "must  apply  so  recentl}'  after  the  doing  of  the  act  of  which  they  complain 
that  the  court  may  stop  or  undo  the  wrong  to  them  without  doing  e(|iKil  or  greater  wrong  to 
some  other  person.  .  .  ."  If  the  stockholder  "  wants  protection  against  the  consequences 
of  an  ultra  vires  act,  he  must  ask  for  it  with  sufficient  promptness  to  enable  the  court  to  do 
justice  to  him  without  doing  injustice  to  others."  V.\n  Fleet,  V.  C,  in  Rabe  v.  Dunlap, 
61  New  Jersey  Equity,  40,  pp.  46,  48.  —  Ed. 


FOSS   V.    HARBOTTLE. 


507 


by  a  personal  action.  He  must  proceed  in  equity  or  not  at  all,  join- 
ing the  corporation  as  a  party  in  the  capacity  of  trustee  for  all  its 
members. 

"  So  the  test  is  not  whether  the  corporation  can  sue  in  equity,  but 
whether  it  can  sue  at  all.  Whether  its  remedy,  if  exercised  direct, 
would  be  at  law  or  in  equity,  that  of  the  member  indirectly  interested 
to  enforce  its  rights,  must  always  be  in  equity.  That  is  his  only 
remedy.  The  direct  injury  to  be  remedied  is  to  the  corporation  as  a 
whole.  The  cause  of  action  belongs  to  the  corpox-ation,  but  is  enforce- 
able, rathe r  than  that  ]ustlce  shall  utterly  fail,  by  the  remedy  in 
equity  at  the  suit  of  its  members.  .  .  . 

•^So  the  rule  is  firmly  established,  that  where  a  cause  of  action 
exists  in  favor  of  acorporation,  whatever  be  it^_proper^emedy^f_its_ 
governing  body  refusesjto_j)rnceed,  jnRtice_cannot  thereby  be  defeated,, 
foTthose  upon^hom  the  injury  indirectly  falls  may  obtain  redress  in 
equity."  ... 


BOTTLE. 

niy  1843.     2  ZTare,  461.1  ^ 

Bill  in  equit}-  by  Foss  and  Turton,  shareholders  in  a  corporation! 
styled  the  Victoria  Park  Company,  on  behalf  of  themselves  and  all  other' 
shareholders,  against  five  persons  who  had  been  directors,  and  also^ 
against  several  other  persons. 

The  case  stated  in  the  bill  was,  in  part,  as  follows  :  v^       J^yit^ 

At  or  after  the  formation  of  the  company  was  agreed  upon,  an  arrange-     a 
ment  was  fraudulently  concerted  between  certain  parties  (including  a^    ^    .   L^ 
majority  of  the  directors),  with  the  object  of  enabling  themselves  ^jol^^ i^ ^  \j^       •/ 
derive  a  profit  or  personal  benefit  from  the  establishment  of  the  company.  /  y\  '^    '  o^ 
The  arrangement  was,  that  certain  of  the  parties  should  be  appointed   „J'4^j(-^tV' 

t.lip.    rnmnanv  rprt.M'in    lnnfl<s    nwnpH  y  ^ 


L>^ 


directors,  and  should  purchase  for   the  company  certain  lands  owned         4   ', 
by  themselves  and    by  other  parties  to  the  combination,   at  greatly    /^"^V*^ 
increased  and  exorbitant  prices.     The  directors,  accordingl}-,  before  the  ^^ 
passing  of  the  act,  agreed  to  purchase  certain  lands  at  rents  or  prices  A'^'^    y^  i*^ 
greatly  exceeding  those  at  which  the  vendors  had  purchased  the  same,      ^^/^  ^ 
After  the  passing  of  the  act  of  incorporation,  the  directors  and  their  ^x^  ^  'U^ 
confederates  proceeded  to  carry  into  execution  the  previously  formed 'TIa^    C^      ^     ,^r^ 
design  of  fraudulently  profiting  by  the  establishment  of  the   company      y^^ '      ^y*    '  ' 
arid  at  its  expense.    The  directors,  accordingl}-,  on  behalf  of  the  companj'^^*''^      ^  ij^* 
purchased  from  themselves,  and  from  the  other  parties,  lands  charged;//*^ /^ "  -  ^y      y 
with  chief  or  fee-farm  rents,  greatly-  exceeding  the  rents  payable  to  the  7^^    w^^^-'^^'^^^L^ 
persons  from   whom  the  said  vendors  had  purchased  the  same.     B}-' 
these  means,  the  company  took  the  laud,  charged  not  only  with  the  chief ''  #>*-^  c'^ 

1  Statement  abridged.     Arguments  and  part  of  opinion  omitted.  —  Ed.        'J,-^^L^]  1} 


\ 


^^ 


508  rOSS   V.    HARBOTTLE. 

rents  reserved  to  the  original  landowners,  but  also  with  additional  rents 
reserved  and  paj'able  to  the  immediate  vendors  (the  directors  et  als.). 
In  further  pursuance  of  the  same  fraudulent  design,  the  directors,  after 
purchasing  the  said  land  for  the  company,  applied  about  27,000/.  of  the 
monies  in  their  hands,  belonging  to  the  compau}-,  in  the  purchase  or 
redemption  of  the  rents  so  reserved  to  themselves  and  their  associates, 
leaving  the  land  subject  onl}'  to  the  chief  rent  reserved  to  the  original  land- 
owners. The  lands  pui'chased  bv  defendants  were  re-sold  by  them  to  the 
compan}'  at  a  profit  and  at  a  price  considerably  exceeding  the  real  value  of 
the  same.  Owing  to  the  sums  appropriated  b}'  the  directors  to  themselves, 
and  paid  to  others  in  reduction  of  the  increased  chief  rents,  and  payment  of 
such  rents,  and  owing  to  their  having  otherwise  misapplied  monies,  the 
funds  of  the  company  in  their  hands  were  exhausted,  and  the}'  raised  large 
sums  upon  mortgage  or  incumbrance  of  lands  and  property  of  the  com- 
pan}',  which  the}' had  no  authority  to  do  under  the  act  of  incorporation. 
Some  of  the  lands  thus  mortgaged,  though  the  equitable  property  of 
the  company,  did  not  stand  in  the  name  of  the  compan}" ;  and  hence 
some  of  the  mortgagees  had  no  notice  of  want  of  authority  on  the  part 
of  the  mortgagors. 

The  bill  further  alleged,  that  there  had  ceased  to  be  a  sufl3cient 
number  of  directors  to  constitute  a  board  for  transacting  the  business 
of  the  company ;  and  that,  in  the  present  circumstances  of  the  com- 
pany and  of  the  board  of  directors,  the  shareholders  had  no  power  to 
take  the  propert}-  of  the  company  out  of  the  liands  of  the  former 
directors,  or  to  appoint  directors  to  supply  the  vacancies,  or  to  wind  up, 
or  dissolve,  the  company,  without  the  assistance  of  the  court. 

The  bill  also  alleged,  that  the  defendants  concealed  from  the  plaintiffs 
and  the  other  shareholders  the  aforesaid  fraudulent  and  improper  acts  and 
proceedings  ;  and  that  plaintiffs  and  the  other  shareholders  had  only  re- 
cently ascertained  the  particulars  thereof,  so  far  as  they  were  now  stated. 

The  bill  prayed,  that  an  account  miglit  be  taken  of  the  losses  and 
expenses  incurred  in  consequence  of  the  said  fraudulent  and  improper 
dealings  of  the  defendants  with  the  monies,  lands,  and  property  of  the 
company,  whicli  the}'  were  liable  to  make  good,  and  that  the}'  might  be 
respectively  decreed  to  make  good  the  same,  including  in  particular  tlie 
profits  made  by  buying  and  re-selling  the  said  land ;  that  it  might  be 
declared  that  the  mortgages  upon  the  lands,  etc.,  created  as  aforesaid, 
so  far  as  regards  tlie  defendants  who  executed  the  same  or  were  privy 
thereto,  were  created  fraudulently  and  in  violation  of  the  provisions 
of  the  act,  and  that  certain  of  tlie  defendants  might  be  decreed  to  make 
good  to  the  company  the  principal  and  interest  due  upon  such  of  the 
mortgages  as  were  still  subsisting ;  that  inquiries  might  be  directed  to 
ascertain  which  of  the  mortgages  could  be  avoided  and  set  aside  as 
against  the  persons  claiming  the  benefit  thereof,  and  that  proceedings 
might  be  taken  for  avoiding  them  accordingly  ;  and  that  a  receiver 
might  be  appointed. 


FOSS  V.    HARBOTTLE. 


509 


Certain  of  the  defendants  demurred  to  the  bill,  assigning  for  cause, 
want  of  equit}-,  want  of  parties,  and  multifariousness. 

Lowndes^  Rolt,  Walker^  and  Glasse,  in  support  of  the  demurrers. 

James  Russell.,  Roiipell^  and  Bartrum^  for  the  bill. 

WiGRAM,  Vice-Chancellou.  The  relief  which  the  bill  in  this  case 
seeks,  as  against  the  Defendants  who  have  demurred,  is  founded  on 
several  alleged  grounds  of  complaint ;  of  these  it  is  onl}-  necessary  that 
I  should  mention  two,  for  the  consideration  of  those  two  grounds 
involves  the  principle  upon  which  I  think  all  the  demurrers  must  be 
determined.  One  ground  is,  that  the  directors  of  the  Victoria  Park 
Compan}',  the  Defendants  Ilarbottle,  Adshead^  Byrom,  and  Bealey, 
have,  in  their  character  of  directors,  purchased  their  own  lands  of  them- 
selves for  the  use  of  the  company,  and  have  paid  for  them,  or,  rather, 
taken  to  themselves  out  of  the  monies  of  the  company  a  price  exceeding 
the  value  of  such  lands  :  the  other  ground  is,  that  the  Defendants  have 
raised  money  in  a  manner  not  authorized  by  their  powers  under  their 
act  of  incorporation  ;  and,  especially,  that  the}'  have  mortgaged  or 
incumbered  the  lands  and  property  of  the  compau}-,  and  applied  the 
monies  thereby  raised  in  effect,  though  circuitoush',  to  pay  the  price  of 
the  land  which  the}'  had  so  bought  of  themselves. 

[Part  of  opinion  omitted.] 

For  the  present  purpose,  I  shall  assume  that  a  case  is  stated,  entithng 
the  company,  as  matters  now  stand,  to  complain  of  the  transactions 
mentioned  in  the  bill. 

The  Victoria  Park  Company  is  an  incorporated  body,  and  the  conduct 
with  which  the  Defendants  are  charged  in  this  suit  is  an  injury  not  to 
the  Plaintiffs  exclusively ;  it  is  an  injury  to  the  whole  corporation  b}' 
individuals  whom  the  corporation  entrusted  with  powers  to  be  exercised 
onl}'  for  the  good  of  the  corporation.  And  from  the  case  of  the  Attor- 
ney-General v.  Wilson^  (without  going  further),  it  may  be  stated  as 
undoubted  law,  that  a  bill  or  information  b}'  a  corporation  will  lie  to  be 
relieved  in  respect  of  injuries  which  the  corporation  has  suffered  at  the 
hands  of  persons  standing  in  the  situation  of  the  directors  upon  this 
record.  This  bill,  however,  differs  from  that  in  the  Attorney- General 
V.  Wilson  in  this,  —  that  instead  of  the  corporation  being  formally 
represented  as  plaintiffs,  the  bill  in  this  case  is  brought  by  two  indi- 
vidual corporators,  professedl}'  on  behalf  of  themselves  and  all  the  other 
members  of  the  corporation,  except  those  who  committed  the  injuries 
complained  of,  —  the  plaintiffs  assuming  to  themselves  the  right  and  | 
power  in  that  manner  to  sue  on  behalf  of  and  represent  the  corporation] 
itself. 

Itwasnot,  nor  could  it  successfully  be  argued,  that  it  was  a  matterjof 
course  for  any  individual  members  of  a  corporation  thus  to  assuipe^tq^ 
tllemseh;^s  the  right  of  suing  in  the  name  of  the  corporation.  In  law,Jbe^ 
corporation,  and  the  aggregate  members  of  the  corporation,  arejiot_tlJL&. 
same  thin^for^purposes  like  thisj  and  the  only  question  can  be,  whether 
'^'  1  Cr.  S>-  Ph.  1  "  ~ 


y 


0  ^y 


^ 


/ 


510  FOSS   V.    HAEBOTTLE. 

the  facts  alleged  in  this  case  justif}'  a  departure  from  the  rule  which 
prima  facie  would  require  that  the  corporation  should  sue  in  its  own 
name  and  in  its  corporate  character,  or  in  the  name  of  some  one  whom 
the  law  has  appointed  to  be  its  representative. 

The  demurrers  are,  —  first,  of  three  of  the  directors  of  the  compan}', 
who  are  also  alleged  to  have  sold  lands  to  the  corporation  under  the 
circumstances  charged  ;  secondh',  of  JBealey,  also  a  director,  alleged  to 
have  made  himself  amenable  to  the  jurisdiction  of  the  Court  to  remedy 
the  alleged  injuries,  though  he  was  not  a  seller  of  land  ;  thirdl}',  of 
Denison,  a  seller  of  land,  in  like  manner  alleged  to  be  implicated  in 
the  frauds  charged,  though  he  was  not  a  director ;  fourthl}-,  of  Mr. 
Bunting^  the  solicitor,  and  Mr.  Lane,  the  architect  of  the  company. 
These  gentlemen  are  neither  directors  nor  sellers  of  land,  but  all  the 
frauds  are  alleged  to  have  been  committed  with  their  privit}',  and  thev 
also  are  in  this  manner  sought  to  be  implicated  in  them.  The  most 
convenient  course  will  be,  to  consider  the  demurrer  of  the  three  against 
whom  the  strongest  case  is  stated ;  and  the  consideration  of  that  case 
will  ap[)ly  to  the  whole. 

The  first  objection  taken  in  the  argument  for  the  Defendants  was, 
that  the  individual  members  of  the  corporation  cannot  in  any  case  sue 
in  the  form  in  which  this  bill  is  framed.  During  the  argument  I  inti- 
mated an  opinion,  to  which,  upon  further  consideration,  I  fully  adhere, 
that  the  rule  was  much  too  broadly  stated  on  the  part  of  the  Defendants. 
I  think  there  are  cases  in  which  a  suit  might  properly  be  so  framed. 
Corporations  like  this,  of  a  private  nature,  are  in  truth  little  more  than 
private  jjartnerships ;  and  in  cases  which  may  easily  be  suggested,  it 
would  be  too  much  to  hold,  that  a  society  of  private  persons  associated 
together  in  undertakings,  which,  though  certainly  beneficial  to  the  public, 
are  nevertheless  matters  of  private  propert}',  are  to  be  deprived  of  their 
civil  rights,  inter  se,  because,  in  order  to  make  their  common  objects 
more  attainable,  the  crown  or  the  legislature  may  have  conferred  upon 
them  the  benefit  of  a  corporate  character.  If  a  case  should  arise  of 
injury  to  a  corporation  b}'  some  of  its  members,  for  which  no  adequate 
remed}'  remained,  except  that  of  a  suit  by  individual  corporators  in 
their  private  characters,  and  asking  in  such  character  the  protection  of 
those  rights  to  which  in  their  corporate  character  they  were  entitled,  I 
cannot  but  think  that  the  principle  so  forcibly  laid  down  by  Lord  Cotten- 
luim  in  Walhcorth  v.  Holt^  and  other  cases,  would  apply,  and  the 
claims  of  justice  would  be  found  superior  to  any  difficulties  arising  out 
of  technical  rules  respecting  the  mode  in  which  corporations  are  required 
to  sue. 

But,  on  the  other  hand,  it  must  not  be  without  reasons  of  a  very 
urgent  character  that  established  rules  of  law  and  practice  are  to  be 
departed  from,  —  rules,  which,  though  in  a  sense  technical,  are  founded 
on  general  principles  of  justice  and  convenience  ;  and  the  question  is, 
whether  a  case  is  stated  in  this  bill,  entitling  the  Plaintiffs  to  sua  \s\  their 

1  4  Myl   &  Cr.  G35.     See  also  17  Ves.  320,  per  Lord  EldoH. 


FOSS   V.    HARBOTTLE. 


511 


private  characters.  [His  Honor  stated  the  substance  of  the  act,  sec- 
tions 1,  38,  39,  43,  46,  47,  48,  49,  67,  70,  114,  and  129.1]  The  result 
of  these  clauses  is,  that  the  directors  are  made  the  governing  bod}-, 
subject  to  the  superior  control  of  the  proprietors  assembled  in  general 
meetings  ;  and,  as  I  understand  the  act,  the  proprietors  so  assembled 
have  power,  due  notice  being  given  of  the  purposes  of  the  meeting,  to 
originate  proceedings  for  an}-  purpose  within  the  scope  of  the  company's 
powers,  as  well  as  to  control  the  directors  in  any  acts  which  they  may 
have  originated.  There  may  possibly  be  some  exceptions  to  this  pro- 
position, but  such  is  the  general  effect  of  the  provisions  of  the  statute. 

Now,  that  my  opinion  upon  this  case  may  be  clearly  understood,  I 
will  consider  separately  the  two  principal  grounds  of  complaint  to  which 
I  have  adverted,  with  reference  to  a  very  marked  distinction  between 
them.  The  first  ground  of  complaint  is  one  which,  though  it  might 
prima  facie  entitle  the  corporation  to  rescind  the  transactions  com- 
plained of,  does  not  absolutely  and  of  necessity  fall  under  the  descrip- 
tion of  a  void  transaction.  The  corporation  might  elect  to  adopt  those 
transactions,  and  hold  the  directors  bound  by  them.  In  other  words, 
the  transactions  admit  of  confirmation  at  the  option  of  the  corporation. 
The  second  ground  of  complaint  may  stand  in  a  different  position  ;  I 
allude  to  the  mortgaging  in  a  maniver  not  authorized  by  the  powers  of 
the  act.  This,  being  beyond  the  powers  of  the  cor^wration,  may  admit 
of  no  confirmation  whilst  any  one  dissenting  voice  is  raised  against  it. 
This  distinction  is  found  in  the  case  of  Preston  v.  The  Grand  Collier 
Dock  Gorti'pany.'^ 

On  the  first  point,  it  is  only  necessary  to  refer  to  the  clauses  of  the 
act  to  shew,  that,  Avhilst  the  supreme  governing  body,  the  proprietors  at 
a  special  general  meeting  assembled,  retain  the  power  of  exercising  the 
functions  conferred  u}x>n  them  by  the  act  of  incorporation,  it  cannot  be 
competent  to  individual  corporators  to  sue  in  the  manner  proposed  by 
the  Plaintiffs  on  the  present  record.  This  in  effect  purports  to  be  a  suit 
by  cestui  que  trusts,  complaining  of  a  fraud  committed  or  alleged  to 
have  been  committed  by  persons  in  a  fiduciary  character.  The  com- 
plaint is,  that  those  trustees  have  sold  lands  to  themselves,  ostensibly 
for  the  benefit  of  the  cestui  que  trusts.  The  proposition  I  have 
advanced  is,  that  although  the  act  should  prove  to  be  voidable,  the 
cestui  que  trusts  may  elect  to  confirm  it.  Now,  who  are  tlie  cestui  que 
trusts  in  this  case?  The  corporation,  in  a  sense,  is  undoubtedly  the 
cestui  que  trust ;  but  the  majority  of  the  proprietors  at  a  special  general 
meeting  assembled,  independently  of  any  general  rules  of  law  u[)on  the 
subject,  by  the  very  terms  of  the  incorporation  in  the  present  case,  has 
power  to  bind  the  whole  body,  and  every  individual  corporator  must  be 
taken  to  have  come  into  the  corixjration  upon  the  terms  of  being  liable 
to  be  so  bound.  How  then  can  this  Court  act  in  a  suit  constituted  as 
this  is,  if  it  is  to  be  assumed,  for  the  purposes  of  the  argument,  that  the 


1  Supra,  p.  4()i,  n.,  et  seq. 


2  11  Sim.  327,  S.C.;  2  Railway  Cases,  835. 


512  FOSS   V.    HAEBOTTLE. 

rt  powers  of  the  body  of  the  proprietors  are  still  in  existence,  and  ma> 
Mawfull}-  be  exercised  for  a  purpose  like  that  I  have  suggested?  Whilst 
the  Court  ma}'  be  declaring  the  acts  complained  of  to  be  void  at  the 
suit  of  the  present  Plaintiffs,  who  in  fact  ma}'  be  the  only  proprietors  who 
disapprove  of  them,  the  governing  body  of  proprietors  may  defeat  the 
decree  by  lawfully  resolving  upon  the  confirmation  of  the  very  acts 
i,wliich  are  the  subject  of  the  suit.  The  A'ery  fact  that  the  governing 
body  of  proprietors  assembled  at  the  special  general  meeting  may  so  bind 
even  a  reluctant  minority,  is  decisive  to  shew  that  the  frame  of  this 
suit  cannot  be  sustained  whilst  that  body  retains  its  functions.  In  order 
then  that  this  suit  may  be  sustained,  it  must  be  shewn  either  that  there 
is  no  such  power  as  I  have  supposed  remaining  in  the  proprietors,  or,  at 
least,  that  all  means  have  been  resorted  to  and  found  ineffectual  to  set 
that  body  in  motion  :  this  latter  point  is  nowhere  suggested  in  the  bill : 
there  is  no  suggestion  that  an  attempt  has  been  made  by  any  proprietor 
^jO  set  the  body  of  proprietors  in  motion,  or  to  procure  a  meeting  to  be 
convened  for  the  purpose  of  revoking  the  acts  complained  of.  The 
question  then  is,  whether  this  bill  is  so  framed  as  of  necessity  to  exclude 
the  supposition  that  the  supreme  body  of  proprietors  is  now  in  a  condi- 
tion to  confirm  the  transactions  in  question  ;  or,  if  those  transactions 
are  to  be  impeached  in  a  court  of  justice,  whether  the  proprietors  have 
not  power  to  set  the  corporation  in  motion  for  the  purpose  of  vindicating 
its  own  rights. 

[The  learned  judge  then  controverted  the  plaintiff's  position  that, 
upon  the  allegations  of  the  bill,  it  must  be  regarded  as  impossible  to 
now  legally  convene  a  general  meeting  of  the  shareholders.  He  was  of 
opinion  that  certain  clauses  in  the  act  were  merely  directory,  and  that 
a  general  meeting  could  be  called  even  if  the  corporation  lacked  certain 
oflflcers.  He  also  held,  "that  the  existence  of  a  board  of  directors  ch 
facto  is  sufficiently  apparent  upon  the  statements  in  the  bill."  In  this  dis- 
cussion he  said  —  "I  have  applied  strictly  the  rule  of  making  every  in- 
■^jcndment  against  the  pleader  in  this  case,  .  .  . :  "  also  —  "...  I  have  felt 
bound  in  favor  of  the  defendants  to  construe  this  bill  with  strictness."] 

The  second  point  which  relates  to  the  charges  and  incumbrances 
'  alleged  to  have  been  illegally  made  on  the  property  of  the  company  is 
open  to  the  reasoning  which  I  have  applied  to  the  first  point,  upon  the 
question  whether,  in  the  present  case,  individual  members  are  at  liberty 
to  complain  in  the  form  adopted  by  this  bill ;  for  why  should  this 
anomalous  form  of  suit  be  resorted  to,  if  the  powers  of  the  corporation 
may  be  called  into  exercise?  But  this  part  of  the  case  is  of  greater 
difficulty  upon  the  merits.  I  follow,  with  entire  assent,  the  opinion 
expressed  by  the  Vice  Chancellor  in  Preston  v.  IVie  Grand  Collier  Dock 
Company,  that,  if  a  transaction  be  void,  and  not  merely  voidable,  the 
corporation  cannot  confirm  it,  so  as  to  bind  a  dissenting  minority  of  its 
members.  But  that  will  not  dispose  of  this  question.  The  case  made 
with  regard  to  tliese  mortgages  or  incumbrances  is,  that  they  were  exe- 
cuted In  violation  of  the  provisions  of  the  act.     The  mortgagees  are  not 


FOSS   V.    IIARBOTTLE.  513 

defendants  to  the  bill,  nor  does  the  bill  seek  to  avoid  the  .secnritj-  itself, 
if  it  could  be  avoided,  on  which  I  give  no  opinion.  The  bill  prays 
inquiries  with  a  view  to  proceedings  being  taken  aliunde  to  set  aside 
these  transactions  against  the  mortgagees.  The  object  of  this  billf 
against  the  defendants  is  to  make  them  individually  and  personally/ 
responsible  to  the  extent  of  the  injury  alleged  to  have  been  received  b}'! 
the  corporation  from  the  making  of  the  mortgages.  Whatever  the  case 
might  be,  if  the  object  of  the  suit  was  to  rescind  these  transactions, 
and  the  allegations  in  the  bill  shewed  that  justice  could  not  he  done  to 
the  shareholders  without  allowing  two  to  sue  on  behalf  of  themselves 
and  others,  very  different  considerations  arise  in  a  case  like  the  present, 
in  which  the  consequences  only  of  the  alleged  illegal  acts  are  sought  to 
be  visited  personally  upon  the  directors.  The  money  forming  the  con- 
sideration for  the  mortgages  was  received,  and  was  expended  in,  or 
partly  in,  the  transactions  which  are  the  subject  of  the  first  ground  of 
complaint.  Upon  this,  one  question  appears  to  rae  to  be,  whether  the 
company  could  confirm  the  former  transactions,  take  the  benefit  of  the 
mone}'  that  has  been  raised,  and  yet,  as  against  the  directors  personally, 
complain  of  the  acts  which  they  have  done,  by  means  whereof  the  com- 
pany obtains  that  benefit  which  I  suppose  to  have  been  admitted  and 
adopted  b}'  such  confirmation.  I  think  it  would  not  be  open  to  the 
company  to  do  this ;  and  my  opinion  already  expressed  on  the  first 
point  is,  that  the  transactions  which  constitute  the  first  ground  of  com- 
plaint maj'  possibly  be  beneficial  to  the  company,  and  may  be  so 
regarded  by  the  proprietors,  and  admit  of  confirmation.  I  am  of 
opinion  that  this  question,  —  the  question  of  confirmation  or  avoidance, 
—  cannot  properly  be  litigated  upon  this  record,  regard  being  had  to 
the  existing  state  and  powers  of  the  corporation,  and  that  therefore 
that  part  of  the  bill  which  seeks  to  visit  the  directors  personally  with 
the  consequences  of  the  impeached  mortgages  and  charges,  the  benefit 
of  which  the  company  enjoys,  is  in  the  same  predicament  as  that  which 
relates  to  the  other  subjects  of  complaint.  Both  questions  stand  on  the 
same  ground,  and,  for  the  reasons  which  I  stated  in  considering  the 
former  point   hese  demurrers  must  be  allowed. 


/ 


eP^i4 


iL 


BREWER  V.    BOSTON   THEATRE. 


^       ^  Wells,  J.,  in 


BEEWEE  V.  BOSTON  THEATEE  et  <A. 


> 


^^ 


^        rJ^\    l>^     „    If,, 


1870.     104  Massachusetts,  378,  pp.  394-397.1 

Wells,  J.  .  .  .  The  defendants  contend  that  the  corporation  cannot 
deprived  of  its  right  to  determine,  in  all  matters  not  ultra  vires, 
■whether  to  impeach  or  to  ratify  transactions  supposed  to  be  preju- 
dicial to  its  interests.     Granting  this  position,  it  would  result  that  in 
no  case,  as  to  matters  intra  vires,  could  a  suit  be  maintained  by  indi- 
/      viduaL  stockholders  to  enforce  rights  or  redress  wrongs  of  the  corpo- 
J  jlaft^body,  except  where  the  delay  necessary  in  order  to  secure  corporate 
action  might  defeat  or  endanger  the  attainment  of  appropriate  relief. 
.If,  when  called  upon  to  act,  the  corporate  body  should  elect  to  confirm 
'T^   .  the  supposed  wrongful  transactions,  or  should  do  so  indirectly  by  re- 
cJ'      ~^fusal  to  act,  they  would  no  longer  be  open  to  impeachment.     If,  on 
the  other  hand,  it  should  determine  to  take  action,  it  would  do  so  in 
/^X       its  own  name  and  behalf ;  and  there  would  be  no  ground  of  necessity 
^^-'-^for  proceedings  in  the  name  of  the  individual  corporator. 

We  are  not  prepared  to  say  that  this  would  not  be  the  case  in  all 

matters  to  which  the  only  objection  is  that  they  are  prejudicial,  or 

supposed  to  be  so,  to  the  corporate  interests  merely,  but  not  illegal  in 

themselves,  and  affecting  all  the  corporators  alike.     Perhaps  it  would 

■^l^^i  be  so  whenever  the  surrender  of  property  or  the  release  of  rights, 

(     acquired  by  the  corporation  through  the  transactions  sought  to  be 

■  impeached,  is  necessary  in  order  to  reach  the  proper  remedy.     Great 

Luxembourff  Railway  Co.  v.  Magnaij,  25  Beav.  586.     The  corporation 

might  be  entitled  to  determine  for  itself  exclusively  whether  it  would 

retain  or  release  property  or  rights  thus  acquired,  although  it  thereby 

precluded,  or  rendered  ineffectual,  all  proceedings  against  parties  who 

may  have  made  illegal  or  fraudulent  gains  out  of  the  transactions. 

These  questions,  however,  we  need  not  at  present  decide. 

The  cases  now  before  us  involve  no  release  of  property  or  rights  by 
the  corporation.  The  alleged  wrongs  are  not  merely  prejudicial  to  the 
interests  of  the  corporation ;  but  are  such  as  tend  to  deprive  one  part 
of  the  corporators  of  their  rightful  share  in  the  fruits  of  the  common 
property  and  business,  for  the  advantage  of  others  of  the  corj>orators. 
This  inequality  and  injustice  is  accomplished  by  means  of  the  control 
over  the  corporate  organization  and  management,  which  has  been 
secured  by  the  parties  so  benefited.  By  the  amendments  to  the  several 
bills  it  is  alleged  that  such  control  has  been  exercised  since  the  year 

,     1  This  was  a  bill  in  equity,  brought  by  minority  stockholders,  apfainst  the  corporation 
/and  against  certain  directors  and  other  individuals,  for  fraudulently  conspiring  to  lease  the 
I  corporate  property  on  a  rent  much  below  the  market  value  and  share  in  the  profits  of  the 
I  lessees.    The  bill  (as  amended)  alleged  that  individual  defendants  own  or  control  a  majority 
of  the  stock  and  control  the  proceedings  at  stockholders'  meetings;  also  that  a  majority  of 
the  directors  arc  fraudulently  colluding  with  these  defendants  to  continue  to  them  the  con- 
trol of  the  corporation  and  its  property-.     A  demurrer  was  overruled.  —  ICd. 


>/^ 


BREWER  V.    BOSTON   THEATRE.  515 

1866,  inclusive,  by  Tompkins  and  Thayer,  with  the  aid  of  the  other 
defendants.  That  which  is  important  is  the  fact  of  such  control  and 
its  exercise  for  such  purpose,  rather  than  the  means  by  which  it  has 
been  obtained.  A  majority  of  the  corporators  have  no  right  to  exer- 
cise the  control  over  the  corporate  management,  which  legitimately 
belongs  to  them,  for  the  purpose  of  appropriating  the  corporate  pro- 
perty or  its  avails  or  income  to  themselves  or  to  any  of  the  share- 
holders, to  the  exclusion  or  prejudice  of  the  others.  And  if  any  have 
obtained  such  unfair  advantage  by  fraud  or  abuse  of  the  trust  con- 
fided to  them  as  officers  or  agents  of  the  corporation,  it  is  not  in  the 
power  of  a  majority  to  ratify  or  condone  the  fraud  and  breach  of  trust,! 
so  far  as  it  affects  the  rights  of  the  others,  without  reasonable  restitu-l 
tion.  This  proposition,  if  stated  in  reference  to  formal  transactions,! 
such  as  assessments  of  capital  or  dividends  of  income,  would  not  be) 
questioned.  Preston  v.  Grand  Collier  Dock  Co.,  11  Sim.  327.  Hodg- 
kinson  v.  National  Live  Stock  Insurance  Co.,  26  Beav.  473.  But  the 
indirect  appropriation  of  the  common  property,  profits  or  means  of 
profit,  to  their  own  benefit,  by  any  portion  of  the  corporators,  in  fraud 
of  their  associates,  is  equally  incapable  of  being  authorized  or  ratified 
by  the  vote  of  a  majority  of  the  corporators,  or  by  any  act  or  omission 
of  the  corporate  body.  Gregory  v.  Patchett,  33  Beav,  595.  Atwool  v. 
Mei^y weather,  Law  Eep.  5  Eq.  464,  note.  If  it  were  otherwise,  the 
minority  would  be  without  means  of  protection  or  redress  against 
inequality  and  injustice.  They^ would  be  equally  so  if  they  could 
obtain  redress  only  in  the  name  and  through  the  action  of  the  corpo- 
ration  itself.  Such  acts  are  wrongs  done  primarily  to  the  corporation ; 
and~therefore  the  restitution  or  redress  is  to  be  secured  to  the  corpo- 
ration. But  in  their  effect  and  essential  character  they  are  wrongs 
to  the  individual  shareholder,  inflicted  upon  his  corporate  interests 
by  means  of  the  control  over  those  interests  secured  through  the  cor- 
porate organization  and  management.  He  can  seek  his  redress  only 
through  the  corporation ;  but  that  does  not  give  the  corporation  the 
right  to  deprive  him  of  all  redress.  Any  attempt  to  do  so,  whether 
regarded  as  the  action  of  the  corporation  or  of  a  majority  of  share- 
holders, would  have  the  same  voidable  character  as  the  original  wrong. 
Officers  of  a  corporation,  dealing  with  it  in  matters  of  their  own  indi- 
vidual interest,  stand  very  differently  in  this  respect  from  strangers, 
who  have  no  occasion  to  regard  any  other  than  the  corporate  body.  If 
by  means  of  their  relations  to  the  corporate  management  they  secure] 
to  themselves  undue  advantage  over  their  associates,  they  cannot 
retain  it.  Such  transactions  are  voidable,  not  merely  for  want  of 
authority  in  the  officers  by  whom  they  are  done,  but  because  neither 
the  officers  nor  the  corporation  itself,  by  whatever  majority  of  votes 
it  may  act,  can  do,  assent  to,  or  confirm  them.  The  wrong  to  the  indi- 
vidual shareholder  is  the  same,  whether  committed  with  the  concur- 
rence or  subsequent  approval  and  adoption  of  his  associates  controlling 
the  corporation,  or  without  it. 


^ 


3 


fi 


51G 


ATWOOL  V.    MERRYWEATHER. 


In  our  opinion,  the  facts  of  these  cases,  as  set  forth  in  the  several 
amended  bills,  show  such  abuse  of  authority  and  breaches  of  trust 
by  the  defendants,  in  misappropriating  the  income  of  the  corporate 
property  to  the  benefit  of  themselves  or  of  some  of  them,  as  cannot 
be  ratified  or  remitted  by  the  corporation ;  and  also  such  incapacity 
of  tlie  plaintiffs  to  move  the  corporation  to  take  action  for  their  re- 
dress, as  entitles  them,  from  necessity,  to  seek  it  in  the  form  of  these 
jDroceedings. 

In  the  first  and  second  of  the  bills  a  majority  of  the  present  direct- 
ors are  not  joined  as  parties ;  but  the  necessity  for  the  mode  of 
proceeding  adopted  is  shown  by  the  allegations  that  Tompkins  and 
Thayer  own  or  control  a  majority  of  the  stock  and  control  all  meetings 
of  the  corporation,  and  that  a  majority  of  the  present  directors  are 
knowingly,  wilfully,  and  fraudulently  endeavoring  to  continue  and 
secure  sucli  control  to  them. 

In  support  of  these  conclusions  we  may  cite  Ativool  v.  Merryweather, 
Law  Rep.  5  Eq.  464,  note ;  Hichens  v.  Cosgreve,  4  Russ.  562 ;  Gregory 
V.  Patchett,  33  Beav.  595 ;  Hodges  v.  New  England  Screw  Co.,  1  R.  I. 
312;  Allen  v.  Curtis,  26  Conn.  456;  Hersey  v.  Veazie,  24  Maine,  9; 
March  v.  Eastern  Railroad  Co.,  40  N.  H.  548,  567 ;  Robinson  v.  Smith, 
3  Paige,  222,  233 ;  Peahody  v.  Flint,  6  Allen,  52. 

We  do  not  think  the  authorities  cited  in  support  of  the  demurrers 
are  in  conflict  with  these  positions.  The  leading  case  relied  on,  Foss 
V.  Harhottle,  2  Hare,  461,  was  a  bill'  to  set  aside  a  sale  of  property  to 
the  corporation.  It  was  dismissed  because  it  did  not  exclude  the  sup- 
position that  the  proprietors  might  lawfully  confirm  the  transaction  ; 
nor  show  that  all  means  had  been  resorted  to  and  found  ineffectual 
to  set  the  corporate  body  in  motion  or  that  such  efforts  would  have 
been  useless.  It  involved,  of  course,  a  surrender  of  the  property  %y 
the  corporation.  j 


// 


?(tTWOOL 


MERRYWEirftpfL/  * 

0^     .-nA/^  1867.     L.  R.  5  Eq.  Cases,  464,  note. 

This  was  a  bill  by  the  Plaintiff,  on  behalf  of  himself  and  all  other  the 
areholders  in  the  ^ast  Pant  Du  United  Lead  Mining  Company^ 
Limited,  except  the  persons  who  were  Defendants  thereto,  against 
Samuel  Merryweather,  Henry  Whitworth,  and  the  East  Pant  Du 
Company,  Limited,  for  the  purpose  of  setting  aside  a  contract  for  the 
^^,  and  purchase  of  certain  mines  (for  the  purpose  of  purchasing  and 


M  .  vJ^  '\  ^  JiV^'orking  which  the  company  was  formed),  and  compelling  repayment 


1^.i 


^ 


A^^JJ 


»/» 


>(.^    K 


ATWOOL   V.    MEEEYWEATHEE.  517 

flora  31erryweather  and  Wliihoorth  of  the  sum  of  £3940,  or  such  por- 
tions as  had  been  received  b}*  them,  and  a  return  of  the  GOO  shares 
allotted  to  Merryiceather. 

The  bill  stated  the  incorporation,  in  1863,  of  the  compan)*  under  the 
promotion  of  Defendants  Merryweather  and  WIntworth,  who  published 
a  prospectus  stating  that  the  company  was  formed  "  for  the  purpose  of 
purchasing  and  working  the  extensive  and  valuable  mining  sets  known 
as  the  East  Pant  Du  and  Colomendy  Lead  Mines^^'  and  containing 
ver3'  favourable  representations  of  the  value  of  the  mines,  for  the  pur- 
chase of  which  the  compan\'  was  stated  to  have  arranged  for  £7000  — 
£4000  to  be  paid  in  cash,  and  £3000  in  shares  of  the  company. 

The  capital  was  fixed  at  £30,000,  divided  into  6000  shares  of  £5  each  ; 
but  only  2000  shares  had  been  taken  altogether,  on  which  £3940  had 
been  received.  This  money  was  paid  to  Merryweather,  and  600  shares 
were  registered  in  his  name  as  paid  up,  in  part  payment  of  the  £7000, 
the  alleged  price  of  the  mines. 

Upon  inquiries,  the  following  circumstances  were  discovered  in  refer- 
ence to  the  formation  of  the  compan}- :  Merryweather  applied  to 
Whitworth  to  assist  him  in  disposing  of  the  mines  in  question,  which 
he  held  under  an  agreement  for  a  lease  for  twenty-one  years,  and  had 
then  discovered  to  be  of  no  value.  Merryioeather  proposed  to  dispose 
of  his  interest  for  £4000,  and  the  scheme  concocted  between  himself 
and  Whitworth  was,  that  a  company  should  be  formed  for  the  purpose 
of  purchasing  and  working  the  mines,  which  were  to  be  sold  to  such 
company  for  £7000. 

Of  this  money  3Ierryxoeather  was  to  get  £4000,  while  the  remaining 
£3000  was  to  be  paid  to  Whitworth  for  his  assietance  in  getting  up  the 
company.  This  agreement  was  concealed  from  the  other  directors, 
who  were  induced  to  believe  that  £7000  was  bond  fide  to  be  paid  as  the 
purchase-money. 

A  committee  appointed  at  a  meeting  of  the  1st  of  June,  1864,  recom- 
mended by  their  report  that  the  undertaking  should  be  abandoned, 
steps  taken  to  relieve  the  compan}-  from  any  liability  on  the  contract, 
and  to  recover  back  the  money  alread}'  paid  by  the  shareholders. 

At  an  extraordinary  general  meeting  held  on  the  16th  of  June,  1864, 
a  resolution  was  passed  for  receiving  the  report  bj-  a  majority  of 
the  shareholders,  and  on  the  30th  of  June,  1864,  a  bill  was  filed  in  the 
name  of  the  company,  alleging  that  the  contract  for  the  purchase  of  the 
mine  had  been  fraudulenth'  obtained  by  the  Defendant  Merryweather^ 
and  was  void,  and  that  he  was  not  entitled  to  the  600  shares  allotted! 
to  him  in  respect  of  it,  and  praying  that  the  purchase  of  the  mine 
might  be  set  aside,  and  the  money  paid  returned  to  the  shareholders 
who  had  advanced  it. 

On  the  6th  of  July  Merryweather  and  Whittcorth  caused  notices  to 
be  issued  for  a  meeting  of  the  board  of  directors  "  to  consider  the 
course  to  be  taken  in  reference  to  the  Chancery  proceedings  which 
have  been  instituted  in  the  name  of  the  company."     At  the  meeting 


/vn 


r^ 


518  ATWOOL   V.    MEKEYWEATHER. 

held  on  the  9th  of  Juh'  Merryweather,  Whitworth  and  Ashworth  (the 
three  out  of  the  six  dh'ectors  present  at  the  meeting)  passed  a 
resolution  that  proceedings  should  be  taken  to  get  the  bill  taken 
off  the  file. 

On  the  1st  of  August,  1864,  the  Court  was  moved  to  take  the  bill  off 
the  file,  but  the  motion  was  ordered  to  stand  over  until  the  next  term 
in  order  to  give  an  opportunity  to  call  a  general  meeting  of  the  share- 
holders of  the  company  to  take  the  matter  into  consideration.  A 
meeting  was  accordingly  held  on  the  12th  of  October,  "  for  the  purpose 
of  taking  the  said  bill  into  consideration,  and  adopting  such  resolutions 
in  reference  thereto  as  the  meeting  maj-  determine  upon." 

A  resolution  was  proposed  for  adopting  and  continuing  the  Chancery 
proceedings,  whereupon  an  amendment  was  proposed  by  Whiticorth 
for  referring  all  matters  in  difference  between  the  shareholders  and 
Merryweather  to  arbitration,  and  for  staying  all  legal  proceedings. 
This  amendment  was  lost  by  11  votes  to  4  upon  a  show  of  hands, 
and  the  original  resolution  was  carried  by  10  to  4.  A  poll  having  been 
demanded  upon  the  amendment,  proxies  were  produced,  and  14  per- 
sons, holding  altogether  1070  shares  and  324  votes,  voted  against  the 
amendment,  and  12  persons,  holding  1490  shares  and  having  344 
votes,  voted  for  the  amendment.  But  excluding  the  votes  of  the 
Defendants  Merryioeather  and  Whitworth,  there  was  a  majority  of  86 
votes  against  the  amendment,  and  excluding  only  the  votes  of  Merrxj- 
weather  there  was  a  majority  against  it  of  58  votes.  The  motion 
to  take  the  bill  off  the  file  was  renewed,  and  on  the  5th  of  December, 
1864,  the  Vice-Chancellor  Sir  W.  P.  Wood  directed  the  bill  to  be 
taken  off"  the  file,  but  made  no  order  as  to  the  costs  of  the  motion. 
(See  2  H.  &  M.  254.) 

The  present  bill,  which  was  filed  on  the  14th  of  December,  1864,  by 
a  holder  of  100  shares  in  the  company  (purchased  on  the  faith  of  the 
statements  contained  in  the  prospectus),  suing  on  behalf  of  himself 
and  all  other  the  shareholders  in  the  £!ast  Pant  Pu  Company,  except 
the  Defendants,  against  Merryweather,  Whitworth,  and  the  company 
as  Defendants,  alleged  that  none  of  the  shareholders  in  the  company 
other  than  the  Defendants  were  desirous  that  the  contract  with  Merry- 
v;eather  should  be  carried  into  effect,  or  that  the  relief  prayed  should 
not  be  granted  ;  that  the  Defendants  had  altogether  106  votes  as  shave- 
holders  in  the  company,  and  obtained  the  proxies  of  the  other  share- 
holders who  voted  for  the  amendment  by  entering  into  engagements  to 
indemnify  them  against  loss  ;  "  and  such  votes,  together  with  the  afore- 
said 106  votes  of  the  said  Defendants,  constitute  a  majority  of  the 
shareholders'  votes  in  the  company." 

The  1)111  also  alleged,  that  even  without  such  proxies  the  106  votes 
held  by  the  Defendants  made  it  impossible  to  obtain  a  fair  decision  at 
a  general  meeting. 

The  bill  further  charged,  that  the  contract  was  obtained  by  misrep- 
sesentations  as  to  the  value,  with  full  knowledge  by  the  Defendants 


ATWOOL  V.    MERRYWEATHEE.  519 

that  the  mines  were  worthless,  that  £4000  was  an  exorbitant  price  for 

them,  and  that  no  other  portion  of  the  £7000  was  ever  intended  to 

be  treated  as  purchase-money  of  the  mines,  but  was  intended  to   be 

paid  to    Whitworth,  the  Defendants  having  become  promoters  of  theV        . 

company  solely  for  the  purpose  of  raising  the  £7000  for  their  own  pri-l      ^ 

vate  benefit;  that  these  facts  were  fraudulently  concealed  from  the; 

other  directors  and  shareholders,  and  that  if  they  had  been  disclosedj   ^  -^ 

the  company  never  would  have  contracted  to  purchase  the  mines.    The  (  1^^^ 

bill  pra3'ed  that  the  contract  for  the  purchase  of  the  mine  might  be  seti 

aside,  and  a  return  of  the  money  and  shares  received  by  Whitworth\ 

and  Merry  weather;  and  an  injunction  to  restrain  any  proceeding  to 

recover  the   balance   of  the   purchase-money ;    compensation   for   all 

damage  and  loss  occasioned  to  the  company,  and,  if  necessary,  that  the 

compan-y  might  be  dissolved  and  wound  up  under  the  direction  of  tho 

Court. 

Mr.  Kay,  Q.  C,  and  Mr.  Fry,  for  the  Plaintiff  :  — 

A  sufficient  case  of  fraud,  collusion,  and  suppression  has  been  shewn 
to  enable  the  Court  to  set  aside  the  contract,  and  it  is  competent  foi 
an  individual  shareholder  to  maintain  a  suit  for  setting  aside  the  con- 
tract, even  if  such  suit  were  opposed  by  a  majority  of  the  shareholders. 
But  that  is  not  the  case  here,  as,  by  excluding  the  votes  of  Merry- 
weather^  there  is  a  majority  in  favour  of  setting  aside  the  purchase  and 
winding  up  the  company :  Bromley  v.  Smith  (1  Sim.  8) ;  Preston  v. 
Grand  Collier  Dock  Company  (\\  Sim.  327);  Hichens  v.  Congreve 
(4  Russ.  562)  ;  Beck  v.  Kantorowicz  (3  K.  «Ss  J.  230) ;  Lovell  v. 
Hicks  (2  Y.  &  C.  Ex.  46,  481). 

Mr.  JDruce^  Q.  C,  and  Mr.  A.  E.  Miller^  for  Merryweathe)^ s  assig- 
nee :  — 

Upon  the  frame  of  the  suit,  the  contract  is  not  void,  but  merely 
voidable,  and  the  majorit}'  of  the  shareholders  may  confirm  it,  and 
bind  the  whole  body  for  that  purpose.  The  suit,  therefore,  in  its  pres- 
ent form,  is  improperl}'  framed  :  Foss  v.  Harhotile  (2  Hare,  461,  494)  ; 
and  the  proper  course  would  have  been  for  the  Plaintiff  to  have  filed  a 
bill  for  leave  to  use  the  name  of  the  company  against  the  parties  to  the 
contract.  Assuming  the  price  paid  for  the  mine  to  have  been  excess- 
ive, the  Plaintiff  may  have  a  case  for  making  the  directors  account,  but 
that  affords  him  no  locus  standi  as  against  the  vendors  for  setting 
aside  the  contract:  Pulsford  v.  Richards  (17  Beav.  87)  ;  Fraser  v. 
Whalley  (2  H.  &  M.  10). 

Mr.  Horsey,  for  Whitworth's  assignee. 

Mr.  Charles  Hall,  for  the  company. 
Sir  W.  Page  Wood,  V.  C.  :  — 

I  think  that,  upon  principle,  a  contract  of  this  kind  cannot  stand, 
and  that  there  is   not  such   a  defect  in  the   constitution  of  the  suit  as 
would  be  fatal  according  to  the  authority  of  Foss  v.  Harhottle  (2  Hare,  \ 
461). 

Looking  at  the  facts  as  they  come  out,  I  am  clearly  of  opinion  that 
this  arrangement,  by  which  Merryweather  was  to   have  £4000  and 


520  ATWOOL  V.    MERRYWEATHER. 

Whitioorth  £3000,  was  concealed  from  everybody,  and  that  Merry- 
weather  assisted  in  that  concealment  by  allowing  his  name  to  appear  as 
the  sole  vendor,  and  taking  the  pnrchase-money. 

Upon  such  a  transaction  the  Court  will  hold  that  the  whole  contract 
is  a  complete  fraud.  I  do  not  in  the  least  say  that  where  persons  with 
their  e3-es  open  know  that  the  agent  who  secures  them  the  bargain 
is  going  to  take  mone}'  for  it,  that  would  not  be  all  right  enough.  If  the 
company  knew  this  gentleman  was  to  have  this  amount  as  promotion- 
money,  well  and  good.  There  might  have  been  some  difficulty,  Mr. 
Whitii'orth  being  a  director,  if  it  had  been  a  sale  by  Merryioeather  and 
Whitioorth  eo  nomine,  both  of  them  together.  If  that  had  been  the 
case  more  might  have  been  said  about  the  frame  of  the  suit.  But  here 
it  is  a  simple  fraud,  and  nothing  else.  Merryweather  knowing  Whit- 
worth's  position  with  regard  to  the  company-,  and  that  as  an  honest 
man  Whitioorth  was  bound  to  tell  the  company  what  price  he  bought 
the  mines  for,  agreed  that  the  mine  should  be  sold  to  the  company  for 
£7000,  and  that  the  real  price,  £4000,  should  not  be  disclosed  to  the 
com  pan}'. 

With  regard  to  the  frame  of  the  suit,  a  question  of  some  nicet}'  arises 
how  far  such  relief  can  be  given  at  the  instance  of  a  shareholder  on 
behalf  of  himself  and  other  shareholders  on  the  ground  that  the  trans- 
action might  be  confirmed  by  the  whole  body  if  they  thought  fit,  and 
that  the  case  would  fall  within  Foss  v.  Harbottle^  according  to  which 
the  suit  must  be  by  the  whole  company.  On  the  previous  occasion^ 
when  it  was  desired  to  take  proceedings  to  set  aside  this  transaction,  a 
gentleman  took  upon  himself  to  file  a  bill  in  the  name  of  the  compan}'. 
A  motion  was  made  to  take  that  bill  off  the  file,  as  the  person  filing  the 
bill  was  not  tlie  solicitor  of  the  compan}',  and  was  not  authorized 
to  file  the  bill,  and  I  ordered  the  bill  to  be  taken  off  the  file.  There 
was  a  majority  against  setting  aside  this  transaction.  The  number  of 
votes  for  rescinding  the  transaction  was  324,  and  344  the  other  way. 
But  Merryioeather,  in  respect  of  the  shares  obtained  b}'  this  sale,  which 
I  have  held  cannot  stand,  had  78  votes,  and  Whitworth  28,  mak- 
ing altogether  lOG  out  of  the  344.  If  I  were  to  hold  that  no  bill 
could  be  filed  b}'  shareholders  to  get  rid  of  the  transaction  on  the 
ground  of  the  doctrine  of  Foss  v.  Harbottle,  it  would  be  simply  im- 
possible to  set  aside  a  fraud  committed  by  a  director  under  such  cir- 
cumstances, as  the  director  obtaining  so  many  shares  b}'  fraud  would 
always  be  able  to  outvote  everybody  else.  I  held  on  a  former  occasion, 
and  I  adhere  to  that  decision,  that  the  Court  must  first  be  satisfied 
.that  the  Plaintiffs  were  authorized  to  call  themselves  the  compan}',  the 
Bolicitor  who  put  the  bill  upon  the  file  having  no  retainer  under  the 
corporate  seal. 

This  bill  being  filed  by  the  Plaintiff  on  behalf  of  himself  and  the  other 
shareholders,  it  is  suggested  that  the  proper  course  would  be  to  file  a 
rtill  on  behalf  of  himself  and  the  other  shareholders  for  leave  to  use  th<s 
uame  of  the  company,  in  order  to  set  aside  that  contract.     I  do  not 


riTZWATER   V.    NATIONAL  BANK   OF   SENECA. 


521 


think  that  circuitous  course  is  necessarj'  under  any  circumstances.  It  I 
is  quite  clear  that  it  is  not  necessary  here,  because  in  this  case  the  pur-  I 
chase  of  the  mines  is  the  only  thing  for  which  this  company  was  incor- 
porated. It  appears  to  me  that  it  would  not  be  competent  for  a  major- 
it}'  of  the  sliareholders  against  a  minority  to  sa\'  that  they  insist  upon 
a  matter  of  tliat  kind  where  the  whole  inception  of  the  company  is 
simply  a  motion  b}-  a  fraudulent  agent,  qua  director,  to  confirm  a  pur- 
chase as  made  for  £7000,  which  was  made  for  £4000.  The  whole 
thing  was  obtained  b}-  fraud,  and  the  persons  who  may  possibly  form  a 
majority  of  the  shareholders,  could  not  in  any  wa^-  sanction  a  transac- 
tion of  that  kind. 

I  think  in  this  particular  case  it  is  hardly-  necessary  to  relj'  upon 
that,  because,  having  it  plainly  before  me  that  I  have  a  majority  of  the 
shareholders,  independent  of  those  implicated  in  the  fraud,  supporting 
the  bill,  it  would  be  idle  to  go  through  the  circuitous  course  of  saying 
that  leave  must  be  obtained  to  file  a  bill  for  the  company,  and  pro 
forma  have  a  totally  different  litigation.  The  only  course  now  to  take 
is  to  set  aside  the  contract  for  sale  and  purchase  of  the  mines,  and 
cancel  the  agreement  for  such  sale.  The  purchase-money  must  be  re- 
paid with  interest,  and  the  share  certificates  given  to  Mtrryineather, 
delivered  up.  The  profits  made  by  the  company  to  be  set  off,  and  the 
company-  to  have  a  lien  for  the  balanc^  I  i|iall  also  declare  that  the? 
company  ought  to  be  wopngupj   _jV         ./    Ic^  ^       '^*  ^ 


^ 


y 


r^ 


riTZWATBKVX^9i3^AV'^Jfe£^     SEXECA  et  at"  y\  ^"^  ^    V 

1900.     Si^i^  Cd^t. of  KanM  QlKPaciJic  Reporter,  (iSiA  y  \x    /T  Vy     > 


ys 


The  National  Bank  oT  Seneca  brought  an  action  against  the  State  |^ 
Bank  of  Seneca,  to  recover  for  money  loaned.  The  State  Bank  made  <^ 
default  in  tlie  suit.  Thereupon  certain  of  its  stockholders  (a  minority) 
filed  a  motion  to  be  allowed  to  defend  in  the  place  of  the  corporation, 
alleging  the  lack  of  power  of  the  corporation  officers  to  incur  the  obli- 
gations sued  upon ;  also  that  such  obligations  were  given  without  con- 
sideration and  in  fraud  of  the  corporation  and  its  stockholders  ;  and 
that  the  officers  of  the  defendant  corporation,  being  the  same  as  those 
of  the  plaintiff  corporation  and  being  the  ones  guilty  of  the  wrongful 
acts  charged,  had  neglected  to  defend  as  they  should  have  done.  In 
connection  with  the  motion  to  be  allowed  to  intervene,  the  stockhold- 
ers tendered  a  verified  answer,  setting  up  all  the  matters  herein  briefly 
mentioned ;  and  asked  that  they  be  allowed  to  file  it,  and  under  it  be 
allowed  to  defend  for  their  corporation. 

The  case  was  heard  upon  the  motion  for  leave  to  intervene  and  to 
1  Statement  condensed  from  opinion.  —  Ed. 


h 


522  FITZWATER   V.    NATIONAL   BANK   OF   SENECA. 

file  the  answer.  Considerable  evidence  was  taken,  much  of  which 
tended  quite  strongly  to  support  the  contention  of  the  stockholders. 

The  court  below  overruled  the  motion,  and  the  stockholders  brought 
error. 

DOSTEE,  C.  J.   .   .   . 

.  .  .  the  trial  that  was  had  was  not  a  final  trial,  but  only  a  trial  of 
the  motion  for  leave  to  intervene  and  have  a  trial.  In  other  words, 
the  trial  that  was  had  was  not  the  trial  proper,  but  was  a  trial  of  the 
preliminary  question  as  to  whether  a  tri&,l  should  be  had. 

There  can  bejiojjuestion  but  j;hat  stockholders  are  entitled  to  de- 
fend legal^proceedings  in  behalf  of  their  corporation  in  case  its  direct- 
ors  or  managing  agents  are  wilfully  or  fraudulently  neglectful  of  its 
interests.^  Mining  Co.  v.  McKibben,  60  Kan.  387,  56  -Pac.  756.  In 
that  case  it  was  said :  "  If  the  directors  be  derelict  in  their  duties,  and 
through  wilful  neglect,  or  for  a  fraudulent  purpose,  fail  to  protect  the 
corporate  interests,  the  stockholders  may  do  so  in  their  stead ;  but,  to 
entitle  them  to  do  so,  it  must  be  made  to  appear  that  the  corporate 
officers  who  are  primarily  charged  with  the  duty  are  wilfully  or  fraud- 
ulently neglectful  of  it."  A  proper  practice  in  such  cases  is  for  the 
stockholders  to  move  the  court  for  leave  to  intervene  in  the  suit  they 
wish  to  defend,  and  to  allege  and  show  that  the  authorized  and  man- 
aging agents  of  the  company  are  derelict  in  their  duties.  Before  allow- 
ing this  privilege  to  the  stockholders,  the  courtshould  require  of_them 
a  prima^/actejtiowm  that  showing^ieed  jiot_^e  more 

Than  sl  prima  facie  one,  — -enough  to  enable  the  court  to  conclude  that 
there  are  reasonable  grounds  to  believe  that  the  corporation  defendant 
Eas~a  meritorious~^def  ence  to  the  action  againstit,  and  that  its  officers 


areiraudulently  or  improvidently  neglectful  of  its  interests.  This 
showing~wa^  made~In  the  case  we  are  considering.  Irrespective  of 
the  matters  of  fraud  charged  in  the  motion  and  answer,  and  to  sup- 
port which  there  was  some  showing  of  testimony,  it  would  seem  that, 
if  the  National  Bank  of  Seneca  was  the  State  Bank  of  Seneca  reor- 
ganized, such  last-named  bank  had  no  authority  to  contract  the  obliga- 
tions sued  upon.  Rather,  it  had  no  existence,  and,  having  no  exist- 
ence, the  contracting  of  a  debt  cannot  be  predicated  of  it.  Smith, 
Dig.  Nat.  Bank  Dee.  215.  However,  we  do  not  wish  to  be  understood 
as  making  such  decisions  at  this  time.  We  only  remark,  as  we  did 
before,  that  such  seems  to  be  the  rule  of  the  cases  upon  the  subject. 
If  such  be  the  law,  tliere  can  be  no  question,  unless  some  exceptional 
facts  exist,  that  the  old  corporation  had  no  power  to  contract  the  obli- 
gations sued  upon,  and  the  stockholders,  therefore,  would  be  justified 
in  asking  leave  to  defend.  Hence  we  are  of  the  opinion,  upon  the 
showing  made,  that  the  court  should  have  sustained  the  motion  of 
intervention,  should  have  allowed  the  filing  of  the  answer  and  the 
making  of  an  issue  thereon,  and  sliould  have  allowed  a  full  trial  of 
the  case.  To  enable  such  to  be  done,  the  judgment  of  the  court  below 
is  therefore  reversed.     All  the  justices  concurring. 


V.    DOWS. 


523 


Because  the  railroad  company  was   not   made  a  party  to 
Because    the    complainant   had    a    complete    remedj'  at 


V  'y  ^0■'^>'"  "'''"'""  "'■  ■'■'■ '"''  'i^''  "^-^A 

Appeal  from  tlie  Circuit  Court  for  the  District  of  Iowa.  r    Q  (T     (K^  P^ 

Dows,  a  citizen  of  New  York,  in  belialf  of  himself  and  all  other  non-^    ->    jr"  ir/ii^  ' 
resident  citizens  of  Iowa,  who  were  stockholders  in  tlie  Chicago,  Rock  ^iVr*^      ^ 
Island,  and  Pacific  Railroad  Company,  filed  a  bill  in  the  court  below  fl/^  \^  J   t  \, 
against  the  city  of  Davenport,  and  its  marshal,  to  arrest  the  collection    ^    p^ 
of  a  tax,  alleged  to  be  illegal,  levied  b}'  the  said  city  for  general  revenue  'X   /^      ^ 
purposes,  on  the  property  of  the  company  within  its  limits.     The  bill  /^  -^y^ 
assigned  as  a  reason  for  its  being  filed  by  Dows,  a  stockholder  in  the    ^>-^      y. 
company,  instead  of  by  the  compan}'  itself,  that  the  company-  neglected       .  <^  )  v 
and  refused  to  take  action  on  the  subject.     A  demurrer  was  mterposed  f^    i^ 
to  the  bill,  which  was  overruled,  and  on  the  defendants  refusing  to,i«^     J 
answer  over,  the  Circuit  Court  ordered  that  the  collection  of  the  tax  be      i  ^      ,      !> 
perpetual!}'  enjoined.     From  this,  its  action,  the  defendants  appealed,  ^\4J^     Oy^\ 
insisting  that  the  Circuit  Court  erred  in  overruling  the  demurrer,  for 
three  reasons  : 

I^irst. 
the  bill. 

Second. 
law;  and,  5^_    j^    ^J'^aJ/' 

Third.     Because  the  tax  in  question  was  a  proper  charge  against   .^^  .yy^r^^    L  ^^ 
the  property  of  the  corporation.  ^j^.y^ ^     3 

Mr.   J.   N.   Bogers  for   the  appellants ;  Mr.    T.  F.    Witherotc^  V(> 
contra. 

Mr.  Justice  DAVIS  delivered  the  opinion  of  the  court. 

It  is  unnecessar}'  to  notice  the  last  two  reasons  assigned,  why  the 
demurrer  should  not  have  been  overruled,  as  the  first  is  well  taken. 
Indeed,  it  would  be  improper  to  pass  on  the  merits  of  the  controversy 
until  the  proper  parties  to  be  affected  b}'  the  decision  are  before  the 
court. 

That  a  stockholder  maj'  bring  a  suit  when  a  corporation  refuses  is 
settled  in  Dodge  v.  Woolsey,^  but  such  a  suit  can  only  be  maintained 
on  the  ground  that  the  rights  of  the  corporation  are  involved.  These 
rights  the  individual  shareholder  is  allowed  to  assert  in  behalf  of  himself 
and  associates,  because  the  directors  of  the  corporation  decline  to  take 
the  proper  steps  to  assert  them.  Manifestl}-  the  proceedings  for^tbis 
purposeshould  be^o  conducted  thatany  decree^which  shall  be^  made 
on  the  merits  shall  conclude  the  corporation.  This  can  onl}-  be  done 
Ijvjnaking  the  corporation  a  part}'  defendant.  The  relieT  asked  is  on^ 
behalf  of  the  corporation,  not  the  individual  shareholder,  and  if  it  be 
granted  the  complainant  derives  only  an  incidental  benefit  from  it.  It, 
would  be  wrong,  in  case  the  shareholder  were  unsuccessful,  to  allow 


l^o^'e^'^^^^ 


f^ 


K 


1  18  Howard,  340. 


524 


HAWES  V.    OAKLAND. 


the  corporation  to  renew  the  litigation  in  anothet  suit,  involvino;  pre- 
cisely tlie  same  subject-matter.     To_jvvoid^  such  a^^esult.  a  court  of 


equit}'  will  not  take  cognizai]cej)£ajjillj2rong]it  to  sottlp  a  question  in 
which  the  corporation  is  the  essential  party  in  interest,  unless  it  is 
made  a  parj}^toJhg3itigation.^ 

In  this  case  the  tax  sought  to  be  avoided  was  assessed  against  the 
Chicago,  Rock  Island,  and  Pacific  Railroad  Company,  and  the  decree 
rendered  discharges  the  company  from  the  payment  of  this  tax.  The 
corporation,  therefore,  should  have  been  made  a  party  to  the  suit,  and 
as  it  was  not,  the  demurrer  should  have  been  sustained. 

Decree  reversed,  and  the  cause  remanded  for  further  proceedings, 

In  conformity  with  this  opinion. 


1 


III'''-'' 


*^'%^.r^ 


fc>v- 


HAWES 


1881. 


OAKLAN] 


104  U.  S.  450.2 

I^yl^-PFEAL  from  the  Circuit  Court  of  the  United  States  for  the  District 
I  of  California. 

The  facts  are  stated  in  the  opinion  of  the  court. 

Mr.  Charles  JV.  Fox  for  the  appellant. 

Mr.  Henry  Vrootncm  for  the  appellees. 

Mr.  Justice  Miller  delivered  the  opinion  of  the  court, 
his  is  an  appeal  from  a  decree  in  chancery  dismissing  the  com- 
plainant's bill,  wherein  he,  a  citizen  of  New  York,  alleges  that  he  is  a 
stockholder  in  the  Contra  Costa  AVater-works  Company,  a  California 
corporation,  and  that  he  files  it  on  behalf  of  himself  and  all  other 
stockholders  who  may  choose  to  come  in  and  contribute  to  the  costs 
and  expenses  of  the  suit. 

The  defendants  are  the  city  of  Oakland,  the  Contra  Costa,  Water- 
woijvs_C(ampaiw,  and  Anthony  Chabot,  Henry  Pierce,  Andrew  J.  Pope, 
CHarles  IIoIBrook,  and  John  W.  Coleman,  trustees  and  directors  of 
the  company. 

The  foundation  of  the  complaint  is  that  the  city  of  Oakland  claims 
at  the  hands  of  the  company  water,  without  compensation,  for  all 
municipal  purposes  whatever,  including  watering  the  streets,  public 
squares  and  parks,  flushing  sewers,  and  the  like,  whereas  it  is  only 


1  Robinson  v.  Smith,  3  Paige,  222,  233  ;  Cunningham  v.  Pell,  5  Id.  607;  Hersey  v.  Veazie, 
24  Maine,  1;  Charleston  Insurance  and  Trust  Co.  v.  Sebring,  5  Richardson,  Equit}-,  342; 
Western  Railroad  Co.  v.  Nolan,  48  New  York,  573;  Bagshaw  v.  Eastern  Union  Railroad  Co., 
7  Hare,  114-131. 

2  Portions  of  opinion  omitted.  —  Ea 


\a^ 


HAWES   V.    OAKLAND.  jj-tV^l    52^         ,  ^-'     ^'^ 

■■■'■      '  (■.^'      ,     ■ 

entitled  to  receive  water  free  of  charge  in  cases  of  fire  or  other  great 
•neccssit}- ;  that  the  company  comply  with  this  demand,  to  the  great 
loss  and  injury  of  the  company,  to  the  diminution  of  the  dividends 
which  should  come  to  him  and  other  stockholders,  and  to  the  decrease 
in  the  value  of  their  stock.  The  allegation  of  his  attempt  to  get  the 
directors  to  correct  this  evil  will  be  given  in  the  language  of  the  bill. 

He  says  that /' on  the  tenth  day  of  July,  1878,  he  applied  to  the 
president  and  board  of  directors  or  trustees  of  said  water  company, 
and  requested  them  to  desist  from  their  illegal  and  improper  practices 
aforesaid,  and  to  limit  the  suppl}'  of  water  free  of  charge  to  said  city 
to  cases  of  fire  or  other  great  necessit}',  and  that  said  board  should 
take  immediate  proceedings  to  prevent  said  city  from  taking  water 
from  the  works  of  said  company  for  any  other  purpose  without  com- 
pensation ;  but  said  board  of  directors  and  trustees  have  wholly  declined  ( 
to  take  any  proceedings  whatever  in  the  premises,  and  threaten  to  go  ) 
on  and  furnish  water  to  the  extent  of  said  company's  means  to  said 
cit}'  of  Oakland  free  of  charge,  for  all  municipal  purposes,  as  has  here- 
tofore been  done,  and  in  cases  other  than  cases  of  fire  or  other  great 
necessit}',  except  as  for  family  uses  hereinbefore  referred  to  ;  and  your 
orator  avers  that  by  reason  of  the  premises  said  water  company  and  3'our 
orator  and  the  other  stockholders  thereof  have  suffered,  and  will,  by  a 
continuance  of  said  acts,  hereafter  suffer,  great  loss  and  damage." 

To  this  bill  the  water-works  company'  and  the  directors  failed  to 
make  answer;  and  the  city  of  Oakland  filed  a  demurrer,  which  was 
sustained  b}'  the  court  and  the  bill  dismissed.  The  complainant  ap- 
pealed. 

Two  grounds  of  demurrer  were  set  out  and  relied  on  in  the  court 
below,  and  are  urged  upon  us  on  this  appeal.     They  are :  — 

1.  That  appellant  has  shown  no  capacity  in  himself  to  maintain  this  I    'v.      ■ , 
suit,  the  injur}',  if  any  exists,  being  to  the  interesti  of  the  corporation,  I    r^ 
and  the  right  to  sue  belonging  solely  to  that  body.  ' 

2.  That  by  a  sound  construction  of  the  law  under  which  the  company  / 
is  organized  the  city  of  Oakland  is  entitled  to  receive,  free  of  compen-  / 
sation,  all  the  water  which  the  bill  charges  it  with  so  using. 

The  first  of  these  causes  of  demurrer  presents  a  matter  of  very 
great  interest,  and  of  growing  importance  in  the  courts  of  the  United 
States. 

Since  the  decision  of  this  court  in  Dodge  v.  Woolsey  (18  How.  331), 
the  principles  of  which  have  received  more  than  once  the  approval  of 
this  court,  the  frequency  witli  which  the  most  ordinary  and  usual 
chancer}'  remedies  are  sought  in  the  Federal  courts  by  a  single  stock- 
holder of  a  corporation  who  possesses  the  requisite  citizenship,  in  cases 
where  the  corporation  whose  rights  are  to  be  enforced  cannot  sue  in 
those  courts,  seems  to  justify  a  consideration  of  the  grounds  on  which 
that  case  was  decided,  and  of  the  just  limitations  of  the  exercise  of 
those  principles. 

This  practice  has  grown  until  the  corporations  created  by  the  laws 


526 


HAWES   V.    OAKLAND. 


of  the  States  bring  a  large  part  of  their  controversies  with  their  neigh- 
bors and  fellow-citizens  into  the  courts  of  the  United  States  for  adjudi- 
cation, instead  of  resorting  to  the  State  courts,  which  are  their  natural, 
their  lawful,  and  their  appropriate  forum.  It  is  not  difficult  to  see  how 
this  has  come  to  pass.  A  corporation  having  such  a  controvei-sj-, 
which  it  is  foreseen  must  end  in  litigation,  and  preferring  for  an}' 
reason  whatever  that  this  litigation  shall  take  place  in  a  Federal  court, 
j/1  >v^  '"  which  it  can  neither  sue  its  real  antagonist  nor  be  sued  b}-  it,  has 

i_^     ,>  <A  •     recourse  to  a  holder  of  one  of  its  shares,  who  is  a  citizen  of  another 
State.     This  stockholder  is  called  into  consultation,  and  is  told  that 
his  corporation  has  rights  which  the  directors  refuse  to  enforce  or  to 
protect.     He  instantly  demands  of  them  to  do  their  dut}'  in  this  regard, 
which  of  course  they  fail  or  refuse  to  do,  and  thereupon  he  discovers 
that  he  has  two  causes  of  action  entitling  him  to  equitable  relief  in  a 
(j  "  ~  .A  court  of  chancer}' ;  namely,  one  against  his  own  company,  of  which  he 
^f/^^is  a  corporator,  for  refusing  to  do  what  he  has  requested  them  to  do ; 
^      .        and  the  other  against  the  party  which  contests  the  matter  in  contro- 
versy with  that  corporation.     These  two  causes  of  action  he  combines 
iy^       in  an  equit}-  suit  in  the  Circuit  Court  of  the  United  States,  because  he 
V<       1^^  citizen  of  a  different  State,  though  the  real  parties  to  the  contro- 
jL/f  versy  could  have  no  standing  in  that  court.     If  no  non-resident  stock- 
^    .  ^holder  exists,  a  transfer  of  a  few  shares  is  made  to  some  citizen  of 
^  ff^  another  State,  who  then  brings  the  suit.     The  real  defendant  in  this 
A^  action  ma}'  be  quite  as  willing  to  have  the  case  tried  in  the  Federal 

(Z"  \)    v-A   4<t/^*      court  as  the  corporation  and  its  stockholder.      If  so,  he  makes  no 
^^•^\lC       (>x^  objection,  and  the  case  proceeds  to  a  hearing.     Or  he  may  file  his 
4-  .  L>'      ,        answer  denying  the  special  grounds  set  up  in  the  bill  as  a  reason  for 

^^^^\^r^\     T^x^*'*^  the  stockholder's  interference,  at  the  same  time  that  he  answers  to  the 
^'~  "       -  ■  erits.     In  either  event  the  whole  case  is  prepared  for  hearing  on  the 

rits,  the  right  of*the  stockholder  to  a  standing  in  equity  receives 
but  little  attention,  and  the  overburdened  courts  of  the  United  States 
have  this  additional  important  litigation  imposed  upon  them  by  a  simu- 
lated and  conventional  arrangement,  unauthorized  by  the  facts  of  the 
case  or  by  the  sound  principles  of  equity  jurisdiction. 

That  the  vast  and  increasing  proportion  of  the  active  business  of 
modern  life  which  is  done  by  corporations  should  call  into  exercise  the 
beneficent  powers  and  flexible  methods  of  courts  of  equity,  is  neither 
to  be  wondered  at  nor  regretted ;  and  this  is  especially  true  of  con- 
troversies growing  out  of  the  relations  between  the  stockholder  and 
the  corporation  of  which  he  is  a  member.  The  exercise  of  this  power 
in  protecting  the  stockholder  against  the  frauds  of  the  governing  body 
of  directors  or  trustees,  and  in  preventing  their  exercise,  in  the  name 
of  the  corporation,  of  powers  which  are  outside  of  tlieir  charters  or 
articles  of  association,  has  been  frequent,  and  is  most  beneficial,  and 
is  undisputed.  These  are  real  contests,  however,  between  the  stock- 
holder and  the  corporation  of  which  he  is  a  member. 
The  case  before  us  goes  beyond  this. 


HAWES  V.    OAKLAND.  527 

This  corporation,  like  others,  is  created  a  bod}*  politic  and  corporate, 
that  it  may  in  its  corporate  name  transact  all  the  business  which  its 
charter  or  other  organic  act  authorizes  it  to  do. 

Such  corporations  may  be  common  carriers,  bankers,  insurers,  mer- 
chants, and  may  make  contracts,  commit  torts,  and  incur  liabilities, 
and  may  sue  or  be  sued  in  their  corporate  name  in  regard  to  all  of 
these  transactions.  The  parties  who  deal  with  them  understand  this, 
and  that  they  are  dealing  with  a  body  which  has  these  rights  and  is 
subject  to  these  obligations,  and  they  do  not  deal  with  or  count  upon 
a  liability  to  the  stockholder  whom  they  do  not  know  and  with  whom 
they  have  no  privity  of  contract  or  other  relation. 

The  principle  involved  in  the  case  of  Dodge  v.  Woolsey  permits  the 
stockholder  in  one  of  these  corporations  to  step  in  between  that  cor- 
poration and  the  party  with  whom  it  has  been  dealing  and  institute  and 
control  a  suit  in  which  the  rights  involved  are  those  of  the  corporation, 
and  the  controversy  is  one  really  between  that  corporation  and  the  I 
other  party,  each  being  entirely  capable  of  asserting  its  own  rights. 

This  is  a  \Qvy  different  affair  from  a  controversy  between  the  share- 
bolder  of  a  corporation  and  that  corporation  itself,  or  its  managing 
directors  or  trustees,  or  the  other  shareholders,  who  may  be  violating 
his  rights  or  destroying  the  property  in  which  he  has  an  interest.  Into 
such  a  contest  the  outsider,  dealing  with  the  corporation  through  its 
managing  agents  in  a  matter  within  their  authorit}-,  cannot  be  dragged, 
except  where  it  is  necessary  to  prevent  an  absolute  failure  of  justice 
in  cases  which  have  been  recognized  as  exceptional  in  their  character 
and  calling  for  the  extraordinary'  powers  of  a  court  of  equitj-.  It  is, 
therefore,  always  a  question  of  equitable  jurisprudence,  and  as  such  has, 
within  the  last  forty  j'ears,  received  the  repeated  consideration  of  the 
highest  courts  of  England  and  of  this  countr\'. 

[The  learned  judge  here  cited,  and  commented  on,  various  cases; 
especially  Foss  v.  Harhottle,  2  Hare,  461 ;  Gray  v.  Lewis,  L.  R.  8 
Chan.  Ap.  1035,;  MacDougall  v.  Gardiner^  L.  R.  1  Chan.  Div.  13  ; 
and  Dodge  v.  Woolsey,  18  Howard,  331.  The  opinion  then  proceeds 
as  follows  :] 

This  examination  of  Dodge  v.  Woolsey  satisfies  us  that  it  does  not 
establish,  nor  was  it  intended  to  establish,  a  doctrine  on  this  subject 
different  in  any  material  respect  from  that  found  in  the  cases  in  the 
English  and  in  other  American  courts,  and  that  the  recent  legislation 
of  Congress  referred  to  leaves  no  reason  for  an}-  expansion  of  the  rule 
in  that  case  beyond  its  fair  interpretation. 

We  understand  that  doctrine  to  be  that  to  enable  a  stockholder  in  /  „  -i 
a  corporation  to  sustain  in  a  court  of  equity-  in  his  own  name,  a  suit  (^ 
founded  on  a  right  of  action  existing  in  the  corporation  itself,  and  in 
which  the  corporation  itself  is  the  appropriate  plaintiff,  there  must  exist, 
as  the  foundation  of  the  suit  — 

Some  action  or  threatened  actiori^f  the  managing  board  of  directors 
^r  trustees  of  thecorporation  which  is  beyond  the  authority  conferred 
on  them  by  their  charter  or  other  source  of  organization  ; 


528 


HAWES   V.    OAKLAND. 


y 


>r^ 


Or  such  a^  fraudulent  transaction  completed  or  coatem|jlatcd  by  the 
acting  managers,  in  connection  with  some J0tlleJ:4^J,rt;J^JJ0rJlmong  them- 
iseh-e^or  with  other  shareholders_aa.  will  ..rp..sii1t.,m^erious  injury  to  the 
corporation,  or  to  the  interests  ofjLhe-othm:  shareholders  ; 

Or  where  tlie  board  of  directors,  or  a  majority  of^  them,  are  acting 
forjheir  owninterest,  in  a  manner  destructive  of  the  corporation  itself. 

3         1  or_of  thejnghts  of  the^other  shareholders  ; 
Or  where  the^  majority  of  shareholders  themselves  are  oppressively 
and^llegallyj3ursuing  a  course  „in  thejiame_of  the  corporation^jvhich 
I  is^in  violation  of  the^  rights  of  the  other  shareholders^and  which  can 

IT  only_be  restrained  bjLthe  aid  of  a  court  of  equity.  _  ^ 

'  Possibh'  other  cases  may  arise  in  which,  to  prevent  irremediable 
injur}',  or  a  total  failure  of  justice,  the  court  would  be  justified  in 
exercising  its  powers,  but  the  foregoing  may  be  regarded  as  an  outline 
of  the  principles  which  govern  this  class  of  cases. 

Bufe,^!''  addition  to  the  existence  of  grievances  which  call  for  this 
^fixl  of  relief,  it  is  equally  important  that  before  the  shareholder  is 
permitted  in  his  own  name  to  institute  and  conduct  a  litigation  which 
"^jLj^  usually  belongs  to  the  corporation,  he  should  show  to  the  satisfaction 
^  1-  of  the  court  that  he  has  exhausted  all  the  means  within  his  reach  to 
obtain,  within  the  corporation  itself,  the  redress  of  his  grievances,  or 
action  in  conformity  to  his  wishes.  He  must  make  an  earnest,  not  a 
simulated  effort,  with  the  managing  body  of  the  corporation,  to  induce 
remedial  action  on  their  part,  and  this  must  be  made  apparent  to  the 
court.  If  time  permits  or  has  permitted,  he  must  show,  if  he  fails 
with  the  directors,  that  he  has  made  an  honest  effort  to  obtain  action 
by  the  stockholders  as  a  body,  in  the  matter  of  which  he  complains. 
And  he  must  show  a  case,  if  this  is  not  done,  where  it  could  not  be 
;lone,  or  it  was  not  reasonable  to  require  it. 

The  efforts  to  induce  such  action  as  complainant  desires  on  the  part 
of  the  directors,  and  of  the  shareholders  when  that  is  necessary,  and 
the  cause  of  failure  in  these  efforts  should  be  stated  with  particularity, 
and  an  allegation  that  complainant  was  a  shareholder  at  the  time  of  the 
transactions  of  which  he  complains,  or  that  his  shares  have  devolved 
on  him  since  by  operation  of  law,  and  that  the  suit  is  not  a  collusive 
one  to  confer  on  a  court  of  the  United  States  jurisdiction  in  a  case  of 
which  it  could  otherwise  have  no  cognizance,  should  be  in  the  bill, 
which  should  be  verified  by  aflidavit. 

It  is  needless  to  say  that  appellant's  bill  presents  no  such j;asc  as  we 
have  here  supposed  to  be  ^necessary  to  the  jurisdiction  ofjhe  court. 

He  merely^avers  that  he  requested  the  president  and  directors  to 
desist  from  furnishing  water  free  of  expense  to  the  city,  except  in  case 
of  fire  or  otlicr  great  necessity-,  and  that  they  declined  to  do  as  he 
requested.  No  correspondence  on  the  subject  is  given.  No  reason 
for  declining.  We  have  here  no  allegation  of  a  meeting  of  the  direc- 
tors, in  which  the  matter  was  formally  laid  before  them  for  action.  No 
uttenii)t  to  consult  the  other  shareholders  to  ascertain  their  opinions,  or 


DUNPHY   V.    TEAVELLER   NEWSPAPER   ASSOCIATION.  529 

obtain  their  action.     But  within  five  days  after  his  application  to  the 
directors  this  bill  is  filed.     There  is  no  allegation  of  fraud  or  of  acts  I 
ultra  vii'es,  or  of  destruction  of  propert}',  or  of  irremediable  injur}'  of  j 
an}'  kind. 

Conceding  appellant's  construction  of  the  company's  charter  to  be 
correct,  there  is  nothing  which  forbids  the  corporation  from  dealing 
with  the  city  in  the  manner  it  has  done.  That  city  conferred  on  the 
company  valuable  rights  by  special  ordinance ;  namely,  the  use  of  the 
streets  for  laying  its  pipes,  and  the  privilege  of  furnishing  water  to 
the  whole  population.  It  may  be  the  exercise  of  the  highest  wisdom 
to  let  the  city  use  the  water  in  the  manner  complained  of.  The  direc- 
tors are  better  able  to  act  understanding!}-  on  this  subject  than  a  stock- 
holder residing  in  New  York.  The  great  body  of  the  stockholders 
residing  in  Oakland  or  other  places  in  California  may  take  this  view 
of  it,  and  be  content  to  abide  by  the  action  of  their  directors. 

If  this  be  so,  is  a  bitter  litigation  with  the  city  to  be  conducted  by 
one  stockholder  for  the  corporation  and  all  other  stockholders,  because 
the  amount  of  his  dividends  is  diminished  ? 

This  question  answers  itself,  and  without  considering  the  other  point 
raised  by  the  demurrer,  we  are  of  opinion  that  it  was  properly  sustained,  , 

and  the  bill  dismissed,  because  the  appellant  shows  no  standing  in  a       / 
court  of  equity  —  no  right  in  himself  to  prosecute  this  suit.  l^  /I  > 

Decree  affirmed.  ^   f  t  /  r    b  |^ 


/ 


KxowLTox,  J.,  IN  DUNPHY  v.   TEAVELLER 
ASSOCIATION. 


1888.     146  Massachusetts,  495,  p.  498.  "    •'   y 

Knowlton,  J.  .  .  .  The  only  exception  tO/t]b8  rule  that  a  stock 
holder  must  apply  to  the  directorsTand  alsoif  need  beto  the  corpora- 
tTon^  forredress  of  a  wrong~done  it;,_before  he  can  sue  in  a  court  oi. 
equity,  for  himself  ancT  in  behalf  of  other  stockho]^derSiTs_  when  it 
appeai^s~that"sucli  application  would  be  unavailing  to  protect  bis  rights. 

1  The  following  "  Additional  Rule  of  Practice  in  Equity,"  No.  94,  was  promul- 
gated by  the  U.  S.  Supreme  Court,  Jan.  23,  1882,  and  is  printed  in  vol.  104  U.  S. 
Preface,  ix. :  —  ^ 

"  Every  bill  brought  by  one  or  more  stockholders  in  a  corporation,  against  the  cor-^        ^     •        i 
poration  and  other  parties,  founded  on  rights  which  may  properly  be  a.<serted  by  thel  \jf/  /I  Jr 

corporation,  must  l)e  verified  by  oath,  and  must  contain  an  allegation  that  the  plaintiff  J  i^   no'     OA 
was  a  shareholder  at  the  time  of  the  transaction  of  which  he  complains,  or  that  his(    /v'iila"^^      3« 
share  had  devolved  on  him  since  by  operation  of  law  ;  and  that  the  suit  is  not  a  collusive  I   /        r    o^ 
one  to  confer  on  a  court  of  the  United  States  jurisdiction  of  a  case  of  wliich  it  would      i  \S- 
not  otherwise  have  cognizance.     It  must  alst)  set  forth  with  particularity  the  efforts  off  oV 
the  plaintiff  to  secure  such  action  as  he  desires  on  the  part  of  the  managing  directors!      ' 
or  trustees,  and,  if  necessary,  of  the  shareholders,  and  the  causes  of  his  failure  to  | 
obtain  such  action." 


530  ZIEGLER   V.    LAKE   STEEET   EL.    R.    CO. 

Brewer  v.  Boston  Theatre,  104  Mass.  378.  Allen  Wilson,  28  Fed. 
Rep.  667.  Hawes  v.  Oakland,  104  U.  S.  450.  Detroit  v.  Dean,  106 
U.  S.  537.*  DlmpfellY.  Ohio  &  Ilississipjn  Railway,  110  U.  S.  209. 
Foss  V.  Harbottle,  2  Hare,  461.  That  may  happen  when  the  directors 
themselves  are  the  wrongdoers,  or  are  in  fraudulent  combination  with 
them,  or  when  the  corporation  is  controlled  by  them,  or  when  it  is 
necessary  that  action  should  be  taken  too  speedily  to  leave  time  for 
a  corporate  meeting  of  stockholders. 

In  the  case  at  bar  jthere  is  an  averment  that  Roland  Worthington, 
thealleged  wrongdoer,  has  for  a  long  time  controlled  a  majority  of 
iT^-^t^^    the  stock,  and  has_elected  such  persons_directoi-s  as  he  chose.     That 
V      *"         states  a  sufficient  reason  for  not  applying  to  the  corporation,  at  a 
'^^^''^■'^-'*^    meeting  of  "Its  members,  for  action  jto^edress  its  wrongp.     But  it  is 
"'"  liot  alleged  that  the  plaintiff  ever  attempted  to  move  the  directors  in 

the  interest  of  the  corporation  in  the  matters  complained  of,  or  that 
any  good  reason  existed  for  his  failure  so  to  do.  It  does  not  even 
appear  who  or  how  many  the  directors  are.  It  is  said  that  the  de- 
fendants Roland  Worthington  and  Roland  Worthington  the  younger 
are  directors,  but  no  others  are  named.  The  law  provides  that  there 
shall  be  at  least  three,  and  it  is  to  be  presumed  that  there  are  others 
besides  these  defendants.  Rev.  Sts.  c.  38,  §  3.  Pub.  Sts.  c.  106,  §  25. 
There  is  no  allegation  of  fraud,  or  of  wrongful  combination  with 
Roland  Worthington,  or  of  other  misconduct,  on  the  part  of  any  of 
them.  And  it  cannot  be  presumed,  in  the  absence  of  such  averments, 
that  they  would  refuse  to  do  their  duty  if  their  attention  were  called 
to  it. 

In  Breiver  v.  Boston  Theatre,  uhi  supra,  —  a  much  stronger  case  for 
the  plaintiff  than  this,  —  an  allegation  was  in  these  words :  "  A  ma- 
jority of  the  present  board  of  directors  of  said  defendant  corporation 
are  acting  in  the  interest  of,  and  are  under  the  control  of,  Tompkins 
and  Thayer,"  the  authors  of  the  alleged  frauds  ;  and  it  was  held  that 
this  allegation  did  not  set  forth  a  sufficient  reason  for  bringing  a  suit 
without  first  requesting  the  directors  to  do  it. 


Woods,  J.,  ZIEGLER  v.  LAKE  STREET  EL.  R.  CO. 

1896.    7G  Federal  Reporter,  6G2,  p.  003. 

Woods,  J.  .  .  .  We  desire  to  emphasize  here  the  necessity,  in  suits 
like  this,  for  a  full  and  unequivocal  compliance  with  the  requirements 
of  equity  rule  94.  As  we  had  occasion  to  say  in  Watson  v.  United 
States  Sugar  Refinerij,  34  U.  S.  App.  81,  88,  15  C.  C.  A.  662,  666,  and 
68  Fed.  769,  772 : 


MENIER  V.    HOOPER'S   TELEGRAPH  WORKS. 


531 


"  The  rule  is  well  settled  that  a  stockholder  cannot  maintain  a  suit 
for  a  wrong  to  the  corporate  body  without  showing  either  an  effort  to 
set  the  corporation  in  motion  to  redress  the  wrong,  an  application 
made  to  the  board  of  directors  to  that  end,  or  that  such  pffnrt  nr  pppljjnfl- 
tion  would  beu^eless ;  and  this  requirement  is  not  satisfied  by  an 
allegation  thatlhTdirectors,  or  a  majority  of  them,  are  acting  in  the 
interest  or  under  the  control  of  others,  who  are  charged  with  the 
fraud.  Brewer  v.  Proprietors,  104  Mass.  378  ;  Dodge  v.  Woolsen,  18 
How.  331." 

A  failure  to  seek  action  on  the  part  of  the  corporation  itself  cannot 
be  excused  by  vague  and  general  averments  of  complicity  on  the  part 
of  the  directors  in  the  wrongs  against  which  relief  is  sought. 


^ 


MENIER  V.  HOOPER'S   TELEGRAPH   WORKS. 

1874.     L.  R.  9  Chan.  Ap.  350. 

The  bill  in  this  case  was  filed  by  JS.  J.  Menier,  on  behalf  of  him- 
self and  all  other  the  shareholders  of  the  European  and  South  Ameri- 
can Ttlegraph  Company  (except  such  of  them  as  were  Defendants), 
against  a  company  called  IToopter's  Telegraph  Worhs^  TF!  Hooper.,  H. 
TF.  Grace.,  and  the  European  and  South  American  Telegrapjh  Com- 
pany., and  stated  (amongst  other  things)  as  follows  :  —  That  the  Euro- 
pean Company  was  incorporated  in  1871  with  the  object  of  carrying 
out  an  agreement  between  the  Plaintiff,  Menier.,  and  one  Bradford., 
and  others,  for  constructing  a  submarine  telegraph  from  Eurojje  to 
South  America.,  under  certain  conventions  and  decrees  of  foreign  gov- 
ernments. The  capital  of  the  company'  was  to  be  £1,250,000,  in 
62,500  £20  shares,  and  b}'  the  articles  of  association  provisions  were 
made  for  holding  meetings  of  the  compan}-,  at  which  every  member 
was  to  have  one  vote  for  ever}'  share  held  by  him.  That  Iloopjei^s 
ComjKiny  were  to  make  and  lay  down  for  the  Earojjean  Company 
telegraph  cables  from  Portugal  to  Brazil.  That  a  prospectus  was 
issued  and  many  shares  were  applied  for,  but  in  consequence  of  objec- 
tions raised  the  directors  determined  not  to  proceed  with  the  allotment 
to  the  public,  and  the  only  shares  allotted  were  3000  to  Hooper's  Com- 
pany., 2000  to  the  Plaintiff,  and  325  to  thirteen  persons,  ten  of  whom 
were  the  directors.  That  £3  was  paid  on  each  of  the  shares  so  allotted. 
That  one  of  the  concessions  for  making  the  telegraph  had  been  granted 
to  the  Baron  de  M<nca,  who  was  at  one  time  chairman  of  the  European 
Company.,  and  this  concession  was  claimed  by  the  Eurojyean  Com- 
pany. That  a  bill  was  filed  in  this  Court  by  the  European  Company 
against  the  Baron  de  Maua  and  another  company,  praying  a  declara- 
tion that  the  Baron  de  Maua  was  a  trustee  of  the  concession  for  the 


532  MENIER  V.    hooper's   TELEGRAPH   WORKS. 

European  Company,  and  that  lie  might  be  restrained  from  transfer- 
ring it  to  an}"  one  else.  That  a  motion  was  made  for  an  interlocutory 
injunction,  and  was  refused  by  the  Vice-Chancellor  Malins^  but  on  the 
balance  of  convenience  onl}'.  That  the  European  Conip)any^  and  also 
Soojyer's  Compmny^  at  first  intended  to  appeal  against  the  order  of  the 
Vice-Chancellor  Malins.  That  Hooper's  Company  afterwards  deter- 
mined not  to  appeal,  and  then  the  directors  of  the  European  Compjany 
determined  not  to  appeal,  but  to  take  steps  for  winding  up  the  European 
Conipany.  That  the  Plaintiff  was  resident  in  Paris  and  ignorant  of 
English  law,  and  believed  that  any  arrangements  adopted  by  the  direc- 
tors would  be  for  the  benefit  of  the  European  Company^  and  not  ex- 
clusively in  the  interests  of  Hooper's  Company.  That  the  Plaintiff 
wished  the  appeal  to  proceed,  and  offered  to  bear  the  costs.  That  on 
the  12th  of  Februar}',  1873,  an  extraordinar}' meeting  of  the  European 
Company  was  held,  at  which  a  resolution  was  passed  that  the  company 
be  wound  up  voluntarily,  and  that  the  Defendant  Crace  be  the  liquida- 
tor. That  the  resolution  was  proposed  b}-  one  Kennedy,  a  director  of 
Hooper^ s  Company,  and  that  Crace  was  secretary  of  Hooper's  Com- 
pany. That  this  resolution  was  confirmed  at  another  extraordinary 
meeting,  at  which  five  persons  onh*  were  present,  of  whom  three  were 
directors  nominated  by  Hooper^s  Company,  and  one  was  Crace.  the 
secretary.  That  the  Plaintiff  protested  against  these  proceedings. 
That  the  Plaintiff  was  then  ignorant,  but  had  since  discovered,  that 
these  proceedings  took  place  through  the  influence  of  Hooper's  Com- 
pany. The  bill  then  stated  the  circumstances  of  an  arrangement  be- 
tween Hooper's  Company  and  the  Telegraph  Construction  and  Main- 
tenance Company  and  the  Baron  de  Maua,  under  which  it  would  be  to 
the  advantage  of  Hooper's  Company  that  the  agreement  between  them 
and  the  European  Company  should  be  put  an  end  to,  in  order  to 
benefit  Baron  de  Maua's  Company.,  and  in  order  that  Hooper's  Cohi 
pany  might  sell  to  another  company  the  cable  they  were  making  for 
the  European  Comjxmy.  That  these  arrangements  were  concealed 
from  the  Plaintiff  and  the  other  shareholders  in  the  European  Com- 
pany. That  Hooper's  Company  procured  the  abandonment  of  the 
suit  against  the  Baron  de  Maua,  and  the  winding-up  of  the  E'-i'>'opean 
Company,  through  the  influence  which  they  had  as  holders  of  3000 
shares  in  the  European  Company,  and  through  the  influence  of  the 
directors  nominated  by  them. 

And  the  bill  prayed  that  Hoop>et's  Company  might  be  declared  not 
entitled  to  the  benefit  of  the  profits  derived  from  the  abandonment  of 
the  suit  and  other  arrangements  aforesaid,  and  might  be  declared  a 
trustee  of  those  profits  for  the  Plaintiff  and  the  other  shareholders  in 
the  European  Company  ;  and  that  the  European  Compa)nj  and  the  De- 
fendants might  be  restrained  from  repaying  to  Hooper's  Company  an}- 
of  the  money  paid  on  the  allotment  of  shares  in  the  European  Company., 
and  from  disposing  of  the  property  of  the  European  Company. 


MENIER  V.  hooper's   TELEGRAPH  WORKS.  ,  o33 

To  this  bill  the  Defendants  Hooper's  (Jompany  and  W.  Hooper 
demurred  for  want  of  equit}' ;  and  the  Defendants  Cruce  and  the  Euro- 
pean Compxiny  also  demurred,  and  for  cause  of  demurrer  shewed 
that  the  Plaintiff  had  not  made  out  such  a  case  as  entitled  him  to  dis- 
covery or  relief. 

The  Vice-Chancellor  Bacon,  on  the  12th  of  Januar}-,  1874,  overruled 
both  demurrers  ;  and  the  Defendants  appealed. 

Mr.  Fry,  Q,  C.,  and  Mr.  Millar,  for  Hooper's  Company :  — 

A  shareholder  has  a  right  to  vote  as  he  pleases,  and  to  suit  his  own 
interests.  If  not,  the  Court  in  every  case  might  have  to  interfere 
wherever  there  was  a  small  majority,  and  consider  what  were  the  motives 
of  each  shareholder.  If  there  was  a  suit  by  the  company  against  any 
individual  shareholder,  he  would  not  be  disabled  from  voting.  He  is 
not  a  trustee  for  any  one,  and  he  may  vote  against  the  interests  of  the 
company  or  of  any  of  the  other  shareholders.  No  constructive  trust  can 
be  raised:  Gray  \.  Lexins}  In  Atwool  v.  Merryweather"  the  vote 
■was  impeached.  If  such  a  suit  can  be  maintained,  one  shareholder 
ma}'  file  a  bill  to  have  a  certain  contract  set  aside,  and  another  to 
have  it  carried  on.  Such  a  suit  can  only  be  maintained  b}'  the  com- 
pany against  the  directors.  At  all  events,  the  proceedings  ought  to  be 
in  the  liquidation,  and  not  b}'  bill. 

Mr.  Kay,  Q.  C,  Mr.  Jackson,  Q.  C,  and  Mr.  Eceritt,  for  the  Plain- 
tiff, were  not  called  upon. 

Sir  W.  M.  James,  L.  J.  :  — 

I  am  of  opinion  that  the  order  of  the  Vice-Chanceilor  in  this  case  is 
quite  right. 

The  case  made  by  the  bill  is  very  shortly  this :  The  Defendants,  who 
have  a  majority  of  shares  in  the  company,  have  made  an  arrangement 
by  which  they  have  dealt  with  matters  affecting  the  whole  compan}-, 
the  interest  in  which  belongs  to  the  minoritj-  as  well  as  to  the  majoritv. 
They  have  dealt  with  them  in  consideration  of  their  obtaining  for  them- 
selves certain  advantages.  Hoopefs  Company  have  obtained  certain 
advantages  b}-  dealing  with  something  which  was  the  propert}'  of  the 
whole  company.  The  minority  of  the  shareholders  sa^^  in  effect  that 
the  majorit}'  has  divided  the  assets  of  the  company,  more  or  less,  be- 
tween themselves,  to  the  exclusion  of  the  minority.  I  think  it  would 
be  a  shocking  thing  if  that  could  be  done,  because  if  so  the  majority 
might  divide  the  whole  assets  of  the  compan}-,  and  pass  a  resolution 
that  everything  must  be  given  to  them,  and  that  the  minority  should 
have  nothing  to  do  with  it.  Assuming  the  case  to  be  as  alleged  by  the 
bill,  then  the  majority  have  put  something  into  their  pockets  at  the  ex- 
pense of  the  minority.  If  so,  it  appears  to  me  that  the  minorit}-  have 
a  right  to  have  their  share  of  the  benefits  ascertained  for  them  in  the 
best  wa}'  in  which  the  Court  can  do  it,  and  given  to  them. 

1  Law  Rep.  8  Ch.  1035.  2  Law  Rep.  5  Eq.  464,  n. 


534      farmers'  loan  and   trust   CO.  V.  N.  Y.  AND   NORTHERN   R.  CO. 

It  is  said,  however,  that  this  is  not  the  right  form  of  suit,  because, 
according  to  the  principles  laid  down  in  I^oss  v.  Harbottle,^  and  other 
similar  cases,  the  Court  ought  to  be  very  slow  indeed  in  allowing 
a  shareholder  to  file  a  bill,  where  the  company  is  the  proper  Plaintiff. 
This  particular  case  seems  to  me  precisely  one  of  the  exceptions  re- 
ferred to  by  Vice-Chancellor  Wood  in  Atwool  v.  llerryiceather,'^  a  case 
in  which  the  majority  were  the  Defendants,  the  wrong-doers,  who  were 
alleged  to  have  put  the  minority's  property  into  their  pockets.  In  this 
case  it  is  right  and  proper  for  a  bill  to  be  filed  by  one  shareholder  on 
behalf  of  himself  and  all  the  other  shareholders. 

Therefore  the  demurrer  ought  to  be  overruled. 

Sir  G.  Mellish,  L.  J. :  — 

I  am  entirely  of  the  same  opinion. 

It  so  happens  that  Hooper's  Company  are  the  majority  in  this  com- 
pany, and  a  suit  by  this  company  was  pending  which  might  or  might 
not  turn  out  advantageous  to  this  compan}-.  The  Plaintiff  says  that 
Hoopefs  Co'tnpany  being  the  majorit}',  have  procured  that  suit  to  be 
settled  upon  terms  favourable  to  themselves,  they  getting  a  considera- 
tion for  settling  it  in  the  shape  of  a  profitable  bargain  for  the  laying  of 
a  cable.  I  am  of  opinion  that  although  it  may  be  quite  true  that  the 
shareholders  of  a  compan}-  ma}'  vote  as  they  please,  and  for  the  pur- 
pose of  their  own  interests,  yet  that  the  majority  of  shareholders  cannot 
sell  the  assets  of  the  company  and  keep  the  consideration,  but  must 
allow  the  minorit}'  to  have  their  share  of  any  consideration  which  may 
come  to  them.  I  also  entirely  agree  that,  under  the  circumstances,  the 
suit  is  properly  brought  in  the  name  of  the  Plaintiff  on  behalf  of  him- 
self and  all  the  other  shareholders. 

The  appeal  will  be  dismissed  with  costs. 

Mr.  Fooks,  Q.  C,  and  Mr.  Davey,  for  the  other  Defendants,  then 
submitted  to  have  their  appeal  dismissed. 


FAEMERS'   LOAN  AND  TRUST   CO.,   as   Trustee,   v.   NEW 
YORK  AND  NORTHERN  R.  CO. 

1896.     150  New   York,  410.3 

Action  to  foreclose  a  second  mortgage  upon  the  property  of  the 
New  York  and  Northern  R.  Company ;  the  mortgage  being  given  by 
that  corporation  to  the  plaintiff  as  trustee  to  secure  the  payment  of 
bonds.  The  mortgage  provided  that  no  foreclosure  could  be  had  until 
the  expiration  of  one  year  after  default  in  the  payment  of  the  inter- 
est.    Such  default  had  taken  place. 

1  2  Hare,  461.  2  Law  Rep.  5  E<^  4*4,  n. 

8  Sutement  abridged.    Arguments  and  part  of  opinion  omitted.  — ■  ^, 


farmers'  loan   and   trust   CO.  V.  N,  Y.  AND   NORTHERN  R.  CO.      535 

The  Northern  E.  Company  made  no  defence.  Holmes  and  Pick, 
minority  stockholders  in  that  corporation,  were,  tn  their  own  motion, 
made  parties  defendant  in  the  action,  and  served  an  answer. 

Upon  the  trial,  the  following  facts  appeared  : 

The  New  York  Central  and  Hudson  River  E.  E.  Company  and 
the  Northern  Company  are  parallel  lines  and  were  competing  lines. 
The  Central  purchased  a  majority  of  the  stock  and  a  majority  of  the 
second  mortgage  bonds  of  the  Northern  for  the  sole  purpose  of  ob- 
taining control  of  the  property  of  the  latter  corporation.  The  Central, 
as  such  majority  stockholder,  acquired  the  entire  control  of  the  affairs 
of  the  Northern  ;  dictating  and  governing  the  action  of  the  board  of 
directors  of  the  Northern.  The  present  action  was  procured  to  be 
commenced  by  the  Central. 

On  the  trial,  Holmes  and  Pick  sought  to  prove  that  after  the  Cen- 
tral became  the  owner  of  such  stock  and  bonds,  and  while  its  officers 
were  in  substantial  control  of  the  Northern,  they  declined  to  accept 
traffic  from  other  roads  that  would  have  produced  a  fund  with  which 
to  pay  the  interest  due  on  the  bonds ;  that  the  income  of  the  road 
Avhich  should  have  been  employed  to  pay  such  interest  was  used  for 
other  and  improper  purposes  ;  and  that  such  action  caused  the  in- 
ability of  the  Northern  to  pay  the  interest  and  thus  cure  its  default. 
This  evidence  was  rejected  as  immaterial.  Holmes  and  Pick  excepted 
to  the  ruling. 

The  trial  court  held  that  the  plaintiff  was  entitled  to  judgment  of 
foreclosure  and  sale.  This  decision  was  affirmed  by  the  General  Term 
(78  Hun,  213).  The  minority  stockholders  appealed  from  this  judg- 
ment. 

James  C.  Carter  and  Simon  Sterne,  for  appellants. 

Ashbel  Greene,  David  McClure,  and  Thomas  Thacher,  for  respond- 
ents. 

Martix,  J.  ...  In  determining  the  correctness  of  the  rulings 
made  by  the  trial  court,  it  becomes  necessary  to  determine  inciden- 
tally whether  a  corporation,  purchasing  a  majority  of  the  stock  of 
another  competing  corporation,  may  thus  obtain  control  of  its  affairs, 
cause  it  to  divert  the  income  from  its  business,  or  to  refuse  business 
which  would  enable  it  to  pay  the  interest  for  which  it  was  in  default, 
and  then  institute  an  action  in  equity  to  enforce  its  obligations  for 
the  purpose  of  obtaining  control  of  its  property  at  less  than  its  value 
to  the  injury  of  the  minority  stockholders,  and  they  have  no  remedy. 
Or,  in  other  words,  whether  a  court  of  equity,  with  those  facts  estab- 
lished, would  lend  its  aid  to  such  a  stockholder  by  enforcing  the  mort- 
gage and  decreeing  a  foreclosure  and  sale  of  the  mortgaged  premises, 
at  its  request,  in  its  behalf,  and  to  accomplish  such  a  purpose.  If  it 
would,  then  the  rulings  of  the  trial  court  were  proper ;  if  not,  then 
the  appellants  were  entitled  to  prove  those  facts,  and  it  was  error  to 
reject  the  evidence. 

[After  citing  and  stating  various  decisions.] 


536      FAKMEKS'  LOAN   AND   TRUST   CO.  V.  N.  Y.  AND   NORTHERN   E.  CO. 

"  The  law  requires  of  the  majority  of  the  stockholders  the  utmost 
good  faith  in  thei*  control  and  management  of  the  corporation  as 
regards  the  minority,  and  in  this  respect  the  majority  stand  in  much 
the  same  attitude  towards  the  minority  that  the  directors  sustain 
towards  all  the  stockholders.  Thus,  where  the  majority  are  inter- 
ested in  another  corporation,  and  the  two  corporations  have  contracts 
between  them,  it  is  fraudulent  for  that  majority  to  manage  the  affairs 
of  the  first  corporation  for  the  benefit  of  the  second.  A  court  of 
equity  will  intervene  and  protect  the  minority  upon  an  application  by 
the  latter."  (2  Cook  on  Stock  and  Stockholders  [2d  ed.],  §  662,  p. 
945.)  The  same  principle  is  stated  in  1  Morawetz  on  Private  Corpo- 
rations (2d  ed.,  §  529) ;  1  Beach  on  Private  Corporations  (§  70)  ;  2  Bige- 
low  on  Frauds  (§  645),  and  Beach  on  Mod.  Eq.  Juris.  (§§  132,  686). 

While  the  question  in  some  of  the  cases  cited  arose  between  stock- 
holders and  the  directors  and  officers  of  a  company,  who  as  such  held 
a  position  of  trust  as  to  the  former,  still,  where,  as  in  this  case,  a 
majority  of  the  stock  is  owned  by  a  corporation  or  a  combination  of 
individuals,  and  it  assumes  the  control  of  another  company's  business 
and  affairs  through  its  control  of  the  officers  and  directors  of  the  cor« 
poration,  it  would  seem  that  for  all  practical  purposes  it  becomes  the 
corporation  of  which  it  holds  a  majority  of  stock,  and  assumes  the 
same  trust  relation  towards  the  minority  stockholders  that  a  corpora- 
tion itself  usually  bears  to  its  stockholders,  and,  therefore,  under  such 
circumstances,  the  rule  stated  in  the  Sage  and  other  similar  cases 
applies  to  majority  stockholders  who  control  the  affairs  of  the  com- 
pany, as  well  as  to  its  directors  or  officers. 

The  principle  of  these  authorities  renders  it  quite  obvious  that  a 
corporation,  purchasing  a  majority  of  the  stock  of  another  competing 
one,  cannot  obtain  control  of  its  affairs,  divert  the  income  of  its  busi- 
ness, refuse  business  which  would  enable  the  defaulting  company  to 
pay  its  interest,  and  then  institute  an  action  in  equity  to  enforce  its 
obligations,  for  the  avowed  purpose  of  obtaining  entire  control  of  its 
property  to  the  injury  of  the  minority  stockholders.  Such  a  course 
of  action  is  clearly  opposed  to  the  true  interests  of  the  corporation 
itself,  plainly  discloses  that  one  thus  acting  was  not  influenced  by  any 
honest  desire  to  secure  such  interests,  but  that  its  action  was  to  serve 
an  outside  purpose,  regardless  of  consequences  to  the  debtor  company, 
and  in  a  manner  inconsistent  with  its  interest  and  the  interest  of  its 
minority  stockholders. 

The  respondents,  however,  contend  that  the  doctrine  of  tlie  author- 
ities cited  is  not  controlling  in  this  case,  but  that  the  New  York  Cen- 
tral and  Hudson  River  Railroad  Company  had  a  right  to  purchase  a 
majority  of  the  stock  and  bonds  of  the  New  York  and  Northern  Rail- 
way Company,  for  the  express  purpose  of  obtaining  control  of  the 
affairs  of  the  latter  for  its  own  use  and  benefit,  and  to  thus  acquire 


'  FAKMERS'  LOAN  AND   TRUST  CO.  V.  N.  Y.  AND   NORTHERN  R.  CO,      537 

its  property  at  less  than  its  actual  value,  to  the  injury  of  the  minority 
stockholders,  and  that  such  stockholders  had  no  remedy  in  law  or  in 
equity  to  protect  themselves  against  such  action  of  the  majority  stock- 
holder, although  it  diverted  the  income  which  should  have  been  ap- 
plied to  the  payment  of  such  interest  to  other  and  improper  purposes, 
and  refused  business  which  would  have  enabled  the  defaulting  com- 
pany to  pay  its  interest.  In  other  words,  the  claim  of  the  respond- 
ents is,  and  the  General  Term  in  effect  held,  that  the  purpose  for 
which  the  JS'ew  York  Central  and  Hudson  River  Eailroad  Company 
obtained  a  majority  of  the  stock  and  bonds  of  the  ]New  York  and 
Northern  Railway  Company  is  entirely  immaterial,  and  that  notwith- 
standing the  existence  of  such  a  purpose,  a  court  of  equity  will  aid 
them  in  enforcing  the  mortgage.  To  sustain  this  contention  they  cite 
Morris  v.  Tutliill  i;j2  N.  Y.  575)  ;  Fhelps  v.  NoxoUn  (72  N.  Y.'39)  ; 
Chenango  Bridge  Co.  v.  Paige  (83  N.  Y.  178)  ;  Ramsey  v.  Erie  Rail- 
way Co.  (8  Abb.  Pr.  [n.  s.]  174)  ;  Clinton  v.  Mijers  (46  N".  Y.  511)  ; 
Simjjson  v.  Ball  (3  Wall.  476)  ;  Ogleshy  v.  Attrill  (105  U.  S.  605) ; 
Adler  v.  Fenton  (24  How.  [U.  S.]  407),  and  Beveridge  v.  N.  T.  E.  R. 
Co.  (112  N.  Y.  1). 

In  Morris  v.  Tuthill  the  action  was  to  foreclose  a  mortgage  brought 
by  an  assignee.  There  was  no  question  or  principle  of  trust  involved 
in  that  case.  The  plaintiff  owed  the  defendant  no  duty,  and,  hence, 
it  was  held  that  under  such  circumstances  the  plaintiff  had  a  right  to 
maintain  an  action  for  the  foreclosure  of  the  mortgage,  although  he 
took  title  to  it  from  motives  of  malice,  and  the  assignor  assigned  the 
mortgage  to  him  from  a  like  motive.  That  that  case  was  correctly  de- 
cided we  have  no  doubt,  but  it  is  clearly  distinguishable  in  principle 
from  the  case  at  bar,  and  has  no  bearing  whatever  upon  the  question 
under  consideration. 

In  the  Phelps  case  it  was  held  that  a  party  was  not  liable  for  the 
consequences  of  an  act  done  upon  his  own  land,  lawful  in  itself,  which 
did  not  infringe  upon  any  lawful  right  of  another,  simply  because  he 
was  inflvienced  in  doing  it  by  wrong  and  malicious  motives,  and  that 
courts  would  not  inquire  into  the  motives  actuating  a  person  in  the 
enforcement  of  a  legal  right.  How  the  doctrine  of  that  case  is  ap- 
plicable to  the  question  involved  in  this,  it  is  difficult  to  perceive.  In 
that  case  the  party  simply  exercised  a  lawful  right,  and  the  court  held 
that  no  liability  arose  from  his  having  done  so.  There  the  plaintiff 
owed  the  defendant  no  duty  and  sustained  no  relation  of  trust  towards 
him,  and,  hence,  it  is  clearly  distinguishable  from  the  case  at  bar. 
The  same  may  be  said  of  Chenango  Bridge  Co.  v.  Paige,  Ramsey  v. 
Erie  Raihvay  Co.,  Clinton  v.  Myers,  Simpson  v.  Dall,  Ogleshy  v. 
Attrill,  and  Adler  v.  Fenton.  We  do  not  think  these  cases  in  any  way 
aid  the  respondents. 

[After  discussing  the  Beveridge  case.] 

As  we  have  already  seen,  there  are  circumstances  under  which  the 


538    farmers'  loan  and  trust  CO.  V.  N.  y.  and  northern  R.  CO. 

majority  stockholders  occupy  substantially  the  same  relation  of  trust 
towards  the  minority  as  the  board  of  directors  would  occupy  towards 
the  stockholders  it  represents,  and,  hence,  where  there  are  Qorrupt 
motives,  personal  intere(St  or  fraud,  the  case  cited  is  an  authority  to 
sustain  the  conclusion  which  we  have  already  reached. 

That  any  person  or  corporation  authorized  to  do  so  might  have  pur- 
chased the  bonds  of  the  New  York  and  Northern  Railway  Company, 
and  have  rigorously  enforced  them  by  a  sale  of  its  property,  there  can 
be  no  doubt.  They  might  also  have  purchased  the  stock  of  the  com- 
pany and  thus  have  become  the  owners  of  both ;  and  while  such 
owners  might  have  enforced  the  liability  of  the  company  upon  its 
bonds,  so  long  as  they  acted  in  good  faith  and  their  purpose  was  pro- 
per ;  but  when  the  New  York  Central  and  Hudson  Eiver  Railroad 
Company  purchased  the  stock  and  bonds  in  question,  thus  obtaining 
a  controlling  interest  in  the  affairs  of  the  New  York  and  Northern 
Railway  Company  for  the  avowed  purpose  of  destroying  it,  to  serve 
a  purpose  entirely  outside  of  that  for  which  it  was  organized,  and  in 
hostility  to  it,  it  becomes  clear  that  as  such  stockholder  it  owed  a 
duty  to  the  minority  stockholders,  that  the  law  implied  a  quasi  trust 
upon  its  part,  and  that  a  court  of  equity  will  not  aid  it  in  the  destruc- 
tion of  that  corporation  and  a  confiscation  of  its  property,  although  it 
held  a  majority  of  its  stock  and  the  required  amount  of  its  bonds. 

Hence,  we  are  of  the  opinion  that  the  court  erred  in  rejecting  as 
immaterial  evidence  offered  by  the  appellants  to  show  that,  after  the 
New  York  Central  and  Hudson  River  Railroad  Company  became  the 
owner  of  a  majority  of  the  stock  and  bonds  of  the  New  York  and 
Northern  Railway  Company,  and  while  its  officers  were  in  control  of 
the  latter  corporation  and  its  affairs,  it  declined  to  accept  traffic  from 
other  roads  which  would  have  produced  a  fund  with  which  to  pay  the 
interest  that  was  due  ;  that  the  income  of  the  road,  which  should 
have  been  employed  to  pay  such  interest,  was  used  for  other  and  im- 
proper purposes,  and  that  such  action  upon  the  part  of  the  majority 
stockholder  occasioned  the  inability  of  the  company  to  pay  the  in- 
terest and  cure  the  default.  To  the  rejection  of  this  evidence  the 
defendants  excepted.  We  think  many  of  these  rulings  were  erroneous, 
and  that  the  appellants  had  the  right  to  make  the  proof  offered,  so  far 
as  it  related  to  the  transaction  of  the  business  of  the  New  York  and 
Northern  Railway  Company  during  the  time  the  New  York  Central 
and  Hudson  River  Railroad  Company  owned  a  majority  of  its  stock 
and  controlled  its  affairs,  and  for  the  error  in  those  rulings  the  judg- 
ment should  be  reversed. 

The  respondents  claim  that  by  virtue  of  the  provisions  of  section 
forty  of  the  Stock  Corporation  Law  the  New  York  Central  and  Hud- 
son River  Railroad  Company  had  the  right  to  acquire  the  stock  of 
the  New  York  and  Northern  Railway  Company.  We  do  not  deem 
it  necessary  to  either  discuss  or  decide  that  question,  for  if  it  be 


EUSSELL  V.  WAKEFIELD   WATERWORKS   CO.  539 

admitted  that  the  Kew  York  Central  and  Hudson  River  Eailroad  Com- 
pauy  was  authorized  to  purchase  such  stock  and  bonds,  still  nothing 
will  be  found  in  the  statute  which  authorizes  it  to  employ  them  for 
the  purpose  of  destroying  the  property  of  the  New  York  and  Northern 
liailway  Company  to  the  injury  of  its  minority  stockholders. 

If  the  New  York  Central  and  Hudson  Kiver  Railroad  Company  had 
a  right  to  purchase  the  stock  and  bonds  of  the  New  York  and  North- 
ern Railway  Company,  it  obtained  no  better  title  and  secured  no  greater 
right  than  any  other  stockholder  would  have  acquired  under  a  similar 
purchase.  The  right  to  purchase,  even  if  given  by  statute,  conferred 
upon  the  purchaser  no  authority  to  employ  the  stock  and  bonds  for 
purposes  condemned  by  the  principles  of  equity. 


Judgment  reversed.     New  trial  granted.  ^ 


Jessel,  M.  R.,  in   RUSSELL  v.  WAKEFIELD  WATER- 
WORKS  CO. 

1875.     L.  R.  20  Eq.  Cases,  474,  478-483. 

Sir  G.  Jessel,  M.R.  A  great  deal  of  the  argument  m  this  case 
turned  upon  what  may  be  described  perhaps,  in  one  sense,  as  a  technical 
objection,  but  which  is  a  very  formidable  and  important  objection.  It 
was  said  that  this  is  a  bill  to  make  a  stranger  pay  back  mone}'  be- 
longing to  a  company  which  the  stranger  has  illegally  or  improperly 
possessed  himself  of,  or  appropriated  to  his  own  use,  and  that  an}' 
person  who  takes  possession  of  a  trust  fund  is  liable  to  be  sued  in 
equity  by  the  owner  of  the  trust  fund  if  he  had  notice  at  the  time  that 
it  was  a  trust  fund ;  and  although  he  gave  value,  still  in  that  way  the 
bill  can  be  maintained  against  him. 

The  answer  was,  that  where  the  owner  of  the  trust  fund  is  an 
incorporated  company,  the  corporation  is  the  only  party  to  sue  ;  the 
stranger  has  nothing  whatever  to  do  with  the  individual  corporators  ; 
and  although  in  a  sense  it  is  their  property,  because  individual  corpo- 
rators make  up  the  corporation,  yet  in  law  it  is  not  their  propert}',  but 
the  property  of  the  corporation,  and  therefore  the  right  person  to  sue 

1  Where  the  managers  of  a  railroad  corporation,  acting  in  its  interests,  buy  a  controlling 
interest  in  the  stock  of  a  connecting  road  for  the  purpose  of  making  witli  themselves  as 
controlling  managers  of  the  latter  road  contracts  more  favorable  to  the  former,  and  ac- 
complish their  purpose,  the  question  whether  the  contracts  thus  obtained  are  fair  and  just 
is  immaterial  in  a  stockholder's  injunction  suit  to  restrain  the  carrying  out  of  the  contracts. 
Pearson  v.  Concord  R.  R.,  A.  i>.  1883,  62  New  Hampshire,  537.  The  contracts  will  be 
annulled,  at  the  instance  of  minority  stockholders  in  the  corporation  thus  controlled,  without 
regard  to  the  question  whether  the  controlling  corporation  was  guilty  of  actual  fraud.  Glen- 
gary    <fc.  Co.  v.  Boehmer,  Supreme  Court  of  Colorado,  a.  d.  1900,  62  Pacific  Reporter,  839. 

See  Stewart  v.  Lthiyh  Valley  R.  Co.,  ante,  397,  and  note  1,  p.  399.  —  Eu. 


540  EUSSELL   V.  "WAKEFIELD    WATERWORKS   CO. 

is  the  corporation,  who  is  the  cestui  que  trust  or  equitable  owner  of  the 
fund.  That  I  take  to  be  the  general  rule  of  this  Court.  In  this  Court 
the  mone^^  of  the  company  is  a  trust  fund,  because  it  is  applicable  only 
to  the  special  purposes  of  the  compan}-  in  the  hands  of  the  agents  of 
the  company,  and  it  is  in  that  sense  a  trust  fund  applicable  b}'  them 
to  those  special  purposes  ;  and  a  person  taking  it  from  them  with 
notice  that  it  is  being  applied  to  other  purposes  cannot  in  this  Court 
sa3'  that  he  is  not  a  constructive  trustee. 

But  the  general  rule  being  that  the  cestui  que  trust  must  sue,  and 
not  the  individual  corporator  who  has  only  an  ultimate  beneficial 
interest,  the  only  point  remaining  to  be  considered  is,  whether  there 
are  an}'  exceptions  to  the  general  rule. 

[After  referring  to  the  general  rule  laid  down  in  Foss  v.  Harhottle^ 
2  Hare,  461.]  But  that  is  not  a  universal  rule;  that  is,  it  is  a  rule 
subject  to  exceptions,  and  the  exceptions  depend  very  much  on  the 
necessity  of  the  case ;  that  is,  the  necessity  for  the  Court  doing 
justice. 

It  remains  to  consider  what  are  those  exceptional  cases  in  which,  for 
the  due  attainment  of  justice,  such  a  suit  should  be  allowed.  AVe  are 
all  familiar  with  one  large  class  of  cases  which  are  certainly  the  first 
exception  to  the  rule.  They  are  cases  in  which  an  individual  corpo- 
rator sues  the  corporation  to  prevent  the  corporation  either  commencing 
or  continuing  the  doing  of  something  which  is  bej'ond  the  powers  oi 
the  corporation.  Such  a  bill,  indeed,  maj-  be  maintained  by  a  single 
corporator,  not  suing  on  behalf  of  himself  and  of  others,  as  was  settled 
in  the  House  of  Lords  in  a  case  of  /Sinqysoti  v.  Westminster  Palace 
Motel  Company.^  If  the  subject  matter  of  the  suit  is  an  agreement 
between  the  corporation  acting  by  its  directors  or  managers  and  some 
other  corporation  or  some  other  person  strangers  to  the  corporation,  it 
is  quite  proper  and  quite  usual  to  make  that  other  corporation  or  person 
a  Defendant  to  the  suit,  because  that  other  corporation  or  person  has 
an  interest,  and  a  great  interest,  in  arguing  the  question  and  having  it 
decided,  once  for  all,  whether  the  agreement  in  question  is  reallj-  within 
the  powers  or  without  the  powers  of  the  corporation  of  which  the  cor- 
porator is  a  member.  So  that  in  these  cases  you  must  always  bring 
before  the  Court  the  other  corporation. 

The  cases  arc  so  numerous  on  this  subject,  that  one  ought  not 
perhaps  to  refer  to  them.  But  I  may  mention  a  few  of  them.  There 
is,  first,  the  well-known  case  o^  Hare  v.  London  and  North-Western 
Railway  Company ,'  ^  there  is  the  case  of  Simpson  v.  Denison  /  ^  j:here 
is  a  case  of  Reman  v.  Rujf'ord;  *  and  a  vast  number  of  cases  as  regards 
agreements  between  Railway  companies  which  have  been  held  to  be 
idtra  vires.  When  you  have  got  the  second  corporation  or  person  a 
party  to  the  suit,  it  may  happen  that,  in  addition  to  the  relief  tiiat  you 
1  8  U.  L.  C.  712.  2  2  J.  &  II.  80.  s  10  Hare,  51.  4  i  gim.  (N.  S.)  550. 


EUSSELL   V.  WAKEFIELD   WATERWORKS   CO.  541 

are  entitled  to  as  regards  the  first,  j'ou  are  entitled  to  have  relief  against 
the  second  for  something  that  has  been  done  under  the  ultra  vires 
agreement.  You  may  be  entitled  to  have  money  paid  back  which  has 
been  paid  under  the  ultra  vires  agreement,  as  in  the  case  of  Salomons 
V.  Lain(jy  and  you  may  be  entitled  to  have  propert}'  returned  or  other 
acts  done.  If  the  detainer  or  holder  of  the  money  or  property,  that  is, 
the  second  corporation  or  other  person,  is  already  a  party,  and  a  neces- 
sary part}-,  to  the  suit,  it  would  be  indeed  a  lame  and  halting  conclusion 
if  the  Court  were  to  say  it  could  do  justice  in  a  suit  so  framed  by 
ordering  the  money  to  be  returned  or  the  propert}-  restored.  It  is  a 
necessary  incident  to  the  first  part  of  the  relief  which  can  be  obtained 
by  individual  corporators,  and  will  do  complete  justice  on  each  side, 
and  that  has  always  been  the  practice  of  the  Court.  Therefore,  in  a 
case  so  framed  there  is  no  objection  to  a  suit  by  an  individual  corpo- 
rator to  recover  from  another  corporator,  or  from  an}'  other  persons 
being  strangers  to  this  corporation,  the  money  or  propert}'  so  improperl}- 
obtained.  But  that  is  not  the  onl}'  case.  An}'  other  case  in  which  the 
claims  of  justice  require  it  is  within  the  exception. 

Another  instance  occurred  in  the  case  of  Ativool  v.  Merry wrMther^ 
in  which  the  corporation  was  controlled  by  the  evil-doer,  and  would 
not  allow  its  name  to  be  used  as  Plaintiff  in  the  suit.  It  was  said  that 
justice  required  that  the  majority  of  the  corporators  should  not  appro- 
priate to  themselves  the  property  of  the  minority,  and  then  use  their 
own  votes  at  the  general  meeting  of  the  corporation  to  prevent  their 
being  sued  by  the  corporation,  and  consequently  in  a  case  of  that  kind 
the  corporators  who  form  part  of  the  minority  might  file  a  bill  on  their 
own  behalf  to  get  back  the  property  or  money  so  illegally  appropriated. 
It  is  not  necessary  that  the  corporation  should  absolutely  refuse  by  vote 
at  the  general  meeting,  if  it  can  be  shewn  either  that  the  wrong-doer 
had  command  of  the  majority  of  the  votes,  so  that  it  would  be  absurd 
to  call  the  meeting  ;  or  if  it  can  be  shewn  that  there  has  been  a  general 
meeting  substantially  approving  of  what  has  been  done  ;  or  if  it  can  be 
shewn  from  the  acts  of  the  corporation  as  a  corporation,  distinguished 
from  the  mere  acts  of  the  directors  of  it,  that  they  have  approved  of 
what  has  been  done,  and  have  allowed  a  long  time  to  elapse  without 
interfering,  so  that  they  do  not  intend  and  are  not  willing  to  sue.  In 
all  those  cases  the  same  doctrine  applies,  and  the  individual  corporator 
may  maintain  the  suit.  As  I  have  said  before,  the  rule  is  a  general 
one,  but  it  does  not  apply  to  a  case  where  the  interests  of  justice 
require  the  rule  to  be  dispensed  with.  I  do  not  intend  by  the  observa- 
tions I  have  made  in  any  way  to  restrain  the  generality  of  the  terms 
made  use  of  by  the  learned  judge  who  decided  the  case  oiFossy. 
Uarbottle? 


1  12  Beav.  377.  2  Law.  Rep.  5  Eq.  464,  n. 

8  In  Alexander  v.  Atlantic  cf  W.  P.  R.  Co.,  Supreme  Court  of  Georgia,  1901,  38  South- 
eastern Reporter,  772,  minority  stockholders  petitioned  for  an  injunction  to  restrain  the 


fM/ 


542  WILLOUGHBY  V.   CHI 


v.   CHICAGO^  JUNCTlOi^,   &c.\CO.fC  ^ 


r 

01^        ^.WILLOUGHBY  v.   CHICAGO^  JUNCTION",   6cc.\m.{f,  ^  ,\ 

^'  Ca>'\       of.      X»  ^^^^-     ^0  New  Jersey  Equity  {5  Dickinson).  656.^         S    /    J)  V/ 

^  '  a^J^On  rule  to  show  cause  why  an  injunction  should  not  issue.  THeard, 
^  JL^  jj^  1^  bill,  supplemental  bill,  answers  and  affidavits,  and  on  subsequent 
f/j^'^^^^fp^  ^■'*^  fetipulatiou  that  the  cause  should  be  disposed  of  as  having  been  heard 
jl^l^    a/^l      c^''^  on  final  hearing. 

^u(v  •      W  Ifjo         The  original  bill  was  filed  Dec.  17,  1891,  by  Willoughby,  on  behalf 

f^  j,^^ l^/^     l<\/^^  himself,  as  a  stockholder  in  the  Chicago  Junction  &c.  corporation 

^      ^^^M/^    '     (called  by  the  court  the  New  Jersey  Co.),  and  all  other  stockholders 

ja>^      1/-      ■  Ji/^       therein,  who  should  come  in  and  contribute  to  the  expense  of  the  suit. 

O^'^'jl^      -^        X^'^©  other  stockholders  were  afterwards,  by  an  order  of  court,  ad- 

'> ju^^^^^^XHj^      ^^(£/*^iiitted  as  parties  complainant.     The  aforesaid  corporation  and  certain 

£^c>\       ^  >^Vt)ther  parties  were  made  defendants.     The  object  of  the  original  bill 

-.  IV^""^^^ K/^     ^  /L^^^  ^o  restrain  defendants  from  carr3'ing  into  execution  an  agreement 

^^f  I  ^»     „  l^tween  the  New  Jersey  Co.  and  certain  other  defendants,  dated  July 

i     rw    ^fr^y--'^  ^^'  1^9^-     Before  a  hearing  on  this  bill,  another  agreement  was  entered 

*()  n^"*^^^ L^'^^^^'^  between  the  New  Jersey  Co.  and  the  same  parties,  dated  Jan.  15, 

^  "t/^  jj/v  I  r  .  ^  1892,  which,  while  it  contained  many  of  the  provisions  of  the  former 

^^'^/Jt^^^^'''^  M  ^*^i      agreement,  yet  by  its  fourteenth  paragraph  expressly  annulled  such 

^ '^^yf^*^"^^^  '^^f^A{  former  agreement.     Thereupon  Willoughb}^  and  his  three  co-plaintifl^s, 

/;iyt'*-^  /  ^y  leave  of  the  court,  filed  a  supplemental  bill  against  the  same  defend- 

"^  ^^ji^  0^-*^    ants,  setting  out  the  fact  of  the  original  suit,  and,  as  far  as  proper, 

incorporating  the  original  bill,  and  seeking  to  restrain  the  carrying 

*    "-tfiiAto  effect  both  the  agreement  of  Jan.   15,    1892,   and  that  of  July 

.   ^    27,  1891. 

/)  ijy""^^  *y^  /  u  Ellerman,  another  stockholder  of  the  New  Jersey  Co.,  on  Aug.  19, 

nA"^"^^      ^      1891,  filed  a  bill  in  this  court,  on  behalf  of  himself,  and  of  all  other 

'/^   d,^/^.^*^^  stockholders  who  should  come  in  and  contribute  to  the  expense  of  the 

t'^^^'^  "*  suit,  for  the   purpose  of  preventing  the  consummation  of  the  same 

"^'lUAji    ^       /      agreement  of  Jul}'  27,  1891.     Ellerman's  suit  was  heard  before  a  vice- 

(j^^^ '  r    A^  company  from  building  a  belt  line  of  railroad  under  a  charter  amendment,  which  had 

/^  -,^,A>-w^     ^^^-^^  recently  been  granted  by  the  Secretary  of  State  upon  the  application  of  a  majority  of  the 
Ju^v    *'*-^*^^/)    •  stockholders.     After  the  court  had  decided  that  the  amendment  was  invalid  in  tiie  absence 

■'^  mA'^^-'^'*^  of  the  unanimous  assent  of  the  stockholders  and  that  the  injunction  should  be  granted,  the 

^"^"C**^         .A-«>-^  ' — '   plaintiffs  claimed  that  the  company  should  be  compelled  to  pay  the  fees  of  the  plaintiffs'  coun- 
fC^^*'^^'  foi^.    sel.    This  claim  was  disallowed.    The  court  said  that  the  plaintiffs  had  not  sued  in  the  right 

,^Ayi-4-»-*-^  (      of  the  corporation,  but  in  their  own  right  as  stockholders.     They  were  not  compelled  to  ask 

f^^^^^.^  **~  ^?<»^*-— ^  y,g  (jorporation  to  sue  or  to  show  a  reason  for  not  so  asking.  The  gist  of  their  complaint 
^^^t^^^^ji^S^ I  ■^'♦^as  that  the  building  of  the  belt  line  would  violate  the  rights  which  inhered  in  the  owner- 
•j/^^'  ship  of  their  stock.  The  suit  of  a  stockholder  in  such  a  case  is  based  upon  the  contract 
*  Z'''*''*^^"^  which  the  law  im])lies  as  existing  between  the  corporation,  the  other  stockholders,  and 
**/**<.  "^  himself.  It  is  unlike  the  case  where  the  stockholder  is  permitted  to  sue  in  the  right  of  the 
..^-.^  ,  corporation  to  undo  a  wrong  done  to  the  corporation.     In  the  latter  case  his  suit  is  not  based 

on  the  theory  that  his  rights  have  been  directly  violated.     The  corporation  itself  would  be 
(0  the  proper  plaintiff;  and  it  is  only  when  the  corporation  virtually  refuses  to  sue  that  tha 

gtockholder  is  permitted  to  sue  in  its  behalf.  — Ed. 

I  Statement  abridged.     Portions  of  opinion  omitted.  —  Ed. 


V, 


WILLOUGHBY   V.   CHICAGO   JUNCTION,   &c.    CO.  543 

Chancellor  on  bill  and  answers ;  an  opinion  was  filed  Dec.  18,  1891 
(49  N,  J.  Eq.  217),  holding  that  said  agreement  was  not  ultra  vires 
the  corporation  and  not  illegal ;  and  a  decree  was  entered  dismissing 
the  bill  on  tliat  ground. 

AaroJi  P.  Whitehead,  Frederic  W.  Stevens,  and  Thos.  N.  McCarter, 
for  plaintiffs. 

Ji.  Wayne  Parker,  Cortlandt  Parker,  Joseph  H.  Choate,  Wm.  D. 
Guthrie,  and  Barker  Gummere,  for  various  defendants. 

Green,  V.  C.  [After  stating  the  case.]  Assuming  that  such  decree 
is  not  impeachable  for  fraud,  collusion  or  other  vice,  to  what  extent,  if 
at  all,  is  the  decision  of  questions  in  the  Ellerman  suit  conclusive  in 
this  action?  . 

Mr.   Black,   in   his   work   on   Judgments,  thus  states   the   general  j^r^ 

rule  (§  504) :  t^' 

"  A  point  which  was  actually-  and  directly  in  issue  in  a  former  suit,  I  lip^^ 
and  was  there  judicially  passed  upon  and  determined  b}"  a  domestic/      ,^ 
court  of  competent  jurisdiction,  cannot  be  again  drawn  in  question  in\  "A 
any  future  action  between  the  same  parties  or  their  privies,  whether) 
the  causes  of  action  in  the  two  suits  be  identical  or  different." 

As  the  rule  in  question  is  generally  stated,  the  former  judgment  is 
binding  only  on  parties  and  their  privies,  but  the  course  of  decision 
has  been  such  as  to  embrace  others  who  do  not  stand  in  a  relation, 
strictly  speakmg,  of  privity  with  the  orjginal  party^  as  a  sheriff  and  his 
^puty,  iLing  v.  Chase,  15  W.  B~  9  (41  Am.  Dec.  657)  ;  master  and 
servant,  in  an  action  of  trespass,  Emery  v.  Fowler,  39  Me.  326  (63 
Am.  Dec.  627)  :  the  joint  and  several  makers  of  a  promissory  note, 
Spencer  v.  Dearth,  43  Vt.  98 ;  the  true  owner,  and  thp  hnilpp  of  cnm- 
plainant.  Bates  v.  Stanton,  1  Duer.  79;  a  chattel  mortgagee  and  the 
vendee  of  the  mortgaged  goods,  Atkinson  v.  White,  60  Me.  396  ;  a 
town  and  parties  alleged  to  have  caused  an  obstruction  to  the  highway, 
in  an  action  for  negligence.  Hill  v.  Bain,  Town  Treas.,  15  P.  I.  75 
(23  Aln.  Pep.  44) ;  see,  also,  Durham  v.  Giles,  52  Me.  206  ;  Freer  v. 
Stotenhur,  2  Ahh.  Ct.  of  App.  Dec.  189. 

Chief  Justice  Durfee,  in  Hill  v.  Pain,  referring  to  some  of  the  cases, 
says  (at  p.  77)  : 

"In  these  cases  the  defendants  were  permitted  to  avail  themselves, 
by  way  of  estoppel,  of  judgments  to  which  they  were  neither  parties 
nor  privies.  The  ground  on  which  this  was  permitted  seems  to  have 
been  that  the  defendants,  though  not  parties  to  the  judgments,  were  so 
connected  in  interest  or  liability  with  the  parties  that  the  judgments, 
when  recovered,  could  be  regarded  as  virtually  recovered  for  them,  for 
the  purposes  of  estoppel,  as  well  as  b}'  and  for  the  parties  of  record." 

Plack  on  Judgments  (§  537)  thus  states  the  rule  as  to  the  parties 
affected : 

"It  is  not  always  necessary  that  the  parties  to  the  two  suits  should 
be  nominally  the  same  in  order  that  one  recovery  may  bar  another. 


544  WILLOUGHBY   V.  CHICAGO   JUNCTION,   &c.   CO. 

It  is  in  general  sufficient  if  they  are  really  and  substantially  in  interest 
the  same." 

And  Mr.  Freeman,  in  his  work  on  Judgments,  thus  (§  154)  : 
"  Persons  who  were  parties  to  the  suit,  or  in  privity  with  such  party, 
or  in  such  a  position  that  they  were  the  real  parties  in  interest  in  the 
.litigation  conducted  for  their  benefit  in  the  name  of  another,  undei 
such  circumstances  as  to  make  them  answerable  for  the  result  of  the 
litigation  by  virtue  of  the  principles  to  be  hereinafter  stated." 

The  practice  has  long  been  recognized  of  permitting  suit  to  be 
brought  by  a  few  as  the  representatives  of  a  numerous  class,  on  behalf 
of  themselves  and  all  others  of  the  class,  when  there  is  a  common 
interest  or  a  common  right  which  the  suit  seeks  to  protect,  and  against 
a  few  as  representing  a  numerous  class  subject  to  a  common  liabiUt}' 
which  the  suit  seeks  to  enforce.     Story  Eq.  PI.  §  97. 

i'  "  In  most,  if  not  in  all,  cases  of  this  sort,  the  decree  obtained  upon 
such  a  bill  will  ordinarily  be  held  binding  upon  all  other  persons  stand- 
ing in  the  same  predicament,  the  court  taking  care  that  sufficient  per- 
sons are  before  it,  honestl}',  fairly  and  fully  to  ascertain  and  try  the 
general  right  in  contest."  Story  Eq.  PI.  §  120. 
[The  learned  Judge  then  stated  the  cases  of  Harmon  v.  Auditor, 

123  111.  122;  Gasl-ell  v.  Dudley,  6  Metcalf,  546;  and  Paveyx.  St. 
Albans  Trust  Co.,  60  Vt.  1.] 

None  of  these  cases,  it  is  true,  is  exactly  in  point,  but  they  show 
clearly  how  elastic  is  the  rule  limiting  the  conclusive  character  of 
judgments  to  parties  and  their  privies.  How  does  the  question  stand 
on  principle? 

Actions  of  the  class  to  which  the  Ellerman  and  Willoughby  suits 
belong  are  sui  generis,  in  this,  that  the  complainant  does  not  prosecute 
in  his  own  right  —  a  stockholder,  as  such,  does  not  have  a  legal  or 
equitable  estate  in  the  corporate  property ;  his  only  right  of  property 
is  to  a  proportionate  share  of  the  profits  of  the  business  while  the  com- 
pany is  in  operation,  and  to  a  proportionate  share  of  the  net  assets  on 
its  dissolution.  Unauthorized  dealing  with  the  franchises  or  funds  of 
the  corporation  directly  injure  it  as  a  legal  entity  ;  it  is  the  franchises 
of  the  corporation  which  are  to  be  misused,  the  funds  of  the  corporation 
which  are  to  be  misappropriated,  and  the  corporation  is,  therefore,  the 
party  to  be  injured  and  should  itself  seek  redress.  This  class  of  cases 
must  not  be  confounded  with  the  preventive  remedy  of  every  stockholder 
to  restrain  acts  idtra  vires  the  corporation.  While  "  the  directors  are 
\  quasi  or  sid)-modo  trustees  for  the  corporation  with  respect  to  the 
corporate  property,  the}'  are  also  quasi  or  suh-modo  trustees  for  the 
stockholders  with  respect  to  their  shares  of  the  stock."  3  Pom.  Eq. 
Jur.  §1000. 

Each  stockholder  has  invested  his  money  in  tlie  very  enterprise 
contemplated  by  the  charter,  and  has,  in  his  own  riglit,  an  equitable 
remedy  to  prevent  his  quasi-trnsiccQ,  as  directors,  from  misuse  of  the 
corporate  franchises,  and  from  diversion  of  corporate  funds,  to  a  pur- 


WILLOUGHBY   V.  CHICAGO   JUNCTION,  &c.   CO.  545 

pose  foreign  to  that  of  the  charter,  and  for  which  he  has  invested  his 
money,  and  this  although  every  other  stockholder  favors  the  proposed 
action,  and  it  is  plainly  advantageous  to  the  financial  interests  of  the 
company. 

The  Ellerman  and  Willoughby  suits  belong  not  to  this,  but  to  that 
class  of  cases  in  which  the  corporation  itself  is  directly  injured  and  is 
primarily  interested,  and  should  itself  institute  and  maintain  an  action 
for  relief;  in  which  the  remedy-  to  be  obtained,  whether  pecuniar}'  or 
otherwise,  is  for  its  benefit  and  belongs  to  it  alone  ;  the  stockholder  in 
such  case  has  no  standing  in  the  court,  as  a  party,  except  on  the 
refusal,  either  express  or  implied,  of  the  corporation  itself  to  prosecute. 

Where,  as  in  this  case,  an  appeal  to  the  directors  to  bring  suit  would 
apparently  be  unavailing,  refusal  to  prosecute  is  implied,  and  a  stock- 
holder is  permitted  to  commence  the  action  in  his  own  name  ;  but 
otherwise  the  suit  is  treated  in  every  respect  as  one  brought  b}-  and  for 
the  corporation  ;  although  the  stockholder  is  the  nominal,  the  corpora- 
tion is  the  real  part}-  complainant,  represented  not  b}'  its  accustomed 
officials,  but  b}-  one  or  more  of  its  stockholders. 

Professor  Poraeroy  (3  ^q.  Jur.  §  1095)  says,  with  reference  to  such 
a  suit : 

"  AVherever  a  cause  of  action  exists  primaril}'  in  behalf  of  the  cor- 
poration against  directors,  officers  and  others,  for  wrongful  dealing 
with  corporate  propert}',  or  wrongful  exercise  of  corporate  franchises, 
so  that  the  remedy  should  regularly  be  obtained  ihrough  a  suit  by  and 
in  the  name  of  the  corporation,  and  the  corporation  either  actually  or 
virtually  refuses  to  institute  or  prosecute  such  a  suit,  then,  in  order  to 
prevent  a  failure  of  justice,  an  action  may  be  brought  and  maintained 
by  a  stockholder  or  stockholders,  either  individuall}'  or  suing  on  behalf 
of  themselves  and  all  others  similarly  situated,  against  the  wrong-doing 
directors,  officers  and  other  persons  ;  but  it  isabsolutely  indispensable 
that  the  corporation  itself  jihould  be  joined  as  a  party  —  usually  as  a 
co-defendant.  The  rationale  of  this  rule  should  not  be  misapprehended. 
The  stockholder  does  not  bring  such  a  suit  because  his  rights  have 
been  directly  violated,  or  because  the  cause  of  action  is  his,  or  because 
he  is  entitled  to  the  relief  sought ;  he  is  permitted  to  sue  in  this  manner 
simply  in  order  to  set  in  motion  the  judicial  machiner}'  of  the  court. 
The  stockholder,  either  individually  or  as  a  representative  of  the  class, 
ma}'  commence  the  suit,  and  may  prosecute  it  to  judgment ;  but  in 
every  other  respect  the  action  is  the  ordinary  one  brought  by  the 
corporation  ;  it  is  maintained  directly  for  the  benefit  of  the  corporation, 
and  the  final  relief,  when  obtained,  belongs  to  the  corporation  and  not 
to  the  stockholder-plaintiff.  The  corporation  is,  therefore,  an  indis-l 
pensably  necessary  party,  not  simply  on  the  general  principles  of  equity 
pleading,  in  order  that  it  may  be  bound  by  the  decree,  but  in  order 
that  the  relief,  when  granted,  may  be  awarded  to  it,  as  a  party  to  the 
record,  by  the  decree.  This  view  completely  answers  the  objections 
which  are  sometimes  raised  in  suits  of  this  class,  that  the  plaintiff  has 


(^ 


546  WILLOUGHBY  V.   CHICAGO   JUNCTION,   &c.    CO. 

no  interest  in  the  subject-matter  of  the  controversy,  nor  in  the  relief. 
In  fact,  the  plaintiff  has  no  such  direct  interest ;  the  defendant  cor- 
poration alone  has  an}-  direct  interest ;  the  plaintiff  is  permitted,  not- 
withstanding his  want  of  interest,  to  maintain  the  action  solely  to 
prevent  an  otherwise  complete  failure  of  justice." 

Cook  on  Stockholders  (1st  ed.)  §  692,  says : 
'  ""The  rule  that  the  corporation  itself  is  an  indispensable  party  de- 
fendant to  such  suit,  is  due  to  the  fact  that  all  other  possible  future 
suits  by  the  corporation  are  thereby  prevented,  the  rights  of  the  cor- 
poration are  duly  ascertained,  and  the  remedy  made  effectual  against 
the  corporation  as  well  as  others." 

Neither  this  suit  nor  the  Ellerraan  suit  was  in  the  right  of  the 
respective  complainants ;  they  were  the  nominal,  but  not  the  real, 
parties  complainant.  The}'  were  suing  merely  as  representing  the 
company,  to  establish  and  enforce  its  rights ;  the  relief  to  be  obtained 
was  not  and  is  not  for  their  individual  benefit,  but  for  the  benefit  of 
the  corporation  as  such.  In  these  cases  the  corporation  itself  is  a 
necessary  and  was  and  is  actuall}^  a  party  defendant ;  in  these  it  was 
and  is  represented  by  counsel,  answered  the  bills  and  has  taken  part 
by  counsel,  in  the  discussion  of  the  case.  The  decree  in  the  EUerman 
suit  certainly  binds  the  company.  In  the  face  of  that  decree,  neither 
the  old  nor  a  new  board  of  directors  could  attack  it  except  b}'  an  appeal. 
Thejformer  decree  could  be  successfully  pleaded  as  a  bar  to  an  action 
institutedTrTthe  name  o7~tlie~com"pan y  by  an thorfzed  agents  wliojnigh t 
desire  to  relitigate  the  questions  decided.  If  the  compan}'  and  its 
authorized  representatives  are  then  concluded  b}'  such  a  decree,  how 
can  a  stockholder,  suing  in  behalf  of  the  company,  be  permitted  to 
relitigate  questions  which  are  conclusive  upon  the  corporation?  A 
stockholder  has  no  standing  in  the  court  to  prosecute  such  an  action 
except  on  the  refusal  of  the  directors,  either  actual  or  presumptive,  to 
prosecute.  But  such  refusal  of  the  directors  to  prosecute  must  be  an 
unjustifiable  refusal.  If  their  reason  for  not  doing  so  is  a  valid  one, 
the  individual  stockholder  cannot,  from  such  refusal  derive  a  right  to 
.prosecute  in  his  own  name.  It  would  not  be  unreasonable  or  unjusti- 
/fiable  for  a  board  of  directors  to  refuse  to  prosecute,  on  the  application 
of  a  stockholder,  when  there  had  been  an  adjudication  on  the  point 
which  he  seeks  to  have  passed  upon,  which  is  conclusive  upon  the 
company.  And  if  the  stockholder  in  the  face  of  a  refusal  by  the 
directors  on  that  ground  should  persist  and  commence  the  action,  an 
answer  by  the  directors  in  his  suit,  that  they  had  refused  to  bring  the 
action  solely  on  the  ground  that  the  question  had  been  before  adjudi- 
cated, would  necessarily  be  followed  by  a  dismissal  of  his  bill.  This 
argument  goes  to  the  root  of  this  question,  and  demonstrates  that  the 
decision  of  questions  litigated  in  this  court  in  the  suit  brought  by 
Ellerman,  a  stockholder,  in  his  own  behalf  and  tliat  of  other  stock- 
holders, in  which  the  company  was  made  a  defendant  and  appeared, 


WILLOUGHBY  V.   CHICAGO   JUNCTION,   &c.   CO.  547 

is  conclusive  in  another  suit  brought  by  another  stockholder  for  the 
purpose  of  relitigating  the  questions  which  have  been  determined.  If 
not  so  there  can  be  no  end  of  litigation,  for  the  court  is  then  open  to 
suit  by  every  stockholder,  seriatim,  presenting  the  questions  over  and 
over  for  consideration  and  decision. 

In  Daunmeyer  v.  Coleman,  11  ^ed.  JRep.  97,  Sawyer,  C.  J.,  says: 
*'  By  reference  to  JBurke  v.  Flood,  supra,  it  will  be  seen  that  a  similar 
suit  for  these  same  grievances  was  brought  by  a  single  stockholder, 
Burke,  on  behalf  of  himself  and  all  other  stockholders  —  and  it  is  a 
notorious,  historical  fact,  of  which  the  daily  newspapers  have  been  full, 
that  these  are  not  the  onl}'  suits  brought  in  the  same  way  for  the  same 
grievances.  Is  each  holder  of  one  of  these  five  hundred  and  fort}' 
thousand  shares  of  stock  entitled  to  bring  a  suit  in  equit}'  on  behalf  of 
himself  and  all  other  stockholders  for  an  account  of  their  transactions? 
Or,  where  such  a  suit  has  been  brought  by  one  stockholder,  must  the 
others  come  in  and  seek  their  relief  in  that  suit?  If  each  stockholder 
is  entitled  to  bring  such  a  suit,  then  there  is  something  wrong  in  the 
law,  and  the  sooner  tlie  supreme  court  by  rule,  or  congress  by  statute, 
regulates  the  matter  the  better  it  will  be  for  the  due  administration  of 
justice." 

It  is  urged  that  no  party  should  be  concluded  without  an  opportunity 
to  be  heard ;  but  this  complaint  does  not  lie  in  the  mouth  of  Mr. 
Willoughby.  He  had  an  opportunity  to  be  heard  in  the  Ellerman 
suit.  It  was  expressly  for  the  benefit  of  all  stockholders  wlio  might 
come  in  and  contribute  to  its  expense.  He  could,  at  any  time  before 
decree,  have  been  made  a  party  to  the  Ellerman  suit,  and  have  then 
advised  the  court  of  anything  not  before  brought  to  its  attention. 

He  had  ample  time  to  so  apply  after  he  actually  knew  of  the  pendency 
of  the  suit,  and  his  solicitor  was  thoroughly  informed  of  all  proceedings 
in  the  Ellerman  case  in  time  to  Lave  intervened.  Counsel  admitted, 
upon  the  argument,  that  the  question  whether  they  should  intervene  in 
the  Ellerman  suit,  or  resort  to  an  independent  action,  was  considered 
and  discussed  before  bringing  the  present  suit  was  determined  upon. 

Besides,  from  the  very  form  and  nature  of  these  suits,  each  stock- 
hokler  must  be  considered  as  represented,  for  if  he  is  in  sympathy 
with  the  complainant  he  may  become  a  party  complainant  by  appli- 
cation to  the  court ;  if  he  is  in  sympathy  with  the  threatened  action  of 
the  company,  he  is  represented  by  and  in  the  corporation  which  is  a 
necessary  part}'  to  the  suit.  March  v.  Eastern  li.  R.  Co.,  40  N.  H. 
548.  Not  only  this,  but  the  court  may,  if  satisfied  that  the  interests 
of  the  corporation  are  not  being  properly  presented  or  protected,  admit 
a  stockholder  to  be  made  a  party  defendant.  Bronson  et  al.  v.  La 
Crosse  <&  M.  R.  R.  Co.,  2  Wall.  283. 

[The  learned  judge  then  held,  that  the  charge  that  the  Ellerman  suit 
was  collusive  was  not  sustained;  and  said:  "  The  Ellerman  suit,  not 
being  collusive,  must  be  held  to  be  conclusive  in  this,  upon  all  Questions 


548  TOMKINSOX   V.    SOUTH-EASTERN   RAILWAY   CO. 

■which  were  therein  decided,  .  .  ."  He  then  proceeded  to  consider  the 
matters  which  arise  under  the  contract  of  Jan.  15,  1892,  not  passed  on 
in  the  former  suit,  and  which  are  the  subject  matter  of  the  supplemental 
bill.] 

Sill  and  supplemental  bill  dismissed. 
Van  Fleet,  V.  C,  concurred. 


'^?^'' 


^P-' 


O^^J^HJ^K^'      ^CJmkinson  v.  south-eastern  railway  CO. 

t/r\  '.jj       Aj^      r   This  was  a   motion   by   the   Plaintiff,    a  holder   of  £500   deferred 

%^^\^\K  ^^    ^^    ordinary  stock  of  the  South- Eastern  Railway  Company,  for  an  in- 

r  )    'TjjL/^     //rj^mction  to  restrain  the  company  and  its  directors,  officers,  servants, 

^^  Lf c/^     ^^nd  agents,  until  the  trial  of  the  action  or  further  order,  from  sub- 

yy*  ^    ^/^^/iv*      c'  scribing,  advancing  or  paying,  out  of  the  moneys  of  the  company,  the 

...P\.\t^  <h^    sum  of  £1000,  or  any  other  sum,  by  way  of  donation,  or  otherwise,  to 


^    I  ■JCP'       uJ^ .    ^'^r  foi'  the  purposes  of  the  Imperial  Institute,  or  to  any  person  or  per 
^^  ^Ajjt^      /u^     ^  sons  on  behalf  of  the  Institute. 

(tpf^^ ,J^  A  ^        At  a  meeting  of  the  stockholders  or  "  proprietors  "  of   the  South- 

P^y^  .li^    ^ t/a^  Eastern  Hailicay^  held  on    the  5th  of  March,   1887,   to  consider  a 

^    ■{a^-' ^  t^^  fc   t  circular  issued  by  the  executive  council  of  the  Imperial  Institute  to 

/'*'  J    uy\   ^  the  South-Eastern  and  other  railway  companies,  inviting  them  to  sub- 

,4jr^   ,     "■'^  ,  scribe  to  the  funds  of  the  Institute,  the  following  resolution  was  passed, 

.^^       'yJ^J^^  oil  the  motion  of  the  chairman  of  the  company:   "  That  the  directors 

yJ^t^  .        '        ^belfviithorized,  either  by  way  of  donation  from  the  company  or  b}- an 

Ly^^"^ f  iV^psal  to  the  proprietors,  as  they  may  be  advised,  to  subscribe  the  sum 

ft/o^        ^1^  J^     of  £1000  to  VaOi  Imperial  Institute :  provided,  that  any  shareholder 
5   *  *     jf^  who  declines  to  be  a  party  to  any  such  donation  shall  have  his  propor- 

^  '  -^  tion  returned  to  him  with  his  next  dividend  warrant." 

The  resolution  was  carried  by  10,229  votes,  representing  £1,209,035 
ordinary  stock  of  the  company",  against  175  votes,  representing  stock 
to  the  amount  of  £13,500. 

The  Plaintiff  was  not  himself  present  at  the  meeting,  but,  having 
read  a  report  of  the  proceedings,  he,  on  the  11th  of  March,  wrote  to 
the  secretar}^  of  the  company  protesting  against  the  proposed  applica- 
tion of  any  of  the  company's  funds  towards  the  Imperial  Institute,  and 
threatening  legal  proceedings.  In  his  reply  the  secretary  pointed  out 
that  the  directors  were  accustomed  to  act  in  obedience  to  the  orders  of 
their  shareholders,  and  not  otherwise,  and  that,  having  regard  to  the 
amount  of  the  Plaintiff's  holding,  his  interest  in  the  contribution  of 
£1000  would  be  represented  by  about  \^d. 

1  Part  of  opinion  omitted.  —  Ed. 


^ 


TOMKINSON   V.    SOUTH-EASTERN   RAILWAY   CO.  549 

After  some  further  correspondence  the  Plaintiff  commenced  this 
action,  and  now  moved  as  above  stated. 

In  an  affidavit  in  opposition  to  the  motion,  the  company's  general 
manager  stated  that,  in  recommending  the  proprietors  to  contribute 
to  the  funds  of  the  Institute,  the  directors  desired  to  further  its  estab- 
lishment in  the  belief  that  a  great  number  of  visitors  would  thereb}-  be 
drawn  from  the  districts  served  b}'  their  railway  and  their  traffic 
largely  increased  ;  and  that,  inasmuch  as  the  previous  exhibitions  at 
South  Kensington  had,  by  the  issue  of  through  tickets  from  their 
system  of  railways,  increased  the  traffic  revenue  of  the  company  bj' 
several  thousands  of  pounds,  the  directors  believed  that  the  establish- 
ment of  the  Institute  at  South  Kensington  would  lead  to  a  similar 
result.  The  affidavit  further  stated  that  railway  companies  in  general 
had  been  accustomed  to  contribute  to  the  funds  of  objects  likely  to 
encourage  traffic  upon  their  lines,  such  as  race-meetings  and  regattas, 
and  also  to  hospitals  and  other  public  institutions  which  might  benefit 
their  employes. 

A.  Young,  for  the  Plaintiff  :  — 

The  proposed  subscription  is  clearl}'  ultrd,  vires,  it  not  being  one  of 
the  objects  for  which  the  compan}'  was  incorporated  to  promote  or 
support  popular  exhibitions. 

Sir  It.  Webster,  A.  G.,  C.  T.  Mitchell,  and  Worsley  Taylor,  for  the 
Defendants :  — 

It  is  not  ultrd,  vires  of  a  company  to  expend  Its  funds  for  the 
advantage  of  its  undertaking.  A  company  has  inherent  power  to  do 
whatever  ma}-  be  conducive  to  its  popularit}-  or  to  the  objects  of  its 
undertaking :  Taunton  v.  Royal  Insurance  Company ;  ^  Hompson 
V.  Price's  Patent  Candle  Company  •  ^  Hutton  v.  West  Cork  RaiU 
I'-ay  Company  '^  Pickering  v.  Stephenson.'^  As  the  companj'  are 
not,  we  submit,  acting  ultrh  vires,  the  Court  will  not  interfere  in  their 
internal  affairs  :  Foss  v.  Harhottle  -^  Pickerings.  Stepihenson.^  Even 
if  the  proposed  subscription  is  ultra  vires,  the  damage  to  the  Plaintiff 
is  so  infinitesimal  that  the  case  is  not  one  for  an  injunction. 

Kav,  J.  :  — 

I  have  no  doubt  that  it  is  the  duty  of  the  Court  to  grant  an  injunc- 
tion in  this  case. 

The  question,  as  the  Attorney-General  said,  is  whether  the  act  pro- 
posed to  be  done  is  within  the  powers  of  the  railwa}-  company,  or  out- 
side its  powers.  If  it  is  outside  its  powers,  it  is  now  perfectly  settled 
that  any  one  shareholder  may  come  to  this  Court  and  say,  "  This  com- 
pany is  going  to  do  an  act  which  is  beyond  its  powers :  stop  it ;  "  and 
the  Court  thereupon  has  no  discretion  in  the  matter. 

Now,  what  is  proposed  to  be  done  here  is  this :  the  chairman  of  the 

12H.&M.  135.  245L.  J.  (Ch.)437. 

8  23  Ch.  D.  654.  *  Law  Rep.  14  Eq.  322. 

6  2  Hare.  461.  «  Law  Rep.  14  Eq.  339. 


550  TOMKINSON  V.  SOUTH-EASTERN   RAILWAY   CO. 

railway  company,  at  a  meeting  of  the  compan}',  proposed  this  resolu* 
tion :  "That  the  directors  be  autliorized,  either  by  wa}'  of  donation 
from  the  compan}'  or  by  an  appeal  to  the  proprietors,  as  ihey  may  be 
advised"  —  the  resolution  thus  proposing  two  alternative  modes  —  "to 
subscribe  the  sum  of  £1000  to  the  Imperial  Institute"  I  pause  there. 
The  Imperial  Institute  has  no  more  connection  with  this  railway  com- 
pany than  the  present  exhibition  of  pictures  at  Turlington  House,  or 
the  Grosvenor  Gallery,  ox  Madame  Tussaud's,  or  any  other  institu- 
tion in  London  that  can  be  mentioned.  The  only  ground  for  the  sug- 
gestion that  this  company  has  the  right  to  apply  its  funds,  which  it  has 
been  allowed  to  raise  for  specific  purposes,  to  this  purpose,  is,  that  the 
Imperial  Institute,  if  it  succeeds,  will  very  probably  greatly  increase 
the  traffic  of  this  company.  If  that  is  a  good  reason,  then,  as  I  pointed 
out  during  the  argument,  any  possible  kind  of  exhibition  which,  by 
being  established  in  London,  would  probably  increase  the  traffic  of  a 
railway  company  by  inducing  people  to  come  up  to  see  it,  would  be  an 
object  to  which  a  railway  company  might  subscribe  part  of  its  funds. 
I  never  heard  of  such  a  rule,  and,  as  far  as  I  understand  the  law,  that 
clearl}'  would  not  be  a  proper  application  of  the  moneys  of  a  railway' 
compan3\  I  cannot  distinguish  this  case  from  that  at  all,  though,  of 
course,  I  do  not  mean  to  disparage  the  enormous  importance  of  the 
Imperial  Institute.  It  may  be  established  for  the  highest  possible 
objects  of  interest  to  this  country ;  but  still,  the  only  reason  given  to 
me  wh}'  this  railway  company  thinks  it  right  to  spend  part  of  its  funds 
in  subscribing  to  it  is  this,  that  it  will  probably  greatly  increase  the 
traffic  of  the  company  b}'  inducing  many  people  to  travel  up  to  visit 
this  Institute.  I  cannot  accept  that  as  a  reason  for  a  moment.  There- 
fore, as  at  present  advised,  it  seems  to  me  that  this  is  ult7'dL  vires. 

Before  I  go  further  I  will  read  the  rest  of  the  resolution  :  "  Provided, 
that  any  shareholder  who  declines  to  be  a  part}'  to  any  such  donation 
shall  have  his  proportion  returned  to  him  with  his  next  dividend  war- 
rant." That  means  this :  "  We,  the  directors,  propose  to  spend  money 
which  ought  to  be  divided  among  3-ou,  the  shareholders,  in  paying  a 
subscription  to  this  Institute :  if  you  do  not  like  it,  we  admit  you  have 
a  right  to  object,  and  your  proportion  will  be  returned  to  j'ou  with  your 
next  dividend  warrant."  This  shareholder  says,  "  I  do  not  want  my 
money  spent  in  that  way  ;  "  and  he  is  right,  if  it  is  beyond  the  powers  of 
the  company,  in  saying  that  the  money  shall  not  be  spent  in  that  way. 
Moreover,  his  objection  is  not  confined  to  his  own  share.  It  is  said 
that  his  share  of  the  subscription  would  be  comparatively  trivial ;  but, 
if  the  subscription  is  tdtrd,  vires,  the  company  ought  not  to  spend  a 
farthing  of  their  funds  on  the  Institute.  His  objection  is  to  the  whole 
expenditure. 

Now  tlie  cases  which  have  been  cited  reall}'  seem  to  me  to  be  author- 
ities directly  against  this  proposed  application  of  the  company's  funds. 

[The  learned  Judge  then  cited  and  commented  on  Taunton  v.  Royal 
Ins.  Co.y  2  H.   &  M.  135;  Ilampson  v.  Price's  Patent  Candle  Co-t 


TOMKINSON  V.    SOUTH-EASTERN   RAILWAY   CO.  551 

45  L.  J.  (Chan.)  437;  and  Button  v.  West  Cork  B.  Co.,  L.  R.  23 
Chan.  Div.  054  ;  and  then  continued  as  follows  :] 

I  do  not  think  1  need  refer  particularly  to  Pickering  v.  Stephenson} 
There  what  was  done  was  decided  to  be  ultra  vires,  but  seeing  that  the 
amount  which  the  plaintiff  would  be  entitled  to  recover  was  exceedingly 
minute,  the  Court  would  not  make  an  order  for  payment  back  to  him 
of  the  moneys  improperh*  expended. 

Does  an}'  one  of  those  cases  touch  the  present?  Certainly,  I  should 
be  the  last  Judge  on  the  bench  to  extend  the  meaning  of  those  cases. 
It  is  absolutely  necessary  to  keep  incorporated  or  joint  stock  companies 
within  the  limits  of  their  powers.  That  is  a  rule  which  has  been  recog- 
nised over  and  over  again.  To  say  that,  because  the  authorities  which 
have  been  referred  to  have  held  that  the  acts  there  done  Avere  within 
the  limits  of  the  powers  of  the  company  in  each  case,  therefore  it 
follows  that  any  expenditure  which  may  indirectly  conduce  to  the 
benefit  of  the  company  is   intra  vires,  seems  to  me  extravagant. 

I  know  of  no  authority  whatever  for  saying  that  the  payment  of 
£1000  out  of  the  funds  of  this  company  as  a  subscription  to  the 
Imperial  Institute  would  be  within  the  powers  of  a  railway  compan}'. 
I  might  stop  there,  because,  this  being  an  application  for  an  inter- 
locutory injunction,  I  am  bound,  if  I  felt  difficult}'  upon  the  question, 
to  restrain  the  matter  until  the  trial  of  the  action  ;  but  my  present 
opinion  is  entirely  against  the  validity  of  this  act. 

Therefore,  it  seems  to  me  I  am  clearly  bound  to  restrain,  until  the 
trial  of  this  action,  the  expenditure  of  this  money  out  of  the  company's 
funds. 

An  alternative  is  suggested,  as  I  pointed  out,  in  the  resolution  invit- 
ing the  individual  proprietors  to  sanction  this  payment  out  of  their 
funds,  because  it  says  "  either  by  wa}'  of  donation  from  the  company' 
or  b}-  an  appeal  to  the  proprietors,  as  they  may  be  advised."  An 
appeal  to  the  proprietors  means  an  appeal  to  subscribe  £1000,  which 
they  are  Invited  to  give  to  the  Imperial  Institute.  To  that  no  kind  of 
objection  could  be  made ;  but  this  case  has  been  argued  on  the  footing 
that  the  alternative  adopted  by  the  directors  has  been,  not  to  take 
that  step,  but  to  apply  the  moneys  of  the  company.  That,  it  seems  to 
me,  the  Court  is  bound  to  restrain  them  from  doing,  and  I  therefore 
grant  an  injunction  in  the  terms  of  the  notice  of  motion,  the  PlaintitJ 
giving  the  usual  undertaking  in  damages. 

1  Law  Rep.  U  Eq.  323. 


L^ 


^ou^j   ^^YJikdEST   V.    MANC^ESTEK: 
/\  ^>^^FOTlREST   y.   MANCHESTER,    &c.    tlAIL^Y  CO. 

1861.     4  De  Gex,  Fisher  %■  Jones,  125.1 


''^^His  was  the  appeal  of  the  plaintiff  from  the  dismissal  of  his  bill 
b}'  the  Master  of  the  Rolls.     The  plaintiff  was  a  shareholder  in  the 
e^Manchester  &c.    Railway   Co. ;    and  sued,   on  behalf  of  himself  and 
njD       h^"*  ^  <rthe  other  shareholders  of  the  company,  for  an  injunction  to  restrain 
^J^      A^^^the  defendants  from  conveying  in  vessels  or  boats  passengers,  cattle, 
'^'^^  JJ^  iA  ^^^  goods  from  Hull  or  Grimsby  to  Spurn  Point. 
^    <2-^<ljir         /  The  bill  alleged  that  the  traffic  sought  to  be  restrained  was  be3'ond 

y^    i^^^^   ./>*^the  powers  of  the  company  under  their  Act,  and  was  also  prejudicial  to 
'-^,^y''^t,    ^^  another  company  called     The  "  Gainsborough  United   Steam  Packet 
^  .,  ^ i .  Company,  Limited,"  in  which  the  plaintiff  was  a  large  shareholder. 


-  tv 


O-'^'^rl'''*^'''''^^        '^^^  answer  stated,  inter  alia,  that  the  suit  was  not  for  the  benefit  of 

I  "  C^  .jji    Va^A  "^    the  other  shareholders  of  the  company  on  whose  behalf  the  plaintiff 

/-^  'iJ'        ■>-*'       ^^^^^  himself  out  as  suing,  but  was  instituted  solely  to  promote  and 

''^^  t>^'*\y\fVf^  serve  the  interests  of  the  Gainsborough  United  Steam  Packet  Company 

P^  '     ''^^    J/         Limited,  and  that  all  the  other  shareholders  of  the  defendants'  company 

were  opposed  to  the  suit. 

^    i '   v^  Ay^  Evidence  was  gone  into,  and  the  plaintiff  on  his  cross-examination 

(cy^^  /y^ ^  ^admitted,  that  he  held  only  82?.  stock  in  the  railway  company,  but  was 

ju^  /J^  the  holder  of  twelve  30?.  shares  in  the  packet  company,  which  was 

paving  a  dividend  of  lOJ,  per  cent ;  and  that  the  excursion  traffic  had 

e^  continued  for  eight  or  ten  years.     He   also   admitted  that  the 

ifectors  of  the  packet  company  had  directed  the  institution  of  the  suit, 

and  indemnified  him  against  costs.     The  Master  of  the  Rolls  dismissed 

the  bill  on  the  ground  that  the  Act  sought  to  be  restrained  was  not 

xdtra  vires. 

/Selinjn,  and  M  K.  Earslake,  for  appellant.     [Citations  omitted.] 
The  Solicitor  General  (Sir  H.  Palmer)  and  Fischer,  for  respond- 
ents, were  not  called  upon. 

The  Lord  Chancellor  [Westbury].  In  this  case  I  am  asked  to 
reverse  the  order  of  the  Master  of  the  Rolls  dismissing  this  bill  with 
costs.  I  desire  it  to  be  distinctly  understood  that  my  decision  does 
not  proceed  upon  the  grounds  stated  by  the  Master  of  the  Rolls.  It  is 
unnecessary  for  me  to  express  an}'  opinion  upon  the  grounds  stated  by 
his  Honor  which,  if  they  are  correct,  would  be  confined  entirely  to  this 
particular  case,  because  they  have  reference  to  the  peculiar  constitution 
of  the  present  compan}'.  But  the  ground  upon  which  I  proceed  is  en- 
tirely that  of  personal  exception  to  the  character  of  the  i)laintiff,  and 
the  foundation  of  my  decision  is  contained  in  this  passage  of  the  plain- 
tiff's own  examination  not  attempted  to  be  qualified  or  questioned.  lie 
says   in  that  examination    "  The   directors   of  the   packet   company 

1  Statement  abridired.  —  Ed. 


A 


FORREST  V.   MANCHESTER,   &c.   RAILWAY   CO.  553 

directed  the  institution  of  this  suit  and  indemnify  me  against  costs." 
It  is  not  that  the}'  persuaded  him  to  institute  the  suit,  not  that  they 
instigated  the  suit,  but  that  the  directors  of  the  other  companj-  have 
"directed  the  suit,"  and  are  to  indemnify  the  plaintiff  against  the 
costs  of  it.  To  use  a  familiar  expression,  the  plaintiff  is  the  puppet  of 
that  company.  It  has  been  a  very  wholesome  doctrine  of  this  Court 
that  one  shareholder  having  in  view  the  legitimate  purposes  of  the  com- 
pany may  be  permitted  in  this  Court  to  maintain  a  suit  on  behalf  of 
himself  and  the  other  shareholders  of  the  company,  but  the  priuc-iple 
upon  which  that  constructive  representation  of  the  shareholders  is  per- 
mitted indisputably  requires  that  the  suit  shall  be  a  bojid  fide  one, 
faithfull}',  truthfully,  sincerely  directed  to  the  benefit  and  the  interests 
of  those  shareholders  whom  the  plaintiff  clalms~a  right  to" represent. 
But  canT^rmilra  man^who  is  the'^juppet  of  another  company  to 
represent  the  shareholders  of  the  company  against  whom  he  desires  to 
establish  the  interests  and  benefits  of  a  rival  scheme  ?  That  would  be 
entirely'  contrary  to  the  principle  upon  which  this  constructive  repre- 
sentation has  been  permitted  to  be  founded.  "When  the  plaintiff  sues 
in  that  capacity-  any  personal  exception  to  the  plaintiff  remains,  and  it 
would  be  in  direct  contradiction  of  every  principle  of  truth  and  justice 
if  I  permitted  a  man  to  come  here  clothed  in  the  garb  of  a  shareholder 
of  compan}'  A.,  but  who  is  in  reality"  a  shareholder  in  compau}'  B., 
and  has  no  sympatliy  whatever  with,  no  real  purpose  of  promoting  the 
interests  of  the  other  company.  Such  a  thing  would  be  so  much  at 
variance  with  the  principles  of  a  Court  of  Equity  that  it  would  be 
impossible  for  it  to  entertain  a  suit  of  that  description  which  is  a  mere 
mocker}',  a  mere  illusor}-  proceeding. 

It  is,  however,  said  that  this  objection  was  considered  some  Aears 
ago  in  the  well-known  case  of  Colman  v.  The  Eastern  Counties  Rail- 
vxAy  Gomjxiny,^  and  was  overruled  b}'  the  late  Master  of  the  Rolls, 
Lord  Langdale.     All  I  mean  to  saj'  about  that  case  is  that  the  objec- 
tion there  proceeded  upon  a  different  ground.    The  proposition  of  Lord 
Langdale  is  that  it  is  no  ground  of  personal  exception  to  a  plaintiff 
that  he  has  been  instigated  to  institute  his  suit  b}'  another  company. 
If  the  proposition  be  limited  to  the  extent  of  the  words  in  which  it  is 
expressed,  possibl}'  there  may  be  no  exception  to  that  proposition,  but 
undoubtedly  I  would  not  assent  to  it  if  carried  one  jot  beyond  those 
limits.     I  desire,  however,  to  point  out  again  the  wide  difference  which  / 
exists  between  a  suit  "  directed"  to  be  instituted  by  the  directors  of/       ,^ 
another  company,  and  a  suit  which  is  bo7ia  fide  instituted  by  the  plain- 1      -P 
tiff,  persuaded  only  to  the  institution  of  it  by  the  arguments  of  another} 
company.     In  the  one  case  the  suit  is  the  suit  of  the  plaintiff,  and  is 
for  ought  that  appears  instituted  at  the  peril  of  the  plaintiff.     In  the 
otlier  case,  the  w-hole  origin  of  the  suit  and  the  direction  and  conduct 
of  it  emanate  altogether  from  the  other  company,  and  the  suit  would 

1  10  Beav.  1. 


Q 


554  FORREST   V.   MANCHESTER,   &c.    RAILWAY   CO. 

have  no  existence  whatever  but  for  the  order  of  the  other  company. 
I  consider,  therefore,  that  the  language  in  which  the  Master  of  the 
Rolls  expresses  himself  upon  the  proposition  then  submitted  to  him 
does  not  in  the  smallest  degree  interfere  with  or  weaken  the  ground 
that  I  have  taken. 

f  I  have  nothing  to  do  with  the  motives  of  plaintiffs  suing  in  this 
Court.  If  they  come  here  in  a  bond  fide  character,  the  reason  for  their 
coming  here  is  a  matter  beyond  the  province  of  a  Court  of  Justice  to 
inquire  into.^  But  if  a  man  comes  here  representing  to  me  that  he  is  a 
hondfida  shareholder  in  a  compan}^  and  that  it  is  the  bond  fide  suit  of 
that  compan}^,  and  it  turns  out  not  to  be  the  suit  of  that  company',  but 
in  reality  to  be  in  its  origin  and  its  verj^  birth  and  creation  the  suit  of 

^ another  company,  then  I  repeat  that  this  is  an  illusory  proceeding,  and 
ought  not  to  be  attended  to  by  the  Court.  The  well-known  words,  — 
the  trite  quotation,  —  will  occur  to  the  minds  of  those  who  hear  me. 
"  Fabula  non  est  judicium  in  scena  non  in  foro  res  agitur."  If  this 
gentleman  be  permitted  to  come  and  assume  merely  for  the  purpose  of 
coming  into  this  Court  the  garb  of  a  shareholder,  but  at  the  same  time 
explicitly  announces,  "This  suit  is  not  directed  to  the  purposes  of  that 
company  ;  I  have  nothing  in  common  with  the  shareholders  of  that 
company ;  it  has  not  emanated  from  the  wish  of  the  sharehold- 
ers ;  it  does  not  emanate  from  me  as  a  shareholder ;  it  is  not  my 
act :  I  am  directed  to  do  it  by  another  party,  and  another  body  of 
men,"  then  in  point  of  fact  the  suit  is  not  the  expression  of  his  own 
will,  nor  is  it  the  legitimate  prosecution  of  his  own  interests  or  his  own 
objects,  but  it  is  the  prosecution  of  the  interests  and  objects  of  persons 
who  have  no  right  whatever  to  invoke  the  interference  of  this  Court. 

I  treat  this  suit  as  an  imposition  on  the  Court.  By  these  words 
I  mean  no  reflection  upon  the  plaintiff  himself,  because  he  has  told  the 
truth,  and  does  not  appear  at  any  time  to  have  desired  to  conceal  it. 
But  as  he  comes  here  in  the  character  of  a  shareholder  in  the  company, 
and  tells  me  frankly  that  the  institution  of  the  suit  is  not  his  own  act, 
but  an  act  that  he  has  been  directed  to  do  by  the  other  company,  then, 
using  the  words  without  offence,  I  denominate  that  suit  an  imposition 
on  the  Court,  and  I  dismiss  it  accordingly,  and  affirm,  though  on  a  dif- 
ferent ground,  the  order  that  has  been  made. 
I  refuse  this  application  with  costs. 

1  See  Kerr  Inj.  549. 


/ 


0^    >^ 


.y^ 


^  >    y SEASON  V.   aRANT^.-- 

/jyise?.    L.  R.  2  C^n.  A%  459.1 

This  was  an  appeal  from  an  order  made  on  the  12th  of  Februar}'. 
18G7,  by  Vice-Chancellor  JIalins,  refusing  an  application  of  the 
Defendants  that  the  bill  might  be  taken  off  the  file,  or  that  all  further 
proceedings  might  be  stayed. 

The  bill  was  filed  by  Charles  Seaton,  on  behalf  of  himself  and  all 
other  shareholders  in  the  Credit  Fonder  and  Mohilier  of  Enr/land, 
Limited^  except  the  Defendant,  Albert  Grants  against  Albert  Grant, 
George  Edward  Seymour^  and  the  above-named  company,  under  the^ 
following  circumstances :  — 

The  Defendant,  Albert  Grants  was  the   managing  director  of  tlier 
above-named  company.      The  Defendant,  George  Edward  Seymoin\  i ,         .  * 
was  the  chairman  of  a  company  called  the  City  of  Milan  Improvements.  *■    ^^y^- 
Co7npany.     The  Plaintiff  alleged  that  the  two  last-named  DefendantsL«/     •  I    ^\P^ 
bad,  in  the  3'ear  1865,  formed  what  is  called  a  "syndicate"  on  the v    qn  l^..  i/''      0^ 
Stock  Exchange  ;  that  is,  a  combination  for  the  purpose  of  raising  the         , 
value  of  the  shares  of  the  Milan  Company  to  a  fictitious  premium  ;  and  ^  \  Ja 
that,  with  this  end,  Grant  had  purchased  12,129  shares  in  the  Milan,    "y 
Company,  and  paid  for  them  out  of  the  funds  of  the  Credit  Fonder,  by       o. 
iwhich  the  latter  company  had  sustained  a  great  loss,  the  shares  of  ^; 
(the  Milan  Company  having  fallen  ver}'  much  in  value.  ^^>#/7/0 

He  also  alleged  that  the  Defendants  were  taking  measures  to  re-      v^  ^ 
constitute  the  Credit  Fonder^  by  dissolving  the  compao}-,  and  trans- 
ferring its  assets  and  liabilities  to  a  new  company. 

The  bill  prayed  that  the  Defendants,  Grant  and  Seymour^  might 
repay  to  the  Credit  Fonder  the  money  expended  in  the  purchase  of 
the  shares  in  the  Milan  Company,  and  that  the  Credit  Fonder  might 
be  restrained  from  handing  over  their  assets  to  any  other  company, 
until  all  their  debts  and  liabilities  had  been  paid  and  satisfied. 

The  bill  was  filed  on  the  19th  of  July,  1866,  and  immediately  after- 
wards the  Plaintiff  moved  for  an  injunction,  in  terms  of  the  prayer, 
before  Vice-Chancellor  Kindersley,  who  refused  the  motion  with  costs. 

On  the  occasion  of  the  motion,  the  Plaintiff  was  cross-examined  in 
Court,  when  it  appeared  that  he  held  only  five  shares  of  £20  each  in 
the  Credit  Fonder,  which  he  acquired  solely  for  the  purpose  of  filing 
this  bill ;  and  that  his  reason  for  filing  the  bill  was  that  he  and  several 
of  his  friends  had  lost  monc}-  by  speculating  in  shares  of  the  Credit 
Fonder,  and  that  be  was  advised  that  if  he  bought  shares,  and  then 
filed  a  bill  to  impeach  certain  transactions  of  which  he  had  notice, 
he  would  probably  be  bought  oflf  at  a  high  price,  and  so  obtain 
compensation.  ' 


^^P 


1  Portions  of  argument,  and  of  opinions,  omitted.  —  Ed 


556  SEATON   V.   GKANT, 

Subseqnentlj'  to  the  filing  of  the  bill,  two  extraordinary  meetings 
of  the  Credit  Fonder  were  held  on  the  30th  of  July  and  the  15th  of 
August,  1866,  at  which  resolutions  were  passed  for  winding  up  the 
company  voluntaril}',  and  for  the  formation  of  a  new  company-,  for 
objects  which  would  include  the  carrying  on  of  the  business  of  the 
Credit  Fonder. 

The  Defendants  put  in  answers  to  the  bill,  but  refused  to  giA'e  full 
information  to  the  Plaintiff  as  to  the  transactions  complained  of ;  and 
their  answers  were  excepted  to  by  the  Plaintiff. 

The  motion  now  under  appeal  was  made  by  the  Defendants  Grant 
and  the  Credit  Fonder,  and,  having  been  refused  by  the  Vice-Chancellor, 
was  now  renewed  before  the  Lords  Justices. 

The  Attorney-  General  (Sir  John  Molt),  Mr.  Karslake,  Q.C.,  and  Mr. 
Waller.,  for  the  company  ;   and 

Sir  Boundell  Palmer,  Q.C.,  Mr.  Bailey,  Q.C.,  and  Mr.  Speed,  for  the 
Defendant  Grant :  — 

We  say,  first,  that  this  suit  is  not  bond  fide.  The  Plaintiff  had  no 
shares  in  the  company  while  the  bill  was  being  prepared ;  he  bought 
five  shares  just  before  it  was  filed,  and  can  give  no  reason  for  his 
proceedings,  but  that  he  had  lost  money  by  speculating  in  the  shares 
of  the  company,  and  wanted  to  make  the  company  repay  him  these 
losses.  The  Court  will  not  entertain  such  a  bill :  Forrest  v.  Man^ 
Chester,  Sheffield,  and  Lincolnshire  Raihoay  Company.^  That  case 
decided  that  the  Plaintiff  must  have  a  legitimate  interest  in  the  subject 
matter  of  the  suit.  The  interest  of  the  Plaintiff  is  merely  nominal.  If 
his  whole  claim  is  recovered,  and  divided  among  the  shareholders,  his 
share  would  be  about  40s.  Such  a  bill  is  an  abuse  of  the  process  of 
the  Court,  and  partakes  of  the  nature  of  maintenance :  Filder  v. 
London,  Brighton,  and  South  Coast  Mailway  Company  ;^  Foxwell 
V.  Webster.^ 

[Remainder  of  argument  omitted.] 

Mr.  Wickens,  for  defendant  Seymour. 

Mr.  Glasse,  Q.C.,  and  Mr.  Cracknall,  for  plaintiff,  were  not  called  on. 

[The  opinion  of  Sir  G.  J.  Turner,  L.  J.,  is  omitted.] 

Lord  Cairns,  L.  J.     This  motion  is  one  of  a  ver}'  novel,  but  of  a 

ver}'  important  character,  because  it  asks  the  Court  to  shut  the  door 

[0      y  V_A/   ^^  ^^®  ^^^®  ^^  ^^^  Plaintiff,  not  on  the  merits  of  the  case,  but  on  the 

yVr  I/-       ground  that  he  has  b}'  his  conduct  disentitled  himself  to  institute  the 

\      L'C/^    ^  i  t^^  ^^"^*     '^^^  theory  of  the  law  of  this  country  is,  that  ever}'  sul)ject  has 

|l^/    j-j^    ^[/^  a  right  to  bring  his  complaint  to  a  hearing,  if  it  be   not  capable  of 

^-  .^l  .    >\         being  stopped  by  a  demurrer  or  a  plea.     The  exceptions  which  have 

9  ^    'T^J'"'^  (^         been  established  to  this  rule  merely  shew  the  strength  of  the  general 

*^  rule.     Those  exceptions  are  four  in  number  :  —  First,  wliere  the  Plaintiff 

is  required  to  give  security  for  costs.      That  is  hardly  an  exception, 

because  the  Court  only  stays  the  proceedings  in  the  suit  until  the 

1  9  W.  R.  818.  2  1  H.  &M.  489. 

8  12  W.  R.  94,  18& 


M^> 


SEATON   V.   GRANT. 


557 


security  is  given.  Second,  where  the  Defendant  is  willing  to  give  to 
the  Plaintiff  all  the  relief  which  he  asks,  and  to  pay  his  costs  of  the 
suit.  Third,  where  the  subject  matter  of  the  litigation  has  perished,  of 
has  been  removed,  and  nothing  remains  to  be  decided  but  the  payment 
of  costs  of  the  suit.  There  the  Court  considers  that  it  would  be  useless 
to  allow  the  suit  to  go  on  to  a  hearing  when  the  only  question  to  be 
determined  can  be  as  well  decided  upon  motion.  Fourth,  where  the 
bill  has  been  filed  without  the  authority  of  the  person  who  appears  as 
ihe  Plaintiff,  or  where  the  name  of  a  corporation  has  been  used  without 
a  sufficient  title  to  use  it.  In  such  a  case  the  bill  is  treated  as  a  fraud 
upon  the  Court,  and  is  therefore  ordered  to  be  taken  off  the  file. 

The  grounds  alleged  for  the  present  motion  are  three :  —  First,  a 
personal  exception  to  the  Plaintiff.      I  do  not  think  that  I  unfairly  | 
represent  the  conclusion  which  the  parties  desire  to  draw  from  the/ 
cross-examination  of  tlie  Plaintiff  if  I  put  it  in  this  way.     The  Plaintiff  ( 
had  in  a  collateral  way  lost  some  money,  and  he  then  finds  a  blot  in  the 
management  of  the  compan}-  of  which  he  thinks  the  shareholders  might 
complain.     He  buys  five  shares  in  the  compan}',  and  then  files  this  bill, 
in  order  to  induce  the  compan}'  to  bu}-  off  the  litigation.     That,  no 
doubt,  is  a  course  of  conduct  which  would  meet  with  little  approval  in 
this  Court,  Or,  indeed,  in  any  other  Court,  and  such  conduct  might  be 
material  at  the  hearing  with  reference  to  the  amount  of  relief  which  the 
Plaintiff  could  obtain,  or  whether  he  was  entitled  to  an}-  relief  at  all. 
But___the  question  is,  whether  these_jact3_are  necessaril}"  fatal  to  the 
Plaintiff's  claim_to^relief?^  Suppose  an  answer  were  put  in  admitting 
air~the  allegations  contained  in  the  bill,  it  would  be  difficult  to  say  at 
this  stage  of  the  suit  that  the  Plaintiff's  conduct  would  altogether  dis-  • 
entitle  him  to  relief.     The  case  of  Forrest  v.  Manchester,  /Sheffield,  audi 
Lincolnshire  Raihcay,^  which  was  relied  upon  in  the  argument,  is  dis-] 
tinguishable  from  the  present  case  upon  two  grounds :  first,  because  | 
that  was  the  hearing  of  the  cause  ;  and,  secondly  (and  this  is  the  main 
distinction),  because  there  the  Court  came  to  the  conclusion  that  the 
Plaintiff  was  simpl}'  a  puppet  in  the  hands  of  another  company,  and 
that  he  was  indemnified  by  that  company  against  the  costs  of  the  suit. 
That  objection  amounted  to  this,  that  a  suit  professing  to  be  the  suit 
of  Compan}'  A.,  was  really  the  suit  of  Company  B. 

The  second  ground  relied  on  in  support  of  this  motion  was,  that  the 
Plaintiff's  quantum  of  interest  in  the  suit  was  very  insignificant.  But 
if  we  should  hold  that  the  suit  can  be  maintained  in  other  respects,  I 
think  that  the  aggregate  interest  of  all  the  shareholders  in  the  subject 
matter  of  the  suit  is  amply  suflflcient  to  sustain  the  suit. 

[Remainder  of  opinion  omitted.] 

31otion  refused  icith  costs, 

1  9  W.  R.  818. 


^ 


y 


\f\,t 


BURT   V.   BRITISH,   &c.    ASSOCIATION. 


BURT 


BRITISH,  &c.  ASSOCIATION. 

4  De  Gex  ^  Jones,  158.^ 


1859 


yv^ 


Appeal  by  plaintiff  from  the  dismissal  of  his  bill  by  Vice-Chancelloi 
Stuart. 

Plaintiff  sued  on  behalf  of  himself  and  all  other  shareholders,  except 
those  made  defendants.  The  bill  sought  to  set  aside  various  trans- 
actions of  certain  persons  with  the  association. 

Greene  and  Bromehead^  for  appellant. 

Malins^  Thring^  W.  W.  Cooper^  Bacon.,  and  H.  R.  Bagshawe,  for 
various  defendants. 

Knight  Bruce,  L.  J.  [The  learned  Judge  found,  upon  evidence, 
that  the  plaintiff,  who  had  been  a  director  of  the  association,  having 
liad  knowledge  of  the  transactions  now  complained  of,  had  so  con- 
ducted himself  that  he  must  be  regarded  as  having  acquiesced  in  and 
confirmed  these  transactions.     The  opinion  then  proceeds  as  follows  :] 

I  am  of  opinion,  however,  looking  only  at  what  took  place  in 
December.,  1856,  that  by  the  conduct  of  the  Plaintiff  at  that  time,  and 
his  conduct  afterwards,  he  has  precluded  himself  from  any  right  of 
complaint,  whatever  right  of  complaint  others  may  have,  either  as 
against  the  Defendants  or  as  against  the  Plaintiff  himself 

As  to  that  it  is  not  necessary  to  give  an  opinion.  He  has  sued  on 
behalf  of  himself  and  others,  and  notwithstanding  what  has  been  con- 
tended on  the  part  of  the  Defendants,  I  assume  that  there  still  exist 
persons  who  have  a  right  to  complain  of  these  transactions.  But  that 
will  not  give  the  Plaintiff  a  title  to  sue  for  them.  As  on  one  hand  a 
Plaintiff,  who  has  a  right  to  complain  of  an  act  done  to  a  numerous 
societ}^  of  which  he  is  a  member,  is  entitled  effectually  to  sue  on  behalf 
of  himself  and  all  others  similarly  interested  though  no  other  may 
wish  to  sue,  so,  although  there  are  a  hundred  who  wish  to  institute  a 
suit  and  are  entitled  to  sue,  still  if  they  sue  by  a  Plaintiff  only,  who  has 
personally  precluded  himself  from  suing,  that  suit  cannot  proceed.  The 
present  case  in  my  opinion  stands  upon  the  same  footing  as  if  the  dis- 
satisfied shareholders  (supposing  them  to  be  dissatisfied)  had  sued  by 
a  Plaintiff  who  had  released  the  Defendants.  For  that  in  my  opinion 
is  the  position  in  which  effectually  Mr.  Burt  has  placed  himself. 

Whether,  therefore,  agreeing  or  disagreeing  with  the  particular 
ground  on  which  his  Honor  the  Vice-Chancellor  has  proceeded,  I 
apprehend  that  the  grounds  which  I  have  stated  are  amply  sufficieot 
to  render  a  dismissal  of  the  bill  necessary. 


Turner,  L.  J.,  concurred. 


1  Statement  abridged. 
-Ed. 


Only  so  much  of  opinion  is  given  as  relates  to  one  point, 


SOR   V.   BAILEY.  559 


-^m 


/    .V-  \f   /wmSOR  V.  BAILEY. 

1875.     55  New  Hampshire,  21S^ 

Bill  in  equity  by  Winsor  et  als.  against  the  Hooksett  M'f'g  Co., 
and  various  individuals  ;  alleging  that  certain  monies  of  the  company 
have  been  wrongfully  paid  over  to  some  of  the  defendants ;  and  pray- 
ing that  the  recipients  may  be  decreed  to  repay  the  same  to  the  corpo- 
ration. The  bill  alleges  that  the  plaintiffs  are  owners  of  stock  in  the 
company,  and  sets  out  specifically  the  number  of  shares  owned  b}' 
each ;  but  does  not  allege  that  they  were  owners  of  stock  at  the  time 
of  the  payments  complained  of.     Defendants  demurred. 

Mugridge,  for  plaintiffs. 

Fotcler  and  Tappan^  for  defendants. 

Ladd,  J. 

2.  The  bill  alleges  that  the  plaintiffs  are  owners  of  stock,  and  sets 
out  specifically  the  amount  owned  by  each.  It  is  contended  for  the 
defendants  that  the  bill  is  defective  in  jio^  showing jthat  they  weiFe. 
owners  of  stock  at  the  time  of  the  alleged  wrongful  payment  to  some 
or  all  of  the  defendants.  No  authority  is  referred  to  in  support  of  this 
position,  and  I  see  no  sound  reason  upon  which  it  can  be  sustained. 
To  hold  so,  would  jeem  to  involve  the  singular  consequence  that  the 
transfeFoFstofikliL^J^orporalw^  right  to  inquire  into 

tire"previoug_fraudulent  conduct  of  its_officers^  whereby  its  funds  have 
been  misappropriated. 

Gushing,  C.  J.,  concurred. 

Smith,  J.  2.  The  plaintiffs  allege  that  they  are  stockholders  in  the 
Hooksett  Manufacturing  Company,  and  specify  the  number  of  shares 
owned  by  each,  but  do  not  allege  that  they  were  stockholders  at  the  time 
the  dividend  was  paid  the  defendants.  But  that  is  not  necessar}',  and  it 
is  immaterial  whether  they  were  or  not.  The  transfer  of  the  stock  con- 
veyed to  them  not  only  the  ownership  of  the  shares  and  the  right  to 
the  future  dividends  thereon,  but  also  placed  them  on  an  equal  foot- 
ing with  the  other  stockholders  in  respect  to  the  right  to  call  the 
officers  and  agents  of  the  corporation  to  an  account  for  their  fraud- 
ulent conduct. 


1  Only  80  much  of  the  case  is  given  as  relates  to  one  point.  —  Ed. 


t^' 


560        ,)       (J^    ,y  PAESONS   V.   JOS 


i^y.- 


P^  7a<,^^'V^>^  PAESONS  v.\  JOSEJ&. 

^^     ^     /*  r  ^gt)  1890.     92  ^/aiama,  403.1  YJ 

^c  ^v^    >#   Jj,    '   ,  -"Appeal  from  the  Chancery  Court  of  Jefferson 
gi  ^\.  (y     y^ }t         Heard  before  the  Hon.  Thomas  Cobbs. 

'r   *^  A^>^  l^*^  ^^®  ^^  "^  '^^^^  ^^^^  ^^®  ^^®*^  ^"^  ^^®  ^^^^  day  of  Jul}',  1890,  by 

\  K      Jl         Heurj-  Joseph,   as   a   stockhohler   in   the   Bh-mingham,   Powderly    & 

V    ^y    "  J    £j^Bessemer  Street  Raih'oad  Compan}',  against  the  said  corporation  and 

^^    ^(r*^{*^ OjT^S.  H.  Parsons;  and  sought  the  cancellation  of  certain  certificates  of 

\      U     /^      I  ^     stock  issued  by  the  corporation  to  said  Parsons,  on  the  ground  that  the 

stock  was  fictitious  and  fraudulent.     There  was  a  demurrer  to  the  bill, 

and  a  motion  to  dissolve  the  injunction,  each  of  which  was  overruled ; 

and  this  appeal  is  sued  out  by  the  defendants  from  that  interlocutory 

decree. 

Lea  <b  Greene^  for  appellants. 
White  iS)  Hoifze,  contra. 

Coleman,  J.     The  purpose  of  the  bill  is  to  have  certain  certificates 
of  stock  issued  b>'  the  Birmingham,  Powderly  &  Bessemer  Street  Rail- 
road  Co.  to  defendant  Parsons,  cancelled,  on  the  ground  that  the  stock 
/  tJ^       fH^     ^^^■''"^^^fitrtitious,  and  was  issued  in  violation  of  the  Constitution  and  statute 
rr*  4  ^-^^v  y  ^^aw  of  the  State.     The  bill  pra3'ed  an  injunction,  and  the  writ  was 
^^ jS"^^     'r  awarded  by  the  chancellor.     A  demurrer  was  interposed,  and  also  an 

('<^'^  -^  answer   by   the   defendant  Parsons.     The   cause   was   submitted   for 

i/^/^   /f'^^s.K  decree  on  the  demurrer,  and  upon  motion  to  dissolve  the  injunction. 

fd^^    ' "  (^  The  court  overruled  the  demurrer,  and  denied  the  motion  to  dissolve 

/^t^.  the  injunction,  and  from  this  interlocutory  decree  the  appeal  is  taken. 

Among  other  averments,  the  bill  substantially  alleges  that  plaintiff 
is  a  bona  fide  stockholder  in  said  company ;  that  shortly  after  the 
organization  of  the  company,  the  defendant  subscribed  for  one  hundred 
and  seven  shares  of  the  capital  stock  of  the  compan}',  of  the  par  value 
of  fifty  dollars  each,  and  paid  for  the  same  in  full  by  conveying  to  the 
company  thirty-nine  acres  of  land  (describing  the  land)  at  an  agreed 
price  and  valuation  of  one  hundred  and  thirty-seven  dollars  per  acre, 
when  the  land  was  not  worth  more  than  twenty-five  dollars  per  acre, 
and  for  this  land  Parsons  was  to  receive  one  hundred  and  seven  shares 
of  the  stock ;  that  shortly  thereafter,  the  capital  stock  of  the  company 
was  doubled,  and  without  further  consideration  than  the  thirty-nine 
acres  of  land,  Parsons'  stock  was  doubled,  and  he  received  two  hun- 
dred and  fourteen  shares  of  the  capital  stock.  Tlie  bill,  as  amended, 
charges  the  excessive  valuation  of  the  land  was  made  knowingly,  wil- 
fully, and  with  the  fraudulent  intent  of  having  issued  to  Parsons  the 
fictitious  stock,  in  violation  of  law.  This  is  a  sufficient  statement  of 
the  facts  for  the  consideration  of  the  demurrer. 

1  Arguments  omitted.  —  Ed. 


PAKSONS   V.   JOSEPH.  561 

The  demurrer  admits  the  truth  of  the  averments.     It  is_contended, 
that  the  bill  is  defective  in  not  averring  that  plaintiff  was  a  stockholder  "^ /\  " 
at  the  time  of  the  transaction,  complained  ojLas_beiDg  fraudulent,  qt  r  y^^      -^ 

that  his  stock  devolved  upon  him  by  oijgration  of  law.  fH^       .^^ 

In  the  case  of  D  imp  fell  v.  Ohio  S  Miss.  H.  H.  Co.,  110  U.  S.  p«  ^•^-'''''^''^Z^-^ 
209,  relied  upon  by  appellant,  it  was  held,  that  a  stockholder,  contest- />« 
iog  as  idfra  vires  an  act  of  the  directors,  should  aver  "  that  he  was  a 
stockholder  at  the  time  of  the  transaction  of  which  he  complains,  or 
that  his  shares  have  devolved  on  him  since  b}'  operation  of  law,"'  To 
the  same  effect  was  Haices  v.  Oakland^  lO-l  U.  S.  450 ;  and  man}' 
others  might  be  cited.  Upon  an  examination  of  these  authorities,  it 
will  be  seen  that  the  principle  asserted  rests  solel}'  upon  equit}-  Rule 
No.  94  adopted  by  the  United  States  Supreme  Court  and  which  ma}' 
be  found  in  the  preface  to  vol.  104  of  U.  S.  Reports.  Morawetz  on 
Private  Corporations,  speaking  of  this  rule,  sa}s,  it  was  evidently  de- 
signed as  a  rule  of  practice  merely,  and  was  deemed  necessary  to  guard 
courts  from  being  imposed  upon  by  collusion  of  parties.  —  Morawetz 
on  Priv.  Corp.,  §§  269,  270.  The  rule  is  not  a  general  principle  of 
law,  applicable  to  pleadings  in  all  the  courts,  and  has  never  been 
applied  to  the  courts  of  this  State.  The  demurrer  to  the  bill  for  fail- 
ing to  make  this  averment  was  properly  overruled. 
.  The  motion  to  dissolve  the  injunction  was  heard  upon  the  sworn  bill 
and  answer.  The  answer  denied  that  plaintiff  was  a  bo)ia  fide  stock- 
holder, and  set  up  that  plaintiff  was  the  transferee  of  one  E.  Lesser. 
The  answer  admits  that  defendant's  stock  was  doubled  without  the 
payment  of  any  additional  consideration  than  that  of  the  land  ;  but  by 
way  of  explanation  and  defense,  avers  that  the  lands  were  not  truly 
and  properly  valued  at  first,  and  the  increased  valuation  of  the  lauds 
only  raised  them  to  their  real  and  true  value,  and  the  additional  issue 
of  stock  was  for  property  at  its  fair  valuation.     The  answer  continues, 


however,   as  follows ;  that  if  said   transaction  had  been   illegal   and 

fraudulent,  and  not  done  in  good  faith,  complainant  is  estopped  from 

setting  up  fraud  in  said  transaction,  or  seeking  to  cancel  said  stock,  /  P 

because  E.  Lesser,  wTIo~was  complainant's  transferrer,  participated  in  I 

all  of  said  transactions  and  himself  fixed  thejyalue  of  said  lands,  with 

full  knowledge  of  and  after  full  investigation  of  the  value  of  said  land.  'to' 

A  transferree  of  stock  is  not  necessarily  disqualified  as  a  suitor  in  all  i         ^^ 
cases,  because  the  prior  holders  were  personally  disqualified.     If  the '  ly^    ,2 
ti^ansferee  ])urchased  the  sliares  in  good  faith,  and  without  notice  of(  ^' 

the  fact_:tb.at  ^tha^j^norliolderhacl  precluded  himself  from  suing,  he/ 


woiild_haye_asjust  a  title  to  relief,  as  if  he  had  purchased  from  a  share-' 
holder  who  \£a,s_under  no  disability^;  but,  if  the  purchaser  was  aw^arej_ 
tbat^he  prioLJiolder  had  barred  his  ri^it  to  relief,^neitherjustice  iiQrj 
public  4Kllicy  would  require  that  the  transferee,  under  these  circuni- 
staiicejj_sh^uld,Jbe_accprded  any  greater  rights  than  his  transferrer.  — 
Morawetz,  siqyra,  §  267. 
The  same  rule  prevails  in  this  State  in  favor  of  derivative  purchasers. 


5C2 


PARSONS   V.   JOSEPH. 


^ 


^ 


If  a  claimant  was  a  bona  fide  purchaser,  without  notice  of  a  fraud, 
or  of  facts  which  the  law  considers  sufficient  to  establish  it,  or  from 
which  it  is  inferable,  then  he  could  not  be  affected  by  notice  to  his 
vendor.  —  Horton  v.  Smithy  ^  Ala.  78  ;  Fenno  v.  Sayre,  3  Ala.  458  ; 
Weer  v.  Davis,  4  Ala.  442  ;  Martinez  v.  Lindsey^  91  Ala.  334  ;  Wait 
on  Insol.  Cor.,  §§  628,  630. 

If  a  stockholder  participates  in  a  wrongful  or  fraudulent  contract,  or 
silently  acquiesces  until  the  contract  becomes  executed,  he  can  not 
then  come  into  a  court  of  equit}-,  to  cancel  the  contract,  and  more 
especially,  if  the  company,  or  himself,  as  a  stockholder,  has  reaped  a 
benefit  from  the  contract ;  and  this  rule  holds  good,  although  the  con- 
sideration of  the  contract  may  be  one  expressly  prohibited  by  statute. 
The  same  disability  would  attach  to  the  transferee  of  his  stock  who 
bought  with  notice.  We  consider  this  general  rule  of  equity  abund- 
antly sustained.  —  Morawetz'on  Priv.  Corp.,  §§  261,  262;  Cook  on 
Stock  and  Stockholders,  §§  39,  40,  735  ;  Wright  v.  Hughes,  12  Amer. 
St.  Rep.  413.  It  is  sustained  by  the  familiar  rule,  that  he  who  invokes 
the  aid  of  a  court  of  equity  must  have  clean  hands.  Mr.  Cook  states 
the  conditions  upon  which  astockholdei-  can  sustain  a  suit  to  remedy  the 
frauds,  idtra  v lres_a.Q,is,  or  negligence  of  directors,  to  be,  firsts  the 
acts  complained  of  must  be  such  as  to  amount  to  a  breach  of  trust,  and 
such  as  neither  a  majority  of  the  directors  nor  of  the  stockholders  can 
ratify  or  condone;  second^  that  the  complaining  stockholder  himself  js 
free  from  laches^  acquiescence  of  the  acts  to  remedy  which  the  suit  is 
brought ;  third,  that  the  corporation  lias  been  requested  and  refused  or 
neglected  to  institute  the  suit,  that  the  suit  is  instituted  by  bona  fide 
stockholders  as  complainants,  and  that  the  corporation  and  the  guilty 
parties,  and  other  proper  parties  have  been  made  defendants.  Cook, 
supra,  §  646. 

If  the  averments  of  the  bill  are  sustained  by  proof,  the  stock  issued 
to  the  defendants  was  in  violation  of  section  1662  of  the  Code  and 
of  section  6,  Article  XIV  of  the  Constitution.  On  the  contrary,  if  the 
proof  shows  that  the  property  was  received  in  payment  of  stock,  at  a 
fair  valuation,  such  would  not  be  the  result.  —  Davis  Bros.  v.  Mont- 
gomery Fur.  S  (Jhern.  Co..,  at  present  term. 

In  cases  where  the  stockholders  of  the  company  by  any  laches, 
acquiescence,  or  participation  in  the  unlawful  and  fictitious  issue  of 
stock  or  for  any  other  sufficient  cause  are  precluded  from  instituting 
the  proper  proceedings,  to  remedy  the  wrong,  the  remedy  is  still  open 
to  the  State  to  institute  all  necessary  and  proper  proceedings  to  vacate 
and  dissolve  the  corporation,  or  have  such  other  proper  judgment  and 
decree  rendered,  as  the  proof  and  justice  may  demand. 

It  may  be,  that  stockhoUlers,  who  knowingly  and  intentionally  have 
subscribed  and  paid  for  stock  with  property  upon  a  fictitious  valuation, 
•AY(\  liable  as  stockholders  who  have  not  paid  up  in  full  for  their  stock, 
within  the  meaning  of  the  statute,  to  creditors  who  have  not  precluded 
themselves  from  maintaining  the  suit. —Wait,  svpra,  §  593;  Douglas 
V.  Ireland,  73  N.  Y.  100  ;  Boynton  v.  Andrews,  63  N.  Y.  93, 


AMBROSE   LAKE   TIN   AND   COPPEK   MINING   CO.  563 

Applying  the  rule  of  law  applicable  when  a  motion  to  dissolve  an  in- 
junction is  submitted  upon  bill,  exhibits,  and  answer,  and  considering 
only  so  much  of  the  answer  as  is  responsive  to  the  bill,  we  are  of  opin- 
ion that  the  decretal  order,  overruling  the  demurrers  and  motion  to 
dissolve  the  injunction,  is  free  from  error. 

Affirmed. 

The  case  of  Downey  v.  Joseph  was  affirmed  on  the  authority  of  the  /i*^J* 


above  case. 


r^i. 


6''>    C 


r 


In  re  AMBROSE  LAKE  TIN  AND  COPPER  MINING  CO.    .     ,H      <^  t4V^ 


SJx  parte  TAYJ^On. 

Ex  parte  MOSS. 

1880.     Law  Reports,  14  Chancery  Division,  390.  Gr^'^.yA        J^  3-  ^ '  Jr      r^     <^  ^ 


This  was  an  appeal  from  a  decision  of  Mr.  Fisher,  the  Vice-WardeA^       y\  p^ -J* 
of  the  Stannaries  Court,  in  the  winding-up  of  the  Ambrose  Lake  Tin     J'       ^ 
and  Copper  Mining  Company,  Limited,  given  on  the  2d  of  July,  1879.       ^    /^ 

In  the  course  of  the  years  1870  and  1871  the  appellants,  Josephv'^'''''^ 
Taylor  and  Joshua  Moss,  became  the  principal  proprietors  of  theij|>^ 


ited  company.     For  that  purpose  the  mine  and  machinery  were  as-/ 

signed  by  the  lessees  to  W.  Eaton,  a  clerk  of  Taylor's  ;  and  by  ai,  ^j, 

memorandum  of  agreement  dated  the  22d  of  December,  1871,  made  ^ 

between  W.  Eaton  of  the  one  part,  and  Joseph  Taylor  and  E.  Hardey  i  -^ 

of  the  other  part,  Eaton  agreed  to  sell  the  mine  and  machinery  tov 

Taylor  and  Hardey  in  trust  for  a  company  to  be  called  the  Ambrose  >K        -     \'     ' 

Lake  Tin  and  Copper  Mining  Company,  Limited,  in  consideration  of       j^f^  _  ^    - 


to  say,  6000  fully  paid-up  shares  of  £2  each,  and  12,000  shares  with^^  j  "^  -^       r^^ 
each  considered  as  paid  thereon.  th^\     xjf^^      ii^ 


the  sum  of  £24,000,  to  be  paid  to  Eaton  in  manner  following,  that  is       ^^      j 

This  agreement  was  registered  under  the  Companies  Act,  1867,  on  ^  'ur    ^  \^    Xj^K 


20s 


the  26th  of  January,  1872.  '^  ^^  .    .  ^j^  , 

The  new  company  was   registered  on  the  19th  of  January,  1872.  ^     »/6»^H«'*' 

The  memorandum  of  association  stated  that  the  object  of  the  company, (^  ^V  '^\i-'^ft»-' 
was  to  purchase  and  Avork  the  Ambrose  Lake  mine,  and  that  the  capi-^v»  ^  Jt^^  lOT  J^ 
tal  of  the  company  was  to  be  £36,000,  divided  into  18,000  shares  oi  c  ^  ri^^  o-'^ 
£2  each.  ^/.^^O'  ^ 

By  the  articles  of  association  the  first  directors  were  to  be  Joshua^\i>^  P^  t, 
Moss,  Joseph  Taylor,  E.  Hardey,  William  Moss,  and  J.  Maguire,  all^^  % 

of  whom  had  shares  in  the  cost-book  mine,  and  Taylor  was  appointed    *  fj    , 
managing  director.      The  memorandum  and  articles  referred  to  the   P 
agreement  which  had  been  entered  into  with  Eaton  for  the  purchase 
of  the  mine. 


^ 


564  AMBROSE   LAKE   TIN   AND   COPPER   MINING  CO. 

At  the  first  meeting  of  the  directors  it  was  resolved  that  the  agree- 
ment should  be  adopted,  and  Eaton  was  credited  with  £24,000, 
namely,  £12,000  on  account  of  6000  fully  paid-up  shares,  and  £12,000 
on  account  of  12,000  shares  with  £1  paid  on  each.  But  in  fact  only 
five  shares  were  allotted  to  Eaton ;  2900  fully  paid-up  shares,,  and 
5650  shares  with  £1  paid  up  were  allotted  to  J.  Moss ;  2880  fully 
paid-up  shares  and  5650  shares  with  £1  paid  up  were  allotted  to  J. 
Taylor ;  and  the  rest  of  the  shares  Avere  divided  between  the  other 
shareholders  in  the  cost-book  mine  according  to  their  interest  therein. 

The  value  of  the  mine  and  machinery  was  considered  by  the  Vice- 
Warden  to  have  been  about  £6000. 

Taylor  sold  a  considerable  number  of  his  shares  at  a  premium. 
Moss  retained  all  his  except  150. 

No  prospectus  was  issued  to  the  public.  The  allottees  paid  up  the 
remainder  of  the  money  due  on  the  shares  on  which  £1  only  had  been 
paid  ;  but  the  company  was  not  successful,  and  was  wound  up  by  an 
order  of  the  Court  on  the  8th  of  January,  1878. 

The  official  liquidator  applied  for  orders  against  Moss  and  Taylor, 
charging  them  with  having  improperly  sold  the  mine  to  the  company 
for  more  tlian  it  was  worth,  and  calling  upon  them  to  repay  the  differ- 
ence between  the  value  of  their  shares  in  the  new  company,  including 
the  profit  on  those  which  had  been  sold,  and  the  value  of  their  in- 
■terests  in  the  cost-book  mine.  The  Vice-Warden  took  this  view  of  the 
lliability  of  the  two  appellants,  and  in  the  result  he  ordered  Moss  to 
pay  the  sum  of  £6825,  and  Taylor  the  sum  of  £10,185. 

From  this  order  Moss  and  Taylor  appealed. 

Cookson,  Q.  C,  and  Burton  Buckley,  for  the  appellant  Moss ;  and 
Waller,  Q.  C,  and  Bunting,  for  the  appellant  Taylor. 

[Argument  omitted.] 

Ince,  Q.  C'.,  and  Northmore  Lawrence,  for  the  official  liquidator. 

The  contract  was  a  misrepresentation  from  beginning  to  end. 
Eaton  was  not  in  possession  of  the  mine  and  had  no  title  to  it. 
Moss  and  Taylor  had  constituted  themselves  trustees  for  the  new  com- 
pany, and  were  buying  the  property  from  themselves  for  the  company, 
and  they  bought  it  at  a  far  higher  price  than  it  was  worth.  Such  a 
transaction  cannot  stand.  It  makes  no  difference  of  whom  the  com- 
pany consisted  at  the  time.  It  must  be  treated  as  having  an  inde- 
pendent existence,  and  tliose  who  now  represent  it  have  a  right  to  call 
on  the  directors  and  all  persons  who  stand  in  a  fiduciary  relation  to  it 
to  account  for  their  profits.  Moss  and  Taylor  made  a  profit  by  the 
transaction,  for  they  received  shares  to  the  value  of  more  than  £22,000 
in  exchange  for  property  which  was  wortli  only  £6000.  But  if  they 
made  no  profit  themselves  they  prevented  the  company  from  making 
profit,  by  taking  shares  which  the  company  might  have  allotted  to  the 
public.  We  are,  therefore,  entitled  to  call  on  them  to  make  good 
what  they  have  deprived  us  of,  and  that  is  measured  by  the  value 
whicli  might  have  been  obtained  by  their  shares  in  the  market. 

[Citations  omitted.] 


AMBROSE   LAKE   TIN   AND   COPPER  MINING  CO.  565 

James,  L.  J.  I  am  of  opinion  that  the  order  of  the  Vice-Warden 
in  this  case  cannot  be  sustained.  It  appears  to  me  that  one  must  look, 
even  as  between  companies  and  directors,  at  what  the  substance  of  the 
transaction  was  as  between  the  company  and  the  persons  whom  the 
company  is  seeking  to  make  answerable.  Now  the  transaction  appears 
to  me  to  be  quite  clear,  and  I  cannot  help  tliinking  myself  there  was 
an  object  in  it,  and  that  object  was  not  at  all  an  object  for  obtaining 
an  undue  advantage  as  between  the  company  and  the  persons  who  are 
dealing  with  the  company  and  selling  to  the  company,  but  the  obtain- 
ing an  undue  advantage  in  the  stock  market,  wherever  the  stock  market 
of  the  company  might  be,  as  between  the  persons  who  got  the  shares 
in  the  new  company  and  the  persons  who  were  foolish  enough  to  buy 
the  shares  from  them  in  the  new  coinpany.  They  ijitend^fl  ^<^  repre- 
sent the_bhing  as  worth  something  a  great  deal  more  than  it  was  worth, 
namely,  the  nominal  capital  that  was  attributed  to  it. 

Now  what  we  have  got  here  to  consider  is  a  sale  in  substance  made 
by  the  vendors  for  themselves,  as  beneficially  interested,  to  them- 
selves as  directors  of  the  company,  being  in  that  sense  in  a  fiduciary 
character  towards  the  company,  and  the  sale  is  a  sale  by  themselves 
in  the  one  character  to  themselves  in  the  other  character.  OX_course 
such  a  sn1pjR_p.  thing  that  nail  not  stand,  if  it  is  quest-.inned  in  tirneTani^ 
Pioper  offers  made  to  restore  the  thing  purchased.  And  if  there  is 
any  difficulty  in  the  way  of  restoration,  if  it  is  made  out  that  they  had 
received  something  beyond  the  proper  price  of  the  property,  there 
ought  to  be  no  difficulty  in  making  them  pay  that  extra  value.  Sup- 
pose the  property  had  been  sold  before  the  fraud  was  discovered,  or 
suppose  the  cestuis  que  trust  laid  out  a  great  deal  of  money  in  improve 
ments,  then  the  only  mode  of  setting  it  right  would  be  to  make  the 
vendors  give  the  extra  price  which  was  paid  for  it.  According  to_my 
vjewj2fJihisjiase  the^  vendors  did  get  no  extra  price  from  the  company 
asa  company.  What  the  company  got  was  the  mine  as  it  stood.  The 
mine  and  machinery  and  plant,  or  whatever  was  on  the  property, 
was  sold  to  them.  Now  what  they  gave  for  it  was  a  certain  share 
in  the  mine,  the  very  property  itself  divided  into  a  great  number  of 
shares,  it  was  a  certain  share  in  the  assets  of  the  company  ;  the  assets 
of  the  company  consisting  only  of  the  very  thing  which  they  had 
bought.  No  doubt  they  got  the  assets  of  the  company  at  that  moment, 
which  consisted  of  their  right  to  call  up  the  unpaid  part  of  the  unpaid 
shares.  But  then  the  right  to  call  up  that  was  a  liability  upon  the 
vendors  themselves,  so  that  the  only  thing  which  the  company  gave 
back  to  the  vendors  was  what  the  vendors  had  given  to  them,  and 
what  they  covenanted  to  give  to  them,  that  is  to  say,  the  property  and 
the  liability  to  contribute  the  money  which  was  due  on  the  shares. 

Under  these  circumstances  it  seems  to  me  jmpossible  to  say  that, 
howeyer_wrong  the  transaction  was  iiTrespect  to  other  persons^  there 
was  any_thing  wrong  as  Between  the  company  and  the  vendors.  There 
was  no  fraud  on  the  existing  shareholders,  because  they  were  parties 


c 


566  AMBROSE   LAKE   TIN   AND   COPPER  MINING  CO. 

to  it.  There  was  no  fraud  on  any  future  allottees  of  shares,  because 
there  could  be,  under  the  circumstances  at  the  time  the  arrangement 
was  made  and  completed,  no  future  allottees  of  shares.  The  transac- 
tion was  a  transaction  in  which  the  whole  of  the  capital  of  the  com- 
pany was  given  in  exchange  for  the  property  purchased. 

That  being  so,  it  seems  to  me  that  the  numerous  other  questions 
which  have  arisen  in  this  matter,  and  which  have  been  discussed  at 
some  length  and  with  considerable  ability,  do  not  arise.  In  my  view, 
the  company  only  gave  backju  substance  that  which  itwas  getting, 


and  the  fraud  was  not  between  the  vendors  and  the  company,  the  pur- 
chasers, buFVas  a  tiling  calculated  to  delude  people  into  believing 
that  thejhares  when  got  were  something  more  valna.blp.  t.hmi  t^py 
really ^wei'e.  What  the  company  lost,  if  they  lost  anything,  was  this  : 
If  they  had  formed  the  company  and  issued  shares,  they  might  have 
got  the  iictitious  value  which  the  shares  would  have  brought  in  the 
market  by  availing  themselves  of  the  lies  respecting  the  property, 
which  they  say  are  contained  in  the  contract.  That  does  not  seem  to 
me  to  be  a  sort  of  thing  which  the  company  would  be  entitled  to  claim. 
I  rest  my  decision  on  the  ground  which  was  opened  by  the  appellants' 
counsel,  particularly  by  Mr.  Buckley,  that  what  was  taken  back  was 
the  very  thing  that  was  given  in  exchange  for  it,  calling  it  by  differ- 
ent names  and  dividing  it  into  different«shares. 

Brett,  L.  J.  Whether  a  fraud  upon  which  any  action  can  be 
taken  has  been  committed  in  this  case  I  am  not  prepared  at  present 
to  say,  but  that  a  fraud  was  intended  I  have  not  the  least  doubt. 
The  transaction  has  all  the  badges  of  fraud,  but  I  think  that  the 
claim  which  is  now  made  fails  altogether ;  because,  even  if  the  right 
parties  are  suing,  they  have  not  asked  for  the  right  remedy ;  and  I 
also  think  the  parties  suing  are  not  the  parties  who  were  intended  to 
be  defrauded  on  this  occasion. 

Now,  it  seems  to  me  the  facts  are  these,  that  certain  persons  were 
the  owners  of  the  mine,  and  they  had  worked  it  for  a  certain  time, 
and  they  knew  it  was  a  perfect  failure ;  that  they  then,  in  order  to 
retrieve  that  failure,  pretended  themselves  to  make  this  arrangement, 
that  as  to  that  mine,  which  was  a  failing  mine,  probably  worth 
nothing,  they  might  pretend  to  buy  the  mine  from  a  person  other 
than  themselves,  although  they  were  really  (if  it  can  be  called  a  pur- 
chase at  all)  buying  it  from  themselves  for  £24,000,  but  that  they 
might  then  risk  a  further  sum  of  £12,000,  making  up  £36,000,  so  as 
to  work  the  mine  for  a  certain  time,  and  then  the  mine  appearing  to 
have  been  bought  for  £24,000,  and  £12,000  being  advanced  by  them 
to  work  it,  it  would  appear  to  the  outside  public  to  be  a  profitable 
mine,  and  then  the  shares  might  be  sold  at  a  profit,  and  so,  instead  of 
liaving  a  failing  mine  in  which  they  were  wasting  their  capital,  by 
risking  £12,000  more  they  would  be  able  to  place  shares  with  the 
y)ublic,  retrieve  what  they  lost,  leaving  the  public  to  lose  what  they 
gave  for  the  mine. 


AMBROSE   LAKE   TIN  AND   COPPER   MINING  CO.  567 

Now,  many  questions  have  been  raised  as  to  what  would  have  been 
the  effect  if  this  had  been  done  by  directors  of  an  existing  company. 
It  seems  to  me,  the  whole  transaction  was  a  solemn  farce.  This 
agreement  which  has  been  set  out  is  a  mere  farce.  These  people  were 
not  acting  as  trustees  for  anybody,  they  were  the  people  themselves, 
and  that  which  is  called  a  contract  for  purchase  and  sale  being  made 
by  these  people  with  themselves  is  no  contract  at  all,  or  anything  of 
the  kind.  Therefore,  this  agreement,  which  is  set  out,  and  pretends 
to  represent  an  agreement  of  purchase  and  sale,  is  a  mere  falsehood. 
It  is  not  a  contract  of  purchase  and  sale,  to  my  mind,  for  a  price 
greater  than  they  ought  to  have  given,  or  a  contract  of  purchase  and 
sale  for  a  certain  price,  if  the  supposed  price  is  given  back  to  the 
agent  for  the  people  complaining.     The  truth  is,  it  is  no  contract  at/ 


all,  and  this  agreement  which  is  set  out  is  a  mere  farce.  Therefore, 
the  very  constitution  of  the  company,  this  turning  of  themselves  by 
this  mode  into  a  limited  company,  is  a  mere  representation.  Whether 
the  registration  could  have  been  set  aside  or  not  I  really  do  not  know, 
but  the  whole  thing  is  a  misrepresentation  —  to  defraud  whom  ?  The 
people  who_we  re  repres^tingthis  farce  did_not  deceive  themselves"; 
ner  were  the  people  supposed  to  be  buying  nor  the  people  supposed 
to  be  selTmg  deceived^  Is  there  any  deception  at  all  ?  The  whole 
thing  was  done  by  the  same  people.  Theresas  nobody  in  the  limits 
of  company  who  was  deceived  in  the  least,  ^t  is  impossible,  in  my 
mind,  to  suppose  that  it  had  no  business  purpose,  and  that  it  was  not 
intended  to  produce  some  effectj  On  whom  could  it  produce  that 
effect  ?  It  could  not  produce  that  effect  on  the  parties  themselves, 
It  is  quite  true  to  say,  inasmuch  as  they  were  the  same  people,  they 
gave  nothing  for  this  ihine  and  received  nothing  for  this  mine,  The 
supposed  purchaser  gave  nothing,  the  supposed  seller  received  no- 
thing, and  the  only  people  who  would  be  deceived  would  be  the  out- 
side public ;  but  how  would  they  be  deceived  ?  If  anybody  who  had  / 
shares  in  the  new  company  has  sold  those  shares  to  anybody  of  the 
outside  public  upon  the  faith  of  those  documents  which  are  contained 
in  these  articles  of  association,  or  memorandum,  —  if  they  have  sold 
their  shares  on  the  faith  of  that  simulated  agreement  for  the  purchase 
of  the  mine  being  a  true  one,  it  seems  to  me  they  have  obtained  the 
money  from  those  purchasers  by  fraud. 

To  show  that,  it  must  be  shown  that  a  vendor  of  shares  in  the  com- 
pany did  sell  to  the  purchasers  shares  in  the  company,  and  that  the 
persons  whojbmight-  the  shares— purchaaexLJhem  on  the  faith  of  this 
agreement,_g,Tirl  thp^rBpias£ntations_made  in  it.  If  that  should  ever  be 
proyedj_thaJLJ6s:©uhlr-giv^-a. j^medy^o  a^  person  who  has  so  been 
deceived  agajnsiLthe  person  who  made  these  ^presentations  to  him, 


p 


i 


that  is,  against  the— LndtviduaL     There  would  be  no  liability  on  the 


part  of  the  company,ag  such.  Therefore,  there_has  been  no  mischief 
done  to  the  company  as  the  company,  and  it  seems  to  me,  therefore, 
the  latter  has  no  remedy  at  all,    However^mproper  or  disreputable! 


I 


568  AMBROSE   LAKE   TIN   AND   COPPER  MINING  CO. 

as  my  Lord  says^this^transactionjv'as,  it  did  no  mischief  to  anybody 
whom  the  liquidator  represents,  and  it  could  only  do  mischief  to  peo- 
ple wSo^may  have  been  deceived,  but  we  cannot  tell  now  whether 
anybody  has  been  deceiyeX~  Those  persons  are  not  before  the  Cogrt. 
Therefore  the  remedy  sought  here  is  by  the  wrong  persons  and  in  the 
wrong  form. 

Cotton,  L.  J.  ...  As  I  understand  the  transaction,  it  was  this : 
They  were  the  owners  of  the  mine,  the  only  owners,  and  they  were 
originally  the  only  members  of  the  company.  I  say  that  because, 
although  shares  were  allotted  to  some  persons,  yet  as  far  as  I  can  see 
they  were  simply  nominees  of  some  of  the  owners  of  the  mine,  and 
therefore  were  exactly  in  the  same  position  as  the  owners  of  the  mine. 
Then  they,  being  entitled  to  the  mine  in  certain  proportions,  which 
I  will  consider  as  so  many  £2  shares,  in  handing  over  the  property 
of  the  company,  represent,  their  interest  by  a  different  denomination. 
For  themselves  hav^ing  all  the  shares  in  the  company,  they  choose  to 
•call  their  shares  in  the  mine,  as  the  property  of  the  company,  not 
6000  shares  of  £2  each,  but  18,000  shares  of  £2  each ;  of  course  each 
of  those  18,000  shares  is  much  less  valuable  than  its  nominal  value. 
But  they  are  the  only  members  of  the  company,  and  they  were  the 
only  owners  of  the  mine.  Therefore,  I  cannot  see  how  the  company 
can  complain  of  that  act  which  all  the  members  of  the  company  were 
.cognizant  of,  and  which,  as  far  as  they  could,  they  approved  of  and 
jconfirmed. 

If  that  is  so,  the  whole  case  comes  to  an  end.  It  may  be  that  what 
was  done  was  done  for  the  purpose  of  enabling  the  company  to  be 
passed  off  on  the  market  as  something  different  from  what  it  was. 
Whether  that  was  so  or  not  is,  in  my  opinion,  immaterial  to  the 
present  question.  But  if  it  was  so,  the  remedy  is  not  an  action  by 
the  company  against  those  who  were  vendors  and  purchasers.  The 
remedy  is  a  remedy  of  each  purchaser  of  shares,  if  there  were  any 
such,  who  was  deceived  by  the  representations  made  by  his  vendor  as 
to  the  constitution  of  the  company, 

In  my  opinion,  not  only  can  this  order  not  be  maintained,  but  even 
if  there  has  been  any  profit  made  by  the  appellants,  we  are  not  in  a 
position  at  the  suit  and  instance  of  the  company  in  any  way  to  make 
them  account  for  it. 


\PAES0NS  v.   HAYES. 
PAESONS   V.   HAYES. 

'V X^^g  'J\^yYs83.'    U  Abbott's  New  Cases  (N.  Y.),  419.1 

Plaiotiff  sues  on  behalf  of  himself  and  all  other  shareholders  in  the 
V'arhuff  Mining,  &c.  Co.,  a  corporation  formed  under  the  laws  of  New 
York.  The  defendants  are  the  corporation,  and  various  individuals 
who  are  officers  of  the  same.  Tlie  complaint  alleged,  inter  alia,  that 
the  corporation  was  under  a  disabilit}'  to  sue,  by  reason  of  being  con- 
trolled by  its  directors,  who  were  guilty  of  malfeasance  in  office.  The 
other  averments  ai'e  stated  in  the  opinion. 

The  original  complaint  was  demurred  to.  The  demurrer  was  over- 
ruled, but  plaintiff  amended  the  complaint.  Defendants  answered. 
Plaintiff  demurred  to  certain  matters  set  up  as  defenses.  Certain 
of  plaintiff's  demurrers  were  overruled,  and  others  were  sustained. 
Plaintiff  appealed  to  the  General  Term  of  the  Superior  Court,  from 
the  order  overruling  his  demurrers  to  certain  defenses  set  out  in  the 
answer. 

Grove  M.  Jffaricood  and  John  B.  (yDonneU,  for  appellant. 

[Omitting  part  of  argument.] 

III.  The  corporation  could  sue,  as  it  is  a  distinct  person  from  its 
shareholders  (Pollock  on  Contr.,  81,  82;  Lindley  on  Partn.  4,  5; 
Dicey  on  Parties,  1G3).  The  members  are  but  agents  of  the  corpora- 
tion and  the  corporation  may  sue  its  members  {Society  v.  Abbott,  2 
Beav.  559). 

IV.  The  corporation  holds  the  property  and  assets  as  a  trustee  for 
the  members  (Hotel  Co.  v.  Wade,  97  U.  S.  13),  and  if  the  corporation 
will  not  sue,  the  members  can  {Butts  v.  Wood,  37  N.  Y.  317  ;  Greaves 
V.  Gouge,  69  N.  Y.  154). 

Robert  L.  Foxder  and  Yictor  Moraicetz,  for  various  defendants. 

[Omitting  part  of  argument.] 

II.  This  is  not  an  action  for  a  wrong  to  the  plaintiff.  If  the  defend- 
ants had  deceived  the  plaintiff,  or  caused  him  any  injury  directh",  he 
would  be  entitled  to  recover  the  amount  of  damages  he  had  suffered  in 
an  action  of  a  legal  nature.  No  such  claim  is  made.  The  complaint 
is  framed  as  a  proceeding  on  behalf  of  the  corporation  for  a  wrong 
against  the  corporation.  Plaintiff  alleges  that  the  stock  which  he  pur- 
chased was  issued  as  paid  up  stock,  and  represented  to  the  world  as 
paid  up  stock  by  the  board  of  directors.  But  he  does  not  state  that 
he  was  deceived  by  this  representation,  or  that  it  caused  him  any 
injury.  The  form  of  the  complaint  is  that  of  the  ordinary  stock- 
holders' bill  known  in  chancery  practice.  It  is  fimdaraental  that  a 
suit  of  this  character  cannot  be  maintained  b}'  a  stockholder,  unless 

1  The  case,  as  here  given,  is  made  up  partly  from  the  report  in  14  Abbott,  and 
partly  from  the  report  in  50  New  York  Superior  Court,  29.  The  statement  is  re- 
ivritten,  and  portions  of  the  argument  are  omitted.  —  Ed. 


570  PARSONS   V.   HAYES. 

the  corporation  itself  would  be  entitled  to  recover  in  an  action  for  tlie 
wrongs  complained  of.  The  complaint  does  not  show  that  the  cor- 
poration ever  had  a  cause  of  action  against  the  individual  defendants. 
It  was  deprived  of  nothing  of  value  b}'  the  issue  of  its  shares.  Shares 
of  stock  are  merely  the  proportionate  interests  of  the  holders  in  the 
whole  corporate  concern,  and  their  value  depends  upon  the  real  capital 
wliich  the  company  owns.  The  whole  and  the  sum  of  its  parts  must 
be  equal.  In  the  present  case  the  purchaser  took  back  what  he  gave 
in  another  form.  The  corporation  was  not  realh'  in  existence  until  the 
shares  had  been  issued,  although  the  statute  provides  that  it  shall  be 
deemed  in  existence  for  certain  purposes  from  the  filing  of  the  certifi- 
cate of  incorporation.  The  existence  of  a  corporation  before  its  shares 
have  been  issued  is  a  fiction.  The  corporation  could  not  be  injured  by 
the  act  which  brought  it  into  being. 

IV.  If  a  subsequent  bona  fide  purchaser  was  deceived  by  the  un- 
authorized and  untrue  certificates  issued  by  the  directors,  he  would 
have  his  remedy  for  damages.  Creditors  also  would  be  entitled  to 
redress  to  the  extent  of  their  claims.  But  the  corporation  as  a  body 
could  not  complain. 

V.  The  law  recognizes  the  fact  that  a  corporation  and  the  whole 
number  of  its  stockholders  are  identical,  —  that  the  one  represents  and 
is  made  up  of  the  other.  It  is  upon  this  ground  alone  that  the  plaintiff 
has  any  standing  in  this  court.  A  corporation  cannot  complain  even 
on  account  of  a  breach  of  trust,  or  a  direct  misapplication  of  the  cor- 
porate funds  by  the  directors,  after  the  acts  complained  of  have  been 
acquiesced  in  and  ratified  by  the  whole  body  of  shareholders.  If  the 
corporation  itself  cannot  complain  under  these  circumstances,  it  is 
plain  that  a  stockholder  cannot  complain  on  its  behalf  {Hotel  Co.  v. 
Wade,  97  U.  S.\d\  Kent  v.  Quicksilver  3Iining  Co.,  78  N.  Y.  159, 
184;  Scott  y.  Depeyster,  1  Edw.  Ch.  513,  536;  Wattes  Appeal,  78 
Pa.  St.  370 ;  Terry  v.  Eagle  Lock  Co.,  47  Conn.  141  ;  Kitchen  v. 
St.  Louis,  &c.  Ry.  Co.,  69  Mo.  224,  264  ;  Samuel  v.  Ilolladay,  1 
Woolw.  400;  Zahriskie  v.  HacJcensack,  <&c.  JR.  B.  Co.,  18  N.J.  Eq. 
178,  194;  Phosphate  of  Lime  Co.  v.  Green,  L.  B.,  7  C.  F.  43; 
Ffooks  V.  Southwestern  By.  Co.,  1  Sm.  &  G.  142,  164;  Graham  \. 
Birkenhead,  cfcc.  By.  Co.,  2  McM.  tfb  G.  146). 

VII.  There  is  a  distinction  between  a  suit  by  a  shareholder  for  relief 
on  account  of  a  wrong  committed  before  he  purchased  his  shares,  and 
a  suit  brought  to  restrain  the  performance  of  an  unauthorized  and  void 
contract,  which  had  been  previously  entered  into. 

Sedgwick  C.  J.  [After  deciding  that,  upon  this  appeal,  it  is  proper 
to  examine  the  complaint  to  see  if  it  contains  any  cause  of  action.] 
The  learned  counsel  for  the  appellant  states  the  claim  of  the  complaint 
as  follows.  The  plaintiff  sues  on  behalf  of  himself  and  all  other 
stockholders  of  the  corporation  defendant,  alleging  that  the  individual 


PARSONS   V.    HAYES.  '  571 

defendants,  then  being  trustees  of  the  said  corporation,  immediately 
after  the  organization  thereof,  by  agreement  with  one  Catlow,  issued^ ^ 
to  him  the  whole  capital  stock  of  said  corporation,  viz.  $2,000,000;  m 
exchange  for  property  worth  not  to  exceed  $150,000.  That  90,000 
shares  of  the  stock  were  turned  over  to  the  defendant  Hayes  and  his 
associates,  and  20,000  shares  to  the  defendant  corporation  by  said 
Catlow,  without  payment  therefor,  in  pursuance  of  the  real  agi'eement 
between  the  parties  for  the  purchase  of  property  and  the  issue  of  stock. 
That  the  individual  defendants  knew,  or  could  have  known,  the  value 
of  the  property,  and  that  a  portion  of  the  stock  was  to  be  turned  over 
as  stated.  That  the  defendants,  trustees,  represented  the  stock  as 
full  paid,  and  that  the  stock  has  been  sold  as  full  paid  to  innocent  pur- 
chasers, including  the  plaintiff.  That  the  plaintiff  purchased  his  stock 
regularly  in  the  open  market,  relying  upon  such  representations,  and 
received  regular  certificates,  and  that  the  stock  was  regularly  trans- 
ferred to  him  on  the  books  of  the  corporation.  That  the  individual 
defendants  have  received  large  gains  and  profits  from  the  sale  of  that 
portion  of  the  stock  turned  over  to  them.  That  the  individual  defend- 
ants have  sold  the  stock  turned  over  to  the  defendant  corporation,  or 
a  large  portion  of  it,  at  $1  per  share.  That  the  individual  defendants 
have  not  accounted  for  the  difference  between  the  value  of  the  stock 
and  the  amount  of  property  received  (except  as  to  the  $1  a  share  re- 
ceived from  the  treasury  stock),  nor  for  the  gains  and  profits  received 
by  them  from  tlie  sale  of  the  stock  turned  over  to  them.  That  the 
corporation  defendant  is  still  under  the  control  of  the  individual 
defendants. 

The  defendants  among  other  defenses  pleaded  that  plaintiff  pur- 
chased his  stock,  knowing  the  facts  attending  the  transaction  set  out 
in  the  complaint. 

By  the  terms  of  the  complaint  the  plaintiff  sues  for  himself  and 
*'  all  other  stockholders  of  the  defendant  com  pan}'  who  may  choose  to 
come  in  and  avail  themselves  of  the  benefit  of  the  actions."  The  plain- 
tiff is  excused  from  naming  ail  of  thesfe  stockholders,  on  account  of  the 
inconvenience  of  making  a  great  number  of  persons  parties  ;  but  in 
legal  contemplation,  all  of  them  are  parties  plaintiff,  and  all  of  them 
are  in  like  case  with  the  plaintiff  named.  These  persons  are  stock- 
holders, as  it  is  called,  having  become  so  by  transfer  of  shares  from 
Catlow  remotely  or  directly,  and  Catlow  himself,  if  he  have  not  trans- 
ferred all  his  stock ;  unless  as  to  Catlow,  he  is  not  to  be  deemed  a 
party  because  he  is  not  in  like  case  with  the  plaintiff. 

It  will  be  convenient  first  to  inquire,  if  Catlow  as  a  plaintiff  could  | 
have  maintained  such  an  action.     The  facts   would  have  been,   that  I 
previous  to  the  impeached  issue  of  certificates  of  shares,  the  corporation  ' 
would  have  been  in  existence  b}-  virtue  of  the  statute  which  declares 
(.Laws  1848  c.  40,  §  2,  3  Edm.  733)  that  when  the  certificate  shall  have 
been  filed,  the  persons  who  shall  have  signed  and  acknowledged  the 
same  and  their  successors  shall  be  a  body  politic  and  corporate  in  fact 


.vV*-^- 


572  PARSONS   V.   HAYES. 

and  in  name,  by  the  name  stated  in  such  certificate  and  by  that  name 
have  succession  and  shall  be  capable  of  suing  and  being  sued  and  they 
and  their  successors  may  have  a  common  seal  and  the}^  shall  by  their 
corporate  name,  be  capable  in  law  of  purchasing,  etc.,  property. 

There  was  no  stock  or  capital  and  there  could  be  none  excepting  by 
third  persons  paying  money  or  property  for  certificates  of  shares  of  the 
capital  issued  to  them.  There  were  then,  of  course,  no  shareholders. 
Catlow  and  the  trustees  of  the  corporation,  who,  by  the  statute  were 
the  corporation,  made  an  agreement  that  was  carried  out,  that  certifi- 
cates should  be  issued  to  him  by  the  trustees  which  should  represent 
that  he  was  the  owner  of  the  whole  number  of  shares  of  the  capital 
stock,  or  two  hundred  thousand  shares  of  the  stock  which  by  the 
certificate  of  incorporation  was  to  be  $2,000,000,  and  he  should  convey 
to  the  company  mining  claims  and  property-,  which  in  fact  had  no 
greater  value  than  $150,000,  as  the  parties  to  the  transaction  knew. 
In  substance  Catlow  subscribed  for  the  whole  of  the  shares,  agreeing 
to  pay  therefor,  onl}'  propert}^  of  the  value  named. 

The  statute  declared  that  only  money  should  be  taken  by  the  trustees 
to  the  nominal  amount  of  the  shares  issued,  or  property',  the  actual 
value  of  which  was  equal,  to  that  nominal  amount.  The  agreement 
was  unlawful  and  its  execution  could  not  have  been  enforced  by  either 
party  to  it.     It  was  in  fact  made  and  executed  to  evade  the  statute. 

It  was  a  part  of  the  agreement  that  upon  the  certificates  being  issued 
to  Catlow  he  should  transfer  to  each  of  the  trustees  certain  shares. 
The  trustees  received  these  shares  from  Catlow  and  afterwards  sold 
them  for  large  sums  of  money  for  their  own  benefit.  Upon  the  certifi- 
cates being  issued  to  Catlow  he  would  become  a  shareholder.  At  least 
it  is  necessary  to  suppose,  that  although  the  transaction  was  forbidden 
by  law,  yet  it  was  in  fact  done,  and  by  it,  Catlow  became  a  shareholder. 
Upon  the  supposition  that  Catlow,  being  the  owner  of  all  the  shares 
excepting  such  as  he  had  transferred  to  the  trustees,  brougiit  his 
action,  he  would  claim  that  he  had  a  right  to  demand  that  the  company 
should  bring  an  action  against  the  trustees  to  compel  them  to  pay  the 
company  money  sufficient  with  the  value  of  the  mining  property  to 
amount  to  $2,000,000  which  was  by  the  certificate  to  be  the  capital, 
and  also  pay  to  the  company  the  amounts  of  mone}'^  for  which  they  had 
Bold  the  shares  he  had  transferred  to  them. 

As  the  action  would  be  by  him  declared  to  be  for  his  benefit,  it 
ivould  ordinarily  be  necessary  to  say  no  more,  than  that  he  was  not 
entitled  to  be  benefited,  through  claiming  an  interest  in  what  may  be 
called  damages  for  an  act  in  which  he  had  taken  part,  indeed  which 
he  had  promoted.  But  certain  positions  have  been  taken  for  the 
present  plaintiflT,  which  would  apply  to  Catlow  and  those  may  be  now 
examined. 

It  is  said  for  the  present  plaintiff  that  the  transaction  was  unlawful 
and  invalid,  and  cannot  be  made  lawful  or  be  validated.  If  that  be  so, 
it  would  be  true  in  the  case  of  Catlow.     It  is  nevertheless  also  true, 


PAKSONS  V.   HAYES.  573 

that  there  is  nothing  unlawful  or  invalid,  in  the  parties  to  an  unlawful 
arrangement,  being  without  a  right  to  share  in  damages  (to  use  a 
convenient  word)  which  have  flowed  from  the  unlawful  act. 

There  is  at  this  point  a  distinction  taken  for  the  plaintiff,  between 
the  right  of  the  corporation  to  damages  and  the  right  of  a  party  con- 
senting to  the  wrong,  being  entitled  to  damages.  It  is  said  that  a 
corporation  is  an  artificial  person,  a  legal  entit}'  entirel}'  different  and 
distinct  from  the  persons  of  which  it  is  composed  and  the  corporation 
as  a  distinct  person  may  be  injured  b}"  one  or  all  of  its  members,  and 
in  either  case  has  a  right  of  action.  Without  stopping  to  ascertain 
the  real  meaning  of  this  definition  of  a  corporation,  and  assuming  the 
other  proposition  to  be  correct,  it  is  further  to  be  ascertained  if  the 
corporation  has  been  injured  in  the  transaction  or  has  suffered  damage. 

The  injur}'  or  damage  in  one  direction  would  be  the  consequence  of 
issuing  certificates  b}'  an  invalid  act  that  on  the  assumption  of  the 
plaintiff's  argument  is  incapable  of  ratification.  If  this  be  a  void  act, 
then  it  would  be  necessary  to  say,  that  the  certificates  issued  were 
void  and  the  corporation  could  proceed  to  issue  certificates  of  shares  in 
a  legal  manner.  But  such  a  view  would  disclose  that  Catlow  or  the 
plaintiff  would  not  be  a  shareholder  and  therefore  not  entitled  to  bring 
such  an  action  as  the  present. 

Such  an  injur}',  of  course,  is  not  claimed,  but  it  is  claimed  that  the 
injury  was  the  trustees  issuing  for  property  of  small  value  certificates 
to  the  nominal  amount  of  $2,000,000,  whereas  it  was  the  duty  of  the 
trustees  not  to  issue  them  except  for  S2, 000, 000.  The  complaint  does 
not  allege  nor  can  it  be  presumed  that  if  the  certificates  had  been 
properl}'  dealt  with,  any  more  could  have  been  procured  for  them,  than 
was  in  fact,  and  therefore  it  does  not  appear  that  an}-  pecuniary  damage 
was  suffered.  Or,  in  other  words,  it  does  not  appear  that  if  the  trustees 
had  performed  their  dutj',  of  not  issuing  except  for  equivalent  value, 
that  the  corporation  would  have  had  more  capital  than  now. 

Excepting  these  considerations  it  may  be  supposed  that  there  was 
damage  to  the  compan}'  from  the  trustees'  acts.  Was  there  an}'  injury 
under  the  facts?  It  is  true,  that  the  corporation  is  something  more 
than  its  trustees  and  shareholders  ;  but  its  property,  chattels,  money  or 
choses  in  action,  it  owns  not  in  its  own  interest  but  for  the  pecuniary 
benefit  of  the  natural  persons  connected  with  it.  It  would  be  impossible 
to  look  upon  the  property  rights  of  a  corporation  merely  having  regard 
to  its  being  an  ideal  creature.  It  acts  through  natural  persons.  It 
acts  for  the  benefit  of  natural  persons.  In  truth  natural  persons  com- 
pose it.  The  statute  under  which  it  was  formed  says  this.  The 
trustees  who  are  trustees  under  the  statute  for  the  corporation  are 
the  trustees  for  the  shareholders.  In  Karnes  v.  Rochester  &  Genesee 
Valley  R.  R.  (4  Abb.  Fr.  N.  S.  107),  the  court  said,  "  The  directors 
stand  in  the  relation  of  trustees  to  stockholders  and  between  them 
exists  the  relation  of  trustee  and  cestui  que  trust."  As  for  this  Butts 
V.  Wood  (38  J3.  181,  afterwards  affirmed,  37  X.  Y.  317),  was  quoted, 


574  PARSONS   V.    HAYES. 

it  must  have  been  said  upon  an  identification  of  the  stockholders  and 
the  corporation.  The  same  ease  said  (p.  110),  "The  corporation  does 
not  stand  in  any  fiduciary  relation  to  its  stockholders.  Such  a  relation 
between  the  corporation  and  its  corporators,  is  shown  in  a  well  con- 
sidered opinion  by  Vice-Chancellor  McCoun,  in  Verplanck  v.  Mercantile 
Ins.  Co.  (1  £dic.  Ch.  87),  to  be  impossible.  The  stockholders  are  in 
no  sense  creditors  of  the  corporation,  nor  are  the}-  in  the  situation 
of  partners.  They  are  constituent  parts  of  the  corporation."  The 
language  of  Vice-Chancellor  McCoun,  in  Verplanck  v.  Mercantile  Ins. 
Co.  (1  Edw.  Ch.  87)  was,  "The  corporation  is  merel}'  the  creature  of 
the  law,  a  political  bod}',  not  a  natural  bod}',  made  up  of  the  compact 
entered  into  by  the  stockholders,  each  of  whom  becomes  a  corporator 
identified  with  and  forming  a  constituent  part  of  the  corporate  body, 
and  therefore  when  we  speak  of  stockholders  and  the  incorporated 
company  of  which  the}'  are  the  components,  we  refer  to  one  and  the 
same  collection  of  persons.  How  then,  can  the  relation  of  trustees  and 
cestui  que  trust  exist,  for  such  a  relation  requires  separate  and  distinct 
persons  or  separate  and  distinct  bodies  to  constitute  it."  This  case 
afterwards  aflSrms  that  the  directors  are  the  agents  and  trustees  of  the 
corporation  or  stockholders. 

In  Railway  Company  ??.  AUenton  (18  Wcdl.  234),  the  charter  declared 
that  all  the  corporate  powers  of  the  corporations  shall  be  vested  in  and 
exercised  by  a  board  of  directors,  etc.,  and  it  also  declared  that  tlie 
capital  stock  of  the  corporation  may  be  increased  from  time  to  time  at 
the  pleasure  of  said  corporation.  The  court  held  that  the  capital  could 
not  be  increased  by  the  directors  without  the  consent  of  the  share- 
holders. The  opinion  said  that  a  corporation  like  a  partnership  is  an 
association  of  natural  persons,  and  that  fundamental  changes  of  cor- 
porate purposes  cannot  be  made  without  tlie  express  or  implied  consent 
of  the  members. 

J  Again,  considering  that  the  fundamental  position,  is  that  Catlow 
became  in  fact,  shareholder  to  the  amount  of  all  the  capital  stock,  the 
following  was  the  relation  between  the  parties.  The  corporation  was 
the  holder  of  the  legal  title  of  the  property  of  the  corporation,  subject 
to  corporate  uses.  Excepting  this  legal  title  for  corporate  uses,  the 
shareholders  were  the  parties  interested  in  the  property  in  fact,  owning 
all  of  it,  excepting  the  legal  title,  which  as  against  them  could  be  used 
for  corporate  purposes.  The  trustees  were  the  statutory  corporation- 
The  shareholders  were  members  or  a  part  of  the  corporation.  The 
corporation  held  the  legal  title,  for  the  pecuniary  benefit  of  the  share- 
holders, having  no  beneficial  or  pecuniary  benefit  in  it. 

On  tiie  claim  for  the  plaintiff,  the  thing  possessed  is  the  right  of  the 
corporation  to  have  an  action  against  its  trustees,  for  damages  for  their 
acts  wliich  it  is  claimed  were  wrongful  to  the  corporation.  This  right 
was,  if  it  existed,  held  by  the  same  tenure  and  for  the  same  purposes 
that  other  property  would  be  held.  The  corporation  would  have  a  bare 
title  to  it  for  the  beneficial  use  of  shareholders.     It  seems  to  be  evident, 


PARSONS   V.    HAYES.  673 

that  the  corporation  could  not  claim  as  damage  to  its  interest  what 
would  be  damage  to  the  beneficial  interest  where  the  owners  of  the 
latter  had  consented  to  the  so  called  iniury . 

In  fact,  however,  the  case  is  a  little  different  in  point  of  circumstance, 
although  not  essentiall}'.  The  beneficial  owner  or  shareholder  having 
in  advance  of  the  occurrence,  which  but  for  their  participation  would 
have  created  a  cause  of  action  in  the  corporation,  promoted  it  and  then 
participated  in  it,  the  conduct  of  the  trustees  never  made  a  cause 
of  action,  because  that  conduct  was  not  wrongful  as  respects  the 
shareholder. 

The  principles  that  have  now  been  used  are  established  by  Scott  v. 
De  Peyster  (1  Udic.  Ch.  513)  ;  Hotel  Co.  v.  Wade  (97  V.  S.  13)  ; 
Kent  V.  Quicksilver  Mining  Co.  (78  JV.  Y.  159).  It  is  not  necessary 
to  give  the  reasoning  of  these  cases.  Thej'  are  applicable  here.  It  is 
supposed  that  in  the  last  case  there  is  a  difference,  in  that  acquiescence 
of  shareholders  was  held  to  estop  them  in  favor  of  innocent  third  parties. 
But  it  must  be  considered  that  after  the  power  to  ratify-  or  acquiesce  is 
held  to  exist,  the  same  principle  would  act  in  favor  of  third  parties 
although  not  innocent,  against  whom  damages  for  the  act  ratified  were 
claimed. 

It  seems  to  be  clear  that  Catlow  could  not_  maintain  an  action  like. 
this,  first  because  he  could  not  claim  that  the  corporation  should  bring 
an  action  for  his  benefit  on  account  of  a  transaction  which  he  took  part 
i3i7^nd"""second  ^5ecaiise  the  cortooration  would  have  no  cause  of  action 
or  right  to  damages. 

If  the  second  proposition  be  true,  then  it  necessarily  follows  there 
never  having  been  any  cause  of  action,  or  the  right  to  damages  having 
never  accrued  the  claim  cannot  be  revived  in  the  future  in  favor  of  any 
person  whether  or  not  a  transferee  of  shares  from  Catlow. 

The  plaintiff,  however,  because  he  claims  through  a  transfer  from 
Catlow  cannot  bring  an  action  which  Catlow  could  not  have  brought 
upon  this  case. 

In  Mann  v.  Currie  (2  B.  298),  the  court  said  of  the  defendant  that 
"  if  he  became  a  stockholder  by  transfer  to  him  of  the  stock  of  an 
original  subscriber,  he  at  once  adopted  his  contract  with  the  compan}' 
and  became  substituted  in  his  place,  both  as  regards  his  rights  and 
liabilities."  This  was  said  in  relation  to  the  obligations  of  the  defend- 
ant to  fulfil  the  terms  of  the  original  subscription  of  his  assignor. 
The  reasoning  that  tends  to  the  application  of  this  conclusion  in  this 
case  is  just  and  seems  to  be  clear.  The  shares  which  the  plaintiff  holds 
came  to  him  through  a  certificate  which  was  issued  upon  a  particular 
arrangement  under  which  the  plaintiff  claims,  necessarily  admitting  it 
to  have  been  effective.  One  feature  of  that  arrangement  was  that  the 
certificate  should  be  issued  to  Catlow  as  his  property  for  a  consideration 
which  the  plaintiff  claims  was  injurious  to  the  corporation.  As  the 
plaintiff  claims  that  the  consideratioia_aithoiigh  unlaivful  was  sufficient 
togiveatitle  whicti  he  maintains,  he  must  abide  by  it  as  a  fact  and 


576      -  PARSONS   V.    HAYES. 

therefore  in  all  its  consequences.  It_|8_not  competentjor^im  to  take 
part  andjigject  part  as  it  was  one  transaction.  Counsel  for  the  defend- 
ant in  a  later  case  before  the  general  term  cited  on  this  point :  Hooker 
V.  London  Railway  Co.  (7  Ins.  368)  ;  the  opinions  in  Williams  v. 
Telegraph  Co.  (48  Siqyer.  Ct.  349)  ;  Mech.  Bank  v.  N.  Y.  &  N.  H.  R. 
R.  Co.  (13  JSr.  Y.  599)  ;  Hughes  v.  Copper  Co.  (72  N.  Y.  207). 

The  claim  that  the  corporation  had  a  right  to  recover  the  amounts  of 
profits  made  by  the  trustees  for  themselves  individually  in  a  transaction 
which  they  were  conducting  for  the  corporation  has  not  yet  been  noticed. 
What  has  been  already  said  is  to  be  applied  to  this  claim.  There  is  no 
doubt  of  this  general  rule  that  trustees  are  liable  to  respond  to  those 
for  whom  they  act  for  any  profits  made  by  them  individually^  but  this 
is  limited  bj'  the  proposition  in  the  language  of  the  court  of  appeals 
(Moody  V.  Smith,  70  N.  Y.  598),  "  a  principal  may  give  an  agent 
express  power  to  act  in  the  business  of  the  principal,  so  that  the  agent 
ma}'  reap  a  benefit,  and  in  such  case  the  principal  is  bound  by  the  acts 
of  their  agent."  It  has  been  already  considered  that  the  shareholders 
were  the  real  parties  interested  and  that  their  consent  would  bind  the 
corporation,  and  it  follows  that  the  corporation  would  not  recover  from 
[the  trustees,  what  shareholders  had  arranged  they  should  individually 
receive. 

This  opinion' has  had  in  regard  solely  the  right  of  a  niember^f  a 
COTporat^n  to  require  that  corporation  to  assert  for  his  benefit,  a  claim 
for  damages  in  which  he  may  share,  whenln  reality  He  stands  in^the 
shoes  of  one  who  took  part^njthe  transactTon_complained  of.  His 
want  of  jjghtjto  maintain  such  an  action  does  not  affect  any  claim  he 
may  have  for  individual  damage  from  misrepresentation  by_the^orpora- 
tion  oFThird  parties,  nor  does  it  affect  the  claim  of  creditors  or  the 
liability  of  the  corporation  or  its  trustees  to  an  action  by  the  attorney 
generaU^  Judgment  affirmed,  ivith  costs. 

Truax,  J.,  dissents. 

Ingraham,  J.  —  [Concurring.]  —  I  concur  with  the  Chief  Judge  on 
the  ground  stated  by  him  that  as  Catlow  was  a  party  to  the  agreement 
under  which  the  stock  was  issued,  and  received  the  benefit  of  such 
agreement,  he  would  not  be  entitled  to  bring  such  an  action  as  the 
present  one,  and  that  plaintiff's  title  to  the  stock  he  owns  and  on  which 
he  brings  his  action,  having  come  through  Catlow,  he  can  have  no 
greater  right  as  stockholder  than  his  assignor  had. 


LONDON   TRUST   COMPANY  V.   MACKENZIE.  ^W^    i"  jj" 

LONDON   TRUST  COMPANY,   Limited,  v^MAC&eSzIE.         y^ 

1893.    G8  Law  Times,  New  Series,  380.1  OX 

Tkial  of  action  before  "Wright,  J.,  sitting  as  an  additional  Judge 
of  the  Chancery  Division. 

The  original  plaintiffs  were  the  London  Trust  Company,  Limited," 
and  the  Bankers  Investment  Trust,  Limited ;  suing  on  behalf  of  them- 
selves and  other  shareholders  of  the  Barbadoes  Water  Supply  Com- 
pany, Limited ;  and  claiming  relief  against  the  former  directors  of 
the  Barbadoes  Company,  on  the  ground  that  the  Barbadoes  Company 
had  incurred  loss  through  breach  of  duty  on  the  part  of  the  directors. 
In  the  first  instance  the  Trust  Companies  were  the  only  plaintiffs,  the 
defendants  having  control  of  the  voting  majority  when  the  action  was 
instituted ;  but  subsequently,  in  accordance  with  the  resolution  of  a 
general  meeting,  the  Barbadoes  Company  were  joined  as  co-plaintiffs. 

The  Barbadoes  Company  was  formed  in  1886.  The  capital  was 
limited  to  200,000^.  At  the  end  of  1888,  the  Company  had  issued 
only  ASo3L  shares  of  51.  each,  and  debentures  for  a  total  sum  of  5100^. 

About  Jan.  1,  1889,  the  directors  made  an  agreement  in  behalf  of 
the  company  with  a  firm  of  contractors  ;  whereby  the  latter  under- 
took to  execute  certain  works  for  a  specified  sum  in  debentures  and 
fully  paid  shares  of  the  company  (110,000^.  in  cash  or  debentures,  and 
50,735^.  in  fully  paid  shares),  and  by  means  of  a  stipulated  portion  of 
those  debentures  and  shares  to  carry  out  the  provisions  of  certain 
contemporaneous  agreements,  under  which  debentures  and  fully  paid 
shares  of  the  company  were  to  be  handed  over,  without  consideration, 
to  certain  persons  (including  tlie  directors  themselves).  This  scheme 
was  sanctioned  by  each  existing  shareholder  and  creditor  of  the  com- 
pany. Each  of  the  shareholders  and  debenture  holders  for  the  time 
being  of  the  company  ultimately  took  a  benefit  under  one  or  other  of 
the  agreements ;  each  receiving  a  considerable,  though  not  uniform, 
bonus. 

In  order  to  obtain  funds  for  the  purposes  of  the  contract,  the  di- 
rectors issued  debentures.  The  prospectus,  upon  which  subscriptions 
for  the  issue  were  invited,  did  not  disclose  the  above  arrangement,  nor 
give  any  notice  that  the  money  raised  was  to  be  applied  to  any  other 
than  legal  liabilities.  The  issue  was  underwritten  to  the  full  amount 
offered  for  subscription  by  various  financial  concerns  including  the 
plaintiff  trust  companies.  The  underwriting  agreement  purported  to 
be  made  with  the  Barbadoes  Company.  It  states  that  the  debentures 
are  offered  at  99^,  and  that  underwriters  are  to  have  2  per  cent,  com- 
mission and  a  bonus  in  ordinary  shares  equal  to  25  per  cent,  of  their 
subscriptions.  The  plaintiff  trust  companies  subscribed  for  and 
1  Statement  abridged.    Part  of  opinion  omitted. —Ed. 


578  LONDON   TRUST   COMPANY   V.   MACKENZIE. 

acquired  some  of  the  debentures ;  receiving  from  the  contractors  as  a 
commission  a  certain  number  of  shares  and  a  money  payment  from 
the  Barbadoes  Company  itself.  The  plaintiffs  are  now  suing  as 
holders  of  the  bonus  shares  which  they  received  under  this  agreement. 

The  defendants  alleged,  and  the  plaintiffs  appear  to  have  admitted, 
that  no  share  capital  had  been  issued  by  the  Barbadoes  Company  since 
the  completion  of  the  above  transactions,  in  April,  1889. 

Sir  Horace  Daverj,  Q.  C,  Levett,  Q.  C,  and  Waggett,  for  plaintiffs. 
[Argument  omitted.] 

Sir  John  Rigby,  Solicitor  General,  and  Chachvyck  Healey,  Q.  C. 
{Ingle  Joyce  and  Reginald  Hughes,  with  them),  for  one  of  defendants. 

Every  shareholder,  creditor,  and  debenture-holder  of  the  Barbadoes 
Company  was  concerned  in  the  arrangement  which  is  complained  of. 
No  person  was  injured  by  it,  and  no  shares  have  since  been  issued. 
It  was  not  a  scheme  to  deceive  future  shareholders,  as  was  the  case 
in  Society  of  Practical  Knoivledge  v.  Abbott,  2  Beavan,  559.  The 
scheme  was  for  the  benefit  of  the  Barbadoes  Company,  and  the  de- 
fendants, as  directors,  committed  no  breach  of  duty  in  making  it. 
Re  British  Seamless  Paper  Box  Company,  44  L.  T.  n.  s.  498  ;  17 
Chan.  Div.  467.  By  the  issue  of  further  shares  and  debentures,  the 
position  of  the  shareholders  and  debenture-holders  was  altered  for 
the  worse,  and  that  alteration  gave  them  a  right  to  bargain.  The 
consent  of  the  individual  corporations  [corporators  ?]  was  equivalent 
to  a  resolution  of  the  Barbadoes  Company,  by  which  it  became  bound. 
Re  Gold  Company,  40  L.  T.  n.  s.  5  ;  11  Chan.  Div.  701 ;  Re  Ambrose 
&c.  Co.,  42  L.  T.  N.  s.  604  ;  14  Chan.  Div.  390.  The  plaintiffs  must 
show  that  what  was  done  was  a  fraud  on  the  Barbadoes  Company. 
They  have  not  done  so.  There  was,  moreover,  no  purchase  by  the 
Barbadoes  Company  of  its  own  shares.  In  substance  and  in  form 
the  contractors  purchased  the  shares.  The  share  capital  remains  the 
same.  The  court  is  not  obliged  to  visit  directors  with  the  consequences 
of  acts  done  in  good  faith.  London  Financial  Association  y.  Kelk,  50 
L.  T.  N.  s.  492 ;  26  Chan.  Div.  107  ;  Pickering  v.  Stephenson,  26  L.  T. 
N.  s.  608 ;  L.  E.  14  Eq.  322. 

Levett,  Q.  C,  in  reply. 

It  is  conceded  that  a  company  can  condone  or  approve  matters  that 
are  merely  ultra  vires  of  the  directors,  but  that  is  not  the  case  with 
regard  to  matters  ultra  vires  of  the  company. 

Even  if  the  decision  in  Re  British  Seamless  Paper  Box  Company 
(ubi  sup.)  is  now  to  be  regarded  as  good  law,  the  case  does  not  apply, 
for  there  is  here  no  evidence  of  any  resolution,  or  even  of  any  inten- 
tion, that  no  further  capital  should  be  issued  after  April,  1889. 

Wright,  J.  ...  It  is  important  to  observe  that  the  new  shares 
issued  or  intended  to  be  issued  to  the  contractors  must  have  been 
intended,  in  the  ordinary  course  of  things,  to  be  transferred  by  the 


LONDON  TEUST  COMPANY  v.   MACKENZIE,  579 

contractors  to  other  persons,  and  there  is  power  to  issue  further 
shares. 

First,  it  is  said  that  the  arrangement  was  one  to  which  every  one 
who  had  any  interest  either  as  shareholder,  or  debenture-hokler,  or 
creditor,  agreed  that  no  one  Avas  wronged  or  defrauded,  and  that, 
under  the  circumstances,  the  cases  of  He  The  Gold  Mining  Company 
(ubi  sup.),  He  The  Ambrose  Lake  Tin  and  Copper  Company  (ubi  sup.), 
and  He  The  British  Seamless  Paper  Box  Company  (ubi  sup.)  applied, 
and  neither  the  company  nor  the  plaintiff  shareholders  could  complain. 
But  those  were  all  cases  of  persons  who  owned  the  entire  capital  of 
the  company  and  intended  to  remain  the  sole  proprietors,  and  they 
■were  held  free  to  make  honest  agreements  among  themselves  as  to 
the  appropriation  of  their  property,  whereas  in  the  present  case  there 
was  to  be  a  large  issue  of  shares  to  the  contractors,  which  it  must 
have  been  intended  that  the  public  should  take  up,  and  there  remained 
a  large  part  of  the  share  capital  to  be  allotted  in  the  future,  and  the 
parties  to  the  present  agreements  were  taking  for  themselves  some 
30,000^.  of  the  capital  of  the  company  to  the  detriment  of  all  who  might 
take  any  such  shares,  and  they  were  doing  so  secretly  and  were  mis- 
representing by  the  prospectus  and  registered  deed  the  real  nature  of 
the  transaction.  It  seems  to  me  that  the  company  is  entitled  to  pro- 
tect the  future  shareholders  and  its  own  funds  against  such  appro- 
priations, and  that  the  very  cases  relied  on  by  the  defendants  are 
authorities  for  this  view.  "  If,"  said  James,  L.  J.,  in  the  last  cited 
case,  "they  were  intending,  although  then  constituting  the  whole 
company,  that  other  people  should  come  in  afterwards  to  whom  what 
had  been  done  would  be  injurious,  the  court  would  feel  no  difficulty 
in  saying,  as  Lord  Langdale  did  in  The  Society  of  Practical  Know- 
ledge V.  Abbott  {ubi  sup.),  that  they  intended  to  commit  a  fraud." 

Objections  were  raised  to  the  right  of  the  plaintiffs  to  maintain  this 
action.  So  far  as  the  company  is  concerned,  it  is  for  the  reasons 
already  given  entitled  to  sue  in  the  interest  of  those  who  hold  the 
shares  issued  to  the  contractors  or  to  be  issued  to  the  public.  The ' 
other  plaintiffs  are  said  to  be  disentitled  because  their  shares  are 
bonus  shares,  and  they  are  said  to  stand  in  the  shoes  of  the  contract- 
ors from  whom  they  took  the  shares,  and  who  had  notice  of  all  the 
facts.  It  is  clear,  however,  that  these  plaintiffs  had  no  notice  of  any 
part  of  the  arrangement,  nor  any  notion  that  the  28.000Z.  would  be 
applied  otherwise  than  for  new  works  or  in  liquidation  of  existing 
legal  liabilities.  And  I  think  ^there_is  no  authorijy^  for^  the  general 
proposition  that  an  ordinary^transferee  of  shares  in  a  limited  company 
is^ affected  bj^th^^act^:bhatJiis_transferor^ad  knowledgejwhich  would 
havedisabled  him_from  suing.  .  .  .^Tt  would  seriously  affect  the 
position  of  shareholders  in  limited  companies,  and  the  value  of  shares. 


580  LONDON  TRUST  COMPANY  V.   MACKENZIE. 

if  it  were  held  that  such  equities  against  a  transferor  affect  the  rights 
of  transferees  for  value  without  notice. 

[The  learned  Judge  held,  that,  to  the  extent  to  which  the  contract- 
ors had  been  provided  with  debentures  and  shares  to  be  made  over 
to  third  parties  without  consideration,  the  transaction  was  ultra  vires 
of  the  company ;  and  that  the  directors  were  liable  to  make  good  the 
loss  occasioned  thereby.] 


EE  SEVEKN  AND  WYE  AND  SEVERN  BEIDGE  R.   CO.  581 


CHAPTER  XV. 
DIVIDENDS.    PREFERRED  STOCK. 


Re  SEVERN  akd  WYE  and   SEVERN  BRIDGE  R.  CO. 

1896.     74  Law  Times,  New  Series,  219. 


1896.     74  Law  I imes,  j\ew  Series,  2ld.  ^   v^        ^     '\  ^     ^^     df 

(Before  Romer,  J.,  sitting  for  Williams,  J.)         ^     J^^  t^      y^\  *^V^*^ 

Summons.  ^    ^    >  J>\1^^^ 

The   Severn  and  Wye   Railway  and  Canal  Company  (hereinafter^  '^  ,j/^   v  ^'' 
called  the  original  company)  was  incorporated  by  Act  of  Parliamenty  J    /\j^    t .    y 
in  1809,  and  under  an  Act  passed  in  1879  (42  &  43  Vict.  c.  clxiii.)^       \iij^  l^ 
this  company  and  the  Severn  Bridge  Railway  Company  were  amalga-^./-  t      'f    'J- 
mated,  and  the  shareholders  were  united  into  one  company  and  incor-  [|,  '^    i^-       \ 
porated  under  the  name  of  the  Severn  and  Wye  and  Severn  Bridge  n  J^   '  if^  i 

Railway  Company.  ^^         >*  J   ''ji' 

By  tlie  last-mentioned  Act  it  was  provided  that  the  capital  of  the  two  \^  ^^    J^ 
companies  should  after  the  amalgamation  be  kept  distinct.  f^       ^y  i  'J^ 

The  original  company  was  prosperous  in  its  early  days,  and  paid    JL^  o        /^  t 
dividends  half-yearly  on  the  production  to  its  bankers  of  a  notice  issued  r     j,'   jf^    A 
by  the  secretary  to  the  shareholders  and  on  their  signing  a  special  \m^    ff'^^J^f\ 
form  of  receipt.  /^     ^      j\  jp^ 

Under  the  authority  of  another  Act,  passed  in  1894  (57  &  58  Vicf.        ^     rrjy^ 
c.  clxxxix.),  the  amalgamated  company  sold  its  undertaking  to  therh    uf'    .    ^^ 
Great  Western  and  Midland  Railway  Companies.     Sect.  4  of  the  Act  'L  \^'i/^i  ^ 
provided  that  the  amalgamated  company  should  be  wound  up  as  if  it  /LX  ^4>^   'Jb    ^  r 
were  a  company  registered  under  the  Companies  Acts  1862  to  1890,        ^^''^vf     '^'''^^ 
and  had  on  the  day  of  the  passing  of  the  Act  passed  a  special  resolution  t>^^  ^^^  J 
for  winding  up  voluntarily.  ,i^ 

After  providing  for  payments  required  by  sect.  7  of  the  Act  of  1894 
it  was  anticipated  that  there  would  be  a  surplus  in  the  hands  of  the 
liquidators  of  £2000,  inclusive  of  £1238  representing  unclaimed  divi- 
dends declared  by  the  original  compan}-  prior  to  March,  1878,  and  this 
surplus  was,  ^nder  a  proviso  to  sect.  7  of  the  Act,  to  be  divided  amongst 
the  preference  and  ordinary  shareholders  of  the  amalgamated  company 
in  certain  proportions. 

Prior  to  the  amalgamation  the  dividends  appeared  in  a  di\idend 
ledger  of  the  original  company,  and  this  practice  was  continued  in  the 


582 


RE   SEVERN   AND   WYE   AND   SEVERN   BRIDGE   R.    CO. 


same  book  after  the  amalgamation  and  down  to  the  30th  June,  1885, 
each  shareholder  having  an  account  in  the  ledger.  In  December,  1895, 
these  were  written  off  the  dividend  ledger  and  transferred  to  the  general 
ledger  to  an  account  headed  "Unpaid  dividends,"  the  whole  being 
aggregated,  and  that  account  had  ever  since  remained  in  the  general 
ledger.  In  the  half-yearl}'  published  accounts  down  to  June,  1885, 
these  dividends  were  entered  under  one  item  of  "  Unpaid  dividends 
and  interest,"  but  in  subsequent  balf-3early  published  accounts  they 
were  included  in  an  item  called  "  Sundry  outstanding  accounts."  The 
company  had  in  some  cases  paid  dividends  which  had  been  unclaimed 
4 for  over  six  years.  The  £1238  was  made  up  entirely  of  unclaimed 
dividends  on  stock  which  represented  shares  in  the  original  company-, 
such  dividends  having  all  been  declared  more  than  twenty'  3'ears  ago. 

This  was  a  summons  taken  out  by  the  liquidators  for  the  determina- 
tion by  the  court  of  the  question  whether  two  sums  of  £753  14s.  3d. 
and  £349  4s.  3d.  representing  unclaimed  dividends  which  accrued  upon 
the  stocks  respectively  held  by  William  Robbins  and  John  Sherborne 
prior  to  the  3'ear  1874,  and  which  remained  in  the  hands  of  the  liqui- 
dators should  be  paid  to  their  respective  legal  personal  representatives, 
or  whether  the}^  ought  to  be  ti'eated  as  part  of  the  general  assets  of  the 
Icompany  available  for  distribution  as  such  amongst  the  preference  and 
(ordinary  stockholders  as  provided  b}'  sect.  7  of  the  Act  of  1894. 
I^.  Thompson  for  the  liquidators. 
Vernon  H.  Smith,  Q.  C,  and  Hoirden  for  the  stockholders  of  the  amal- 

)gamated  compan}'.  — The  claims  of  the  legal  representatives  of  Robbins 
and  Sherborne  were  barred  by  the  Statute  of  Limitations,  if  not  at  the 
expiration  of  six  years  from  the  time  of  the  declaration  of  the  dividends, 
at  all  events  at  the  expiration  of  twenty  years  :  (Lindley  on  Companies 
(5th  edit.),  p.  437).  As  soon  as  the  dividends  were  declared  an  action 
lay  to  recover  them.  From  that  time  the  company  became  a  simple 
contract  debtor  to  the  shareholders  for  the  amount  of  the  dividends. 
The  entries  in  the  books  of  tlie  company  were  entirely  consistent  with 
the  relationship  of  debtor  and  creditor,  and  cannot  be  regarded  as  a 
sufficient  acknowledgment  to  take  the  case  out  of  the  statute :  Bush 
V.  Martin,  9  L.  T.  Rep.  510 ;  2  H.  &  C.  311.  They  also  referred  to 
the  Companies  Act  1862,  s.  16. 

Dihdin  for  the  personal  representatives  of  Robbins.  —  The  company 

I  held  the  dividends  as  trustees  for  the  shareholders,  and  therefore  no 

ijLquostion  on  the  Statute  of  Limitations  arises:    Smith  v.  Cork  and 

■n)  Jiandon  Baihmy   Company,  Ir.  Rep.  5  Eq.  65  ;   Gourattd  v.  Edison 

Oower  Bell  Telephone  Company  of  Europe  Limited,  59  L.  T.  Rep. 

813;  57  L.  J.  489,  Ch.  ;  Re  Lands  Allotment   Comp>any,  70  L.  T. 

Rep.  286  ;  (1894)  1  Ch.  616.    The  company  was  in  a  position  analogous 

to  that  of  a  partnership.     In  the  case  of  a  claim  by  one  partner  against 

tlie  other  time  docs  not  commence  to  run  under  the  statute  until  after 

the  dissolution  of  the  partnership:  Penny  v.  Pickvnrk,  16  Beav.  246  ; 

Barton  v.  North  Staffordshire  Railway  Company,  58  L.  T.  Rep.  549  ; 


RE   SEVERN   AND   WYE   AND   SEVERN   BRIDGE   R.   CO. 


583 


38  Ch.  Div.  458.  He  also  referred  to  Companies  Act  1862,  Table  A, 
cl.  76  ;  LincUe}-  on  Partnership,  6tli  edit.,  pp.  511-2  ;  Lindley  on  Com- 
panies, 5th  edit.,  p.  401. 

W.  M.  Cann,  for  the  personal  representatives  of  Sherborne,  adopted 
the  same  argument. 

Ver?i07i  H.  Smith  replied.  Cur.  adv.  vult. 

March  9.  —  Romer,  J.,  delivered  the  following  written  judgment : 
The  liquidators  have  raised,  as  they  were  entitled  to  do,  the  defence  of 
the  Statute  of  Limitations  in  answer  to  the  claims  for  unpaid  dividends, 
which  I  have  to  consider.  That  defence  is,  in  my  opinion,  fatal  to  the 
claims.  The  dividends  in  question  were  declared  and  became  pajable 
more  than  twenty  years  before  the  present  claims  were  made,  and 
constituted  debts  due  to  the  shareholders  for  which  they  could  have 
sued  at  law,  as  was  pointed  out  b}'  Lindley,  L.  J.,  in  the  passage  in 
his  treatise  on  company  law  (p.  437),  which  was  cited  in  the  argument 
before  me.  Presumably,  therefore,  the  Statute  of  Limitations  began 
to  run  in  favor  of  the  company  from  the  time  the  dividends  became 
payable. 

But  the  claimants  contend  that  the  statute  never  began  to  run  against 
them,  on  two  grounds.  In  thefirst  place,  they  contend  that  the  com- 
panj'  was  in  the  position  of  a  trustee  for  them  of  these  dividends.  In 
my'  judgment,  this^was^ot_so.  The  declaration  that  the  dividend  was 
payable  did  not  make  the  compan}'  a  trustee  of  it  for  the  shareholders* 
Nor  did  the  company  or  its  successor,  the  amalgamated  company 
constituted  by  the  Act  of  1879,  ever  constitute  itself  a  trustee.  In  the 
books  of  the  two  companies  an  account  was  kept  as  of  a  liability  in 
respect  of  the  unclaimed  dividends.  But  the  entry  in_the  books^f  a 
debtor_of_jMiability  to  a  creditor  does  not  constitutie  the  debtor  a_ 
trustee  of_j,he  amount  of  that  liabilit}^  for  jhe  creditor.  There  was  no 
s'ettmg  apart  of  any  special  part  of  the  assets  of  the  companies  as  being 
or  re2reseritin^these_dLvidendSj^  nor  was  there  any  notice  given  to  the 
sEareholders,  nor  any  step  taken  b^'  the  companies,  which,  so  far  as  I 
can  see,  could  be  treated^s^  putting  the  companies  in  the  position^  of 
trustees_or_as_prevenUng_Jhe^tatute_of^^  from  running  in 

their  favor. 

In  the  next  place,  the  claimants  contend  that  the  statute  did  not  run, 
on  the  ground  that  the  shareholders  and  the  company  were  in  the 
position  of  partners,  or  in  an  analogous  position.  In  my  opinion  that 
contention  is  untenable.  Nor  can  I  see  that  the  reasons  upon  which 
the  rule  is  founded,  that  the  Statute  of  Limitations  does  not  run  in 
respect  of  a  claim  between  partners  during  the  continuance  of  the 
partnership,  apply  to  a  claim  for  unpaid  dividends  between  a  share- 
holder of  an  incorporated  company  and  the  compan}-.  The  case  of 
Penny  v.  PichricJc  (ubi  si/p.),  relied  on  b}"  the  claimants,  was  one  of 
a  simple  partnership  which  Lord  (then  Sir  John)  Romilly  held  under 
the  circumstances  was  a  continuing  partnership.  In  the  case  of  Barton 
V.  North  Staffordshire  Mailway  Company  (ubi  sup.)  Lord  Justice 


^ 


<? 


V 


■^fj.'^ 


y 


f^..^^y 


■> 


584 


LE   KOY   V.   GLOBE   INS.   CO. 


(then  Mr.  Justice)  Kay  decided  that  where  persons  entitled  as  stock- 
holders in  a  railway  company  were  suing  to  establish  their  position  as 
such,  their  cause  of  action  only  arose  when  the  company  first  refused 
to  treat  them  as  stockholders,  and  that  the  Statute  of  Limitations  did 
not  commence  to  run  before  that  refusal.  He  did  not  say  that  the  case 
was,  in  fact,  analogous  to  a  claim  between  partners,  but  only  that,  if 
the  analogy  were  applicable,  it  would  support  his  view,  because  the 
statute  only  runs  against  a  partner  from  the  time  of  his  exclusion. 

Nor  is  the  claimants'  contention  supported  by  the  fact  that,  for 
many  purposes,  the  directors  of  the  company  are  held  to  be  in  a 
fiduciary  position  with  regard  to  their  shareholders  as  shown  by  the 
cases,  referred  to  by  the  claimants,  of  Gouraud  v.  Edison  Qower  Bell 
Telephone  Company  of  Europe  (lihi  sup.)  and  Jie  JLands  Allotment 
Company  {ubi  sup.).  For  these  reasons,  in  my  opinion,  the  claims 
fail.  I  should  add  that,  though  I  cannot  find  any  decision  of  the 
English  courts  on  the  point  I  have  had  to  consider,  the  view  I  am 
taking  was  expressed  in  the  Irish  Court  of  Appeal  by  Christian,  L.  J., 
in  the   case  of  Smith  v.    Cork  and  Bandon  Railway    Cmtpany 


ROY  V.  GLOBE  INS,erca 

2  Edwards  Chancery  (N.  Y.)%7^yy  J^' 

in  this  case,  as  they  appeared  by  the  pleaoings, 


were 


HE  facts 
briefly  these. 

The  complainant  and   Catharine   A.  Newbold,  since   deceased,  as 
guardians  of  infants,  were  stockholders  of  the  Globe  Insurance  Com- 
joany.     These  persons  possessed  one  hundred  and  ten  shares  of  its 
capital  stock,  the  par  value  of  each  share  being  fifty  dollars.     The  said 
/i/'  'K^compan}'  was  incorporated  for  insurance  against  loss  b}'  fire,  with  a 
^         '(>[//        capital  of  one  milhon  of  dollars,  and  conducted  its  business  in  the  city 
jy^     ^^^i    \      of  New  York. 

n^,*  /   '^  At  a  meeting  of  the  directors  of  the  company  held  on  the  tenth  day 

^  .  (y^  yA.  ■     of  November,  one  thousand  eight  hundred  and  thirty-five,  a  statement 

)J^^^  \\^  \  '  ^jj^i  its  affairs,  up  to  the  first  of  December  then  next,  was  exhibited  by 
l^'xt^'^*'^*^  ,/\A^^  the  proper  officers  and  committees  of  the  company,  showing  a  surplus 
(»^^^^  I  f  JiM^  fund,  arising  from  profits  then  earned  and  undivided,  amounting  to 
,  ,  JjJ  (l/i^^  ,  seventy-six  thousand  four  hundred  and  twenty-nine  dollars  and  sixty- 
\     ^  ^Ujv'^''-''^^-^  *  nine  cents. 

t/  >^rv-v.        O^  the  exhibition  of  these  statements,  the  directors,  by  a  resolution 
'.//tAv/^**~^  passed  on  the  same  day,  declared  a  dividend  of  three  and  one  half  per 

Xo    ILa  J    '^^       centum  on  the  capital  stock  of  the  company,  for  the  six  months  then 

•  itjXji^      f*'^  ^  f >Dly  so  much  of  the  case  is  given  as  relates  to  one  point. 


""^ 


\ 


Pa' 


(^i^^^..¥ 


Arguments  omitted. 


%>^ 


LE  ROY   V.   GLOBE   INS.   CO.  585 

last  past,  to  be  paid  out  of  such  surplus  profits  on  and  after  the  first 
day  of  December  then  next.  This  dividend  amounted  to  thirty -five 
thousand  dollars,  which  sum,  on  the  thirtieth  day  of  November,  one 
thousand  eight  hundred  and  thirt^'-five,  was  carried,  in  the  books  of  the 
company,  to  the  debit  of  profit  and  loss  ;  leaving  the  capital  then  entire 
and  a  further  surplus  to  the  credit  of  the  company,  for  profits  then 
earned  and  not  divided,  amounting  to  forty-one  thousand  four  hundred 
and  twenty-nine  dollars  and  sixty-nine  cents.  Notice  of  this  dividend 
and  that  it  would  be  paid  on  and  after  the  first  day  of  December  was 
given  in  the  public  papers  on  the  eleventh  day  of  November,  one  thou- 
sand eight  hundred  and  thirty-five.  Checks  or  drafts  on  the  Merchants 
Bank  were  accordingly  prepared,  such  checks  being  severally  filled  up 
for  the  amount  of  the  dividend  payable  to  each  stockholder.  These 
checks  were  all  dated  the  first  da}'  of  December,  one  thousand  eight 
hundred  and  thirt3'-five.  They  were  signed  by  Henry  Rankin,  Presi- 
dent, made  payable  to  the  order  of  Richard  Dunn,  Secretary'  of  the 
company,  and  were  placed  in  the  hands  of  the  latter,  to  be  endorsed 
by  him  and  delivered  over  to  the  stockholders,  as  they  should  call  for 
them,  on  their  signing  receipts  for  the  same  in  the  dividend  book. 
Between  the  first  and  seventeenth  da^'s  of  December,  about  four-fifths, 
in  amount,  of  these  checks,  were  called  for  by  and  were  delivered  to 
stockholders  and  dul}'  paid  on  presentment  at  the  bank. 

Among  the  checks  thus  filled  up  and  signed,  was  one  for  one  hundred 
and  ninety-two  dollars  and  fifty  cents,  intended  to  pay  the  dividend 
due  to  the  complainant  and  Mrs.  Newbold  on  their  one  hundred  and 
ten  shares  of  stock  and  to  be  delivered  to  them. 

On  the  night  of  the  sixteenth  of  December,  one  thousand  eight 
hundred  and  thirt3--five,  the  great  fire  took  place  in  the  cit}-  of  New 
York :  the  complainant  and  other  stockholders,  to  the  amount  of  about 
one  fifth  in  value,  not  having  then  called  for  their  dividends.  On  the 
eighteenth  of  the  same  December,  the  complainant  applied  for  the  check 
payable  to  him  and  Mrs.  Newbold,  to  the  secretary,  who,  acting  under 
the  orders  of  the  directors,  refused  to  deliver  it  or  otherwise  pay  the 
dividend,  on  the  ground  that  the  company  had  sustained  losses  b}'  the 
fire  above  mentioned  to  an  amount  which  had  rendered  it  insolvent. 
On  application  to  the  directors,  the  same  answer  was  given ;  and  the 
dividend  remained  unpaid. 

On  the  twent3'-fifth  day  of  January,  one  thousand  eight  hundred  and 
thirty-six,  the  directors  declared  the  company  to  be  insolvent ;  and 
three  of  them,  namely,  the  defendants,  Henr}-  Rankin,  Isaac  Carow 
and  James  Heard,  were  (under  the  act)  appointed  receivers  of  its 
estate  and  effects.  The  declaration  of  insolvenc}'  and  a  certificate  of 
the  appointment  of  the  receivers,  both  under  the  seal  of  the  company, 
were  filed  with  the  clerk  of  the  court  of  chancery  for  the  first  circuit : 
on  the  same  day  and  thereupon  the  receivers  took  upon  themselves  tho 
duties  of  their  office  and  possessed  themselves  of  all  the  estate  of  the 
compan}',  including  the  unpaid  portion  of  the  said  dividend. 


>86 


LE   KOY   V.   GLOBE   INS.   CO. 


^ 


J' 


T.  L.  Ogden,  for  complainant. 

D.  Lord,  for  defendants. 

McCouN,  Vice-Chancellor.  —  This  case  does  not  necessarily  call 
for  a  decision  of  the  question,  whether,  as  between  the  stockholders  of 
an  insolvent  insurance  company  and  the  creditors,  the  former  are 
entitled  to  all  the  surplus  which  remained  with  the  compan}^  undivided 
at  the  time  of  its  disaster  over  and  above  the  entire  capital? 

Although  there  is  here  such  a  surplus  of  upwards  of  fort3-one 
thousand  dollars,  besides  the  dividend,  amounting  to  thirty-five  thou- 
sand dollars,  which  was  declared  on  the  tenth  day  of  November  and 
made  payable  on  and  after  the  first  day  of  December,  yet  the  com- 
plainants, in  their  bill,  onl}-  claim  to  have  their  parts  or  portions  of 
this  dividend,  which  they  have  not  received,  now  paid  over  to  them 
out  of  the  funds  in  the  hands  of  the  receivers,  instead  of  leaving  the 
money  there  to  be  applied  as  assets  of  the  company  in  discharge  of 
its  debts. 

The  complainants  assert  their  right  to  the  monej'  upon  the  ground  of 
its  having  become  theirs  by  an  express  appropriation  and  setting  apart 
so  much  out  of  the  company's  earnings  for  the  stockholders  and  thereby 
distinguished  from  the  general  mass  of  the  company's  funds ;  and  I  am 
convinced  that  enough  has  been  done  to  produce  this  separation  in  the 
view  of  a  court  of  equit}'  and  to  confer  upon  this  amount  the  character 
of  a  trust  fund  which  could  not  afterwards  be  diverted  to  other  objects. 

The  investigation  of  the  affairs  of  the  company'  and  the  ascertainment 
of  a  clear  surplus  to  warrant  a  dividend  —  declaring  that  dividend  hy  a 
resolution  of  the  board  of  directors  — fixing  the  period  for  its  payment 
—  giving  publicity  to  it  —  carrying  the  amount  on  the  books  of  the 
company  to  the  debit  of  profit  and  loss  —  apportioning  the  same  among 
the  stockholders,  b}'  filling  up  and  signing  checks  upon  the  bank  where 
the  funds  were  deposited  for  the  purpose  of  being  delivered  to  each 
stockholder  when  called  for :  —  these  are  all  acts  which  the  company-, 
by  its  officers,  might  lawfull}^  perform.  These  acts  became  binding  upon 
the  company  in  its  corporate  capacit}' ;  and  gave  to  the  stockholders 
individually  rights  which  the  directors  and  officers  of  the  company 
could  not  afterwards  take  from  them.  If,  for  instance,  the}'  had 
refused,  after  the  first  day  of  December,  to  deliver  out  the  checks  or 
make  payment  of  the  dividends  and  no  insolvency  had  intervened,  it 
appears  to  me  there  would  have  been  no  difficulty  in  the  remedy  by 
mandamus  in  favor  of  all  the  stockholders  or  by  action  at  the  suit  of 
individuals  from  whom  the  payment  was  withheld. 

Neither,  I  apprehend,  could  there  be  any  valid  objection  to  a  bill  in 
equity  for  the  purpose  of  obtaining  possession  of  the  checks  or  the  fund 
in  the  bank  upon  which  they  were  drawn,  upon  the  footing  of  its  being 
a  trust  fund  which  the  officers  of  the  company  were  bound  to  distribute 
after  the  first  day  of  December  and  over  which  they  had  no  other 
control.  That  the  officers  of  the  company-  considered  tlic  money  which 
was  deposited  to  its  credit  in  the  bank  appropriated  to  meet  the  checks 


LE   ROY  V.   GLOBE   INS.   CO.  587 

is  evidenced  by  the  fact  that  they  went  on  delivering  out  checks  to  such 
of  the  stockholders  as  called  for  them  until  the  seventeenth  of  December, 
when  the  disastrous  fire  had  occurred  ;  and  they  would  have  delivered 
checks  to  these  complainants  in  like  manner  if  the}'  had  called  to  receive 
thera.  It  makes  no  difference,  in  m}'  judgment,  that  themone}*  was  not 
told  out  and  specifically  set  apart  in  the  bank  to  meet  these  checks  or  that 
a  separate  fund  was  not  created  for  the  purpose  or  that  the  money 
intended  to  meet  them  still  formed  a  part  of  the  general  mass  standing 
to  the  credit  of  the  compan}'  on  the  books  of  the  bank :  for  this  court 
can^  nevertheless,  la}'  hold  of  the  mass  and  separate  so  much  as  may 
be  necessar}'  to  accomplish  what  was  intended  and  which  accident 
alone  prevented  at  the  time.  Up  to  the  moment  of  the  prostration  of 
the  company,  the  intention  remained,  on  the  part  of  those  who  were 
charged  with  the  management  of  its  affairs,  to  continue  the  appropria- 
tion and  consummate  the  payment  of  the  dividends  which  had  been 
nearl}'  completed.  It  was  a  matter  no  longer  executory  in  the  view  of 
the  parties  ;  and  so  far  as  it  remained  unexecuted  this  court  will  now 
perform  it.  The  intention  must  be  fulfilled  ;  and,  for  this  purpose,  a 
court  of  equity  will  consider,  not  merely  the  sums  which  were  paid  out 
in  dividends,  but  the  whole  thirty-five  thousand  dollars  as  actually 
appropriated  and  set  apart  for  distribution  among  the  stockholders 
from  and  after  the  first  day  of  December  and  regard  it  as  a  trust  fund 
to  which  the  stockholders  had  acquired  vested  rights  —  not  in  their 
corporate  capacit}',  but  as  individuals  to  whom  the  money  legally  and 
equitably  belonged  distinct  from  their  other  interests  in  the  funds  and 
effects  of  the  company. 

Having  acquired  this  right,  as  between  thera  and  the  corporation, 
the  assignment  or  transfer  to  the  receivers  could  not  take  it  awa}'. 
The  receivers  do  not  stand  in  the  light  of  purchasers  for  valuable  con- 
sideration without  notice  ;  and,  under  such  circumstances  as  exist  here, 
are  bound  by  the  trust :  Adair  v.  Shaw,  1  Sch.  &  Lef.  262  ;  Wood  v. 
Dummer,  3  Mason's  R.  312. 

The  act  of  the  eighteenth  of  January,  one  thousand  eight  hundred 
and  thirty-six,  under  which  the  receivers  were  appointed,  vests  in  them 
all  tlie  property  and  effects  of  the  corporation  ;  but,  like  any  other 
assignment  by  operation  of  law,  such  as  in  bankruptcy  or  under  our 
insolvent  acts  it  does  not  pass  trust  property  —  but  onl}'  such  as  the 
bankrupt  or  insolvent  held  or  was  possessed  of  or  entitled  to  for  his 
own  benefit. 

I  shall  decree  that  the  receivers  band  over  to  the  stockholders  the 
amount  of  the  unpaid  dividend  declared  on  the  tenth  day  of  Novembei 
and  payable  on  the  first  of  December,  1835  ;    .     .     , 


€ 


jy 


^!^r 


EASTHAMPTON' 


CO. 


RUBBER  THREAD   CO. 


1893.     158  Mass.  84. 

At  the  trial  in  tlie  Superior 
Court,  without  a  juiy,  before  Aldrich,  J.,  there  was  evidence  tending 
to  show  that  the  plaintiff  on  June  16,  1891,  owned  fiftj'-two  shares  of 
the  capital  stock  of  the  defendant  company,  of  the  par  value  of  one 
hundred  dollars  per  share ;  that  on  that  day  the  directors  passed  the 


(K    ^  -Ay^  ir      J^      Contract  for  money  had  and  received 

^    'y^u*^y^        the  capital 
^tr       (r^  y\  ^  hundred 

,^    \       \\i^  following  vote,  namely,  " That  a  dividend  of  20  per  cent  be  paid  to 

V      /f^,^        ^s  i^tockholders  of  this  date,  payable  Tuesday,  June  23d,  1891 "  ;  that  on 
.'j*      said  June  16th  the  annual  meeting  of  stockholders  of  the  compan}-  for 
^         the  election  of  directors  was  held  immediatel}-  after  the  meeting  of 
directors,  according  to  custom,  and  duly  elected  five  directors,  as  pro- 
\ '  vided  by  the  b3--laws  of  the  company,  two  onl}-  of  the  old  directors 
being  re-elected,  and  no  director  being  re-elected  who  voted  for  the 
\     ft/twenty  per  cent  dividend,  though  the  two  who  were  re-elected  were 
^     present  at  the  meeting  when  it  was  voted  ;  and  that  on  said  June  16th, 
as  soon  as  the  stockholders'  meeting  adjourned,  the  directors  elected 
I   re-elected   thereat  met,   qualified,   organized   for   the   ^ear,   and 
passed  the  following  votes:  "That  the  vote  passed  bj'  the  directors 
of  this  company   this  da}^  declaring  a  dividend  of  20   per  cent  on 
the  capital  stock  of  the  company,  payable  Tuesday,  June  23d,  1891, 
be  reconsidered  and  rescinded  ;  the  same  is  hereby  rescinded.     That  a 
dividend  of  six  per  cent,  payable  June  23d  instant  to  stockholders  of 
record  this  day,  be  declared  in  place  of  the  dividend  voted  at  earlier 
.meeting  of  this  board  this  day,"     It  also  appeared  that  no  money  was 
set  aside  or  provided  to  pa}'  said  dividend  of  twent}^  per  cent,  but  the 
company  had  ample  means  and  facilities  for  paying  the  twent}"  per  cent 
dividend ;  that  always  before  money  had  been  provided  to  pay  a  divi- 
dend before  it  was  declared  ;  that  money  to  pay  said  six  per  cent  dividend 
was  provided  after  the  meeting  and  before  said  23d  of  June  bj'  borrow- 
ing, and  the  same  was  set  aside  and  deposited  in  bank  therefor ;  that 
^  --       j^S^^ir^    the  treasurer  sent  the  check  of  the  defendant  on  the  bank  where  the 
iv"      .f,   ^ .\f^ ().     mone}'  was  deposited  to  each  stockholder  of  record  of  said  June  16th 
to  pay  the  dividend  on  his  stock  at  six  per  cent,  including  the  plaintiff, 
on  said  23d  June,  1891 ;  and  that  the  plaintiff  declined  to  accept  the 
check,  and  returned  the  money  to  the  treasurer.     It  further  appeared 
in  evidence  that  no  stockholder  of  the  defendant  had  been  paid  the 
twenty  per  cent  dividend  for  June,  1891  ;  that  a  majority  of  the  stock- 
holders had  accepted  the  dividend  of  six  per  cent  paid  by  checks  as 
.tr      V    "  •       '    aforesaid  on  June  23,  1891,  in  full;  that  the  plaintiff,  by  his  attorney, 
:^Li^^>^j(/'*^'^    ,^J  ^Vby  letter  of  June  30,  1891,  demanded  payment  of  the  twenty  per  cent 
^^-^  fW^  *     dividend  from  the  defendant ;  and  that  the  plaintiff  made  no  objection 

to  the  check  of  the  defendant  sent  him  to  pay  the  dividend  of  June  16, 


«v^ 


y- 


^' 


."r- 


VO>^ 


0^' 


i,o;~^'  .^^'.u>^^ .^■^>^' 


'^ 


FORD   V.    EASTHAMPTON  RUBBER  THREAD   CO. 


;89 


1891,  except  that  it  was  for  a  dividend  of  six  per  cent,  instead  of 
twent}'  per  cent. 

Tlie  defendant  asked  tlie  court  to  rule  tliat  the  directors  elected  on 
June  16  had  a  right  on  that  day  to  rescind  the  vote  whereby  the 
twent)'  per  cent  dividend  was  declared  payable  at  a  future  day ;  and 
that  the  plaintiff  could  not  recover.  The  judge  declined  so  to  rule, 
ordered  judgment  for  the  plaintiff,  and  reported  the  case  for  the  deter- 
mination of  this  court.  If  the  refusal  to  rule  and  order  of  judgment 
were  correct,  judgment  was  to  be  affirmed  ;  otherwise,  judgment  was  to 
be  ordered  for  the  defendant. 

G.  M.  Stearns,  for  the  plaintiff. 

W.  G.  Hassett,  for  the  defendant. 

Field,  C.^J.  It  seems  to  be  settled  that,  when  a  dividend  has  been 
fully  declared,  the  corporation  thereb}'  manifests  its  intention  that  the 
amount  of  the  dividend  should  be  considered  as  having  been  separated 
from  the  other  property  of  the  corporation,  and  as  having  become  the 
individual  propert}'  of  the  stockholders,  and  that  therefore,  when  the 
dividend  becomes  payable  according  to  the  terms  of  the  vote  declaring 
it,  each  stockholder  has  a  right  to  demand  payment  of  the  proportional 
part  of  the  dividend  which  belongs  to  his  shares  of  stock,  and  to  sue  the 
corporation  for  it,  if  it  is  not  paid  on  demand.  In  some  cases  money 
or  other  propert}-  equal  to  the  whole  amount  of  the  dividend  declared 
has  been  specifically  set  apart  as  a  fund  appropriated  to  the  payment 
of  the  dividend,  and  the  stockholders  have  been  regarded  as  the  cestuis 
que  trust  of  this  fund,  each  entitled  to  his  share.  In  other  cases,  the 
corporation  has  credited  the  stockholders  with  the  amount  of  their 
shares  of  the  dividend,  and  the  stockholders  have  assented  to  this,  and 
the  amount  so  credited  has  been  regarded  as  a  debt  of  the  corporation 
to  the  stockholders  ;  or  the  corporation  has  paid  to  some  of  the  stock- 
holders their  shares  of  the  dividend,  and  has  refused  to  pay  anything 
to  the  others,  and  it  has  been  held  that  the  corporation  must  paj'  all 
alike.  See  Beers  v.  Bridgeport  Spring  Co.  42  Conn.  17;  State  v. 
Baltimore  &  Ohio  Railroad,  6  Gill,  363  ;  King  v.  Pater  son  &  Hud- 
son Riner  Railroad,  5  Dutch.  SO-l;  Jcrmain  v.  Lake  Shore  &,  Michi- 
gan Southern  Railicay,  91  N.  Y.  483;  Hopper  v.  Sage,  112  X.  Y. 
530  ;  JacJcson  v.  Neicark  Plankroad  Co.  2  Vroom,  277  ;  Wheeler  v. 
]SForthv:estern  Sleigh  Co.  39  Fed.  Rep.  347.  When  a  dividend  has 
been  declared  payable  at  a  definite  future  time,  but  no  fund  has  been 
set  apart  for  the  payment  of  the  dividend,  and  the  corporation  mean- 
while becomes  insolvent,  whether  the  stockholders  to  the  extent  of 
their  proportions  of  the  dividend  should  share  ratablj'  with  the  creditors 
of  the  corporation  in  its  property"  has  not,  so  far  as  we  know,  been 
recenth'  considered,  but  the  decision  in  Loxrene  v.  American  Ins.  Co. 
6  Paige,  482,  is  that  they  should.  XLie getting  apart  of  a  fund  to  pay 
a,  dividcnd^has  been  held  to  give  a  lien  upon  it  tq_tbc  stockholdersT 
which  they  can  enforce  to  the  exclusion  of  the  general  creditors  of  the 
corporation.     In  re  Xe  Blanc,  14  Ilun,  8,  and  75  N.  Y.  598.     Le  Roy 


A 


590 


rOED   V.   EASTHAMPTON   KUBBER   THREAD   CO. 


V.  Ghbe  Ins.  Co.  2  Edw.  Ch.  657.  The  English  Companies'  Act, 
1862,  (25  &  26  Vict.  c.  89,  §  38,  cl.  7,)  provides  that  "  no  sum  due  to 
any  member  of  a  compan}-,  in  his  character  of  a  member,  by  wa^-  of 
dividends,  profits,  or  otherwise,  shall  be  deemed  to  be  a  debt  of  the 
company,  payable  to  such  member  in  a  case  of  competition  between 
himself  and  any  other  creditor  not  being  a  member  of  the  company- ; 
but  any  such  sum  may  be  taken  into  account,  for  the  purposes  of  the 
final  adjustment  of  the  rights  of  the  contributories  amongst  them- 
selves." Upon  these  questions,  however,  we  desire  to  express  no 
opinion. 

It  has  been_argued  ^at  thereig^no  consideration  for  the  promise  of 
a  corporation  to  pa}-  a  dividend  to  its  stockholders,  but  we  think  that 
\  the  doctrme^f  consideratioiT  applicable  to  a  simple  contract  between 
persons  having  no  fiduciary  relations  to  each  other  is  not  applicable  to 
such  promise.  It  is  the  object  of  a  private  business  corporation  to 
make  money  for  its  stockholders,  and,  under  our  laws,  it  is  ordinarily 
the  duty  of  the  directors  from  time  to  time  to  declare  dividends  out  of 
the  net  earnings,  if  there  are  an}',  and  it  must  be  left  largelj^  to  the  dis- 
cretion of  the  directors  to  determine  when  and  for  how  much  such  divi- 
dends should  be  declared.  The  whole  property  of  the  corporation  is 
held  on  a  sort  of  trust  for  the  stockholders,  and  the  directors  are,  in  a 
general  sense,  the  managers  ;  and  when  a  dividend  is  declared  bj-  the 
directors,  the  declaration  is  a  determination  b}-  a  bodj'  authorized  to 
make  it  that  the  amount  of  the  dividend  should  be  taken  from  the  prop- 
erty of  the  corporation  and  paid  over  to  the  stockholders.  The  cause 
of  action  q£  each  stockholder  against  the  corporation  forjion-payment 
of  the  dividend  does  not  arise  from  any  actual  contract  between  the 
corporation  and  its  stockholders,  but  from  the  nature  oTThe  organiza- 
tioh,  ancPElie^  relation  oTThe'^tock holders  to  tbe^cofporation~an d  Jts 
propertyT  Unless  the  rights  of  creditors  intervene,  or  the  corporation 
is  enjoined  from  paying  the  dividend,  on  the  ground  that  the  dividend 
has  not  been  earned,  or  on  some  other  ground,  the  amount  of  the  divi- 
dend, after  it  has  been  declared  and  has  become  payable,  is  considered 
as  propert}'  held  by  the  corporation  for  the  use  of  the  stockholders  indi- 
viduall}',  and  the  stockholders  ma}'  recover  their  shares  as  money  or 
property  had  and  received  to  their  use.  We  have  been  able  to  find 
little  or  no  authority  on  the  precise  question  involved  in  this'  case, 
namely,  whether,  after  a  dividend  has  been  duly  declared  by  a  vote  of 
the  directors,  but  payable  at  a  future  time,  the  vote  can  be  rescinded 
at  a  subsequent  meeting  of  the  directors,  held  before  the  time  at  which 
the  dividend  becomes  payable  according  to  the  vote,  when  the  fact  that 
a  dividend  has  been  declared  has  not  been  made  public,  or  in  any 
manner  communicated  to  the  stockholders,  and  when  no  fund  has  been 
set  apart  for  the  payment  of  the  dividend.  On  principle,  we  do  not 
sec  why  the  directors  may  not  rescind  such  a  vote,  under  the  circum- 
stances stated.  .  By  the  vote  no  specific  property  passed  to  the  stock- 
holders.    If  the  vote  be  regarded  as  a  declaration  of  trust  in  favor  of 


McXAB   V.   McNAB   AND   HARLIN   MANUF.   CO. 


;9i 


the  stockholders,  it  could  be  revoked  before  it  was  communicated  to 
them  or  any  property'  was  identified  and  set  aside  for  them.  Indeed, 
cases  ma}'  easily  be  supposed  of  such  a  change  in  the  affairs  of  a  cor- 
poration, between  the  time  when  a  dividend  is  declared  and  the  time 
when  it  becomes  payable,  as  to  make  the  exercise  of  such  a  power  by 
the  directors  useful,  if  not  necessary,  for  the  successful  continuance 
of  the  business  of  the  corporation.  It  appears  in  the  present  case  that 
the  meeting  of  the  new  directors  at  which  the  vote  was  rescinded  was 
held  after  the  annual  meeting  of  the  stockliolders,  but  on  the  same  day 
as  the  meeting  of  the  directors  at  which  the  vote  was  passed,  which 
was  held  just  before  the  meeting  of  the  stockholders  ;  and  that  at  the 
meeting  of  the  stockholders  "  the  president  did  not,  as  had  for  man}' 
years  been  the  custom,  announce  that  an}'  dividend  had  been  declared, 
or  promulgate  the  same  to  the  stockholders  "  ;  and  it  does  not  appear 
that  any  of  the  stockholders,  except  the  directors,  knew  of  the  original 
vote,  or  that  any  of  the  stockholders  had  made  any  contracts,  incurred 
any  liability,  or  done  anything  relying  on  the  vote.  It  also  appears 
that  no  fund  was  distinctly  set  apart  for  the  payment  of  the  dividend 
before  the  vote  was  rescinded.  As  the  passage  of  the  vote  did  not 
constitute  an  actual  contract  of  the  corporation  with  its  stockholders, 
but  was  merely  a  mode  of  dividing  the  earnings  of  the  property  of  the 
corporation  among  the  stockholders,  we  are  of  opinion  that  before  the 
division  had  been  actually  made,  and  before  tlie  position  of  the  stock- 
holders had  been  changed  in  reliance  on  the  vote,  —  certainly  before 
the  passage  of  the  vote  had  been  made  public,  or  communicated  to  the 
stockholders,  — it  was  within  the  power  of  the  directors,  at  a  meeting 
subsequent  to  that  at  which  the  vote  was  passed,  to  rescind  it.  In 
this  action  at  law,  we  cannot  supervise  the  exercise  of  this  power  by 
the  directors.        X'W'^^    /^  Judgment  for  the  defendant. 


.^ 


]^ABtvC/M(^AB   & 


i5^ 


/' 


^ 


^^r 


t 


CO. 


HARLIN  MANUF. 

69  New  York  Supreme  Court  (62  Hun. 
Supreme    Court,    General    Term,   First 


ET 


.),  18.1 


ALS. 


Departmentr^.y*^ 


New  York 
Appeal  from  Special  Term,  New  York  County 

Action  brought  to  compel  the  division  of  a  surplus  among  the  shared 
holders.  A  judgment  was  rendered,  dismissing  plaintiff's  complaint.' 
Plaintiff  appealed. 

Artemus  V.  Smith,  for  appellant.  S'      . 

Frederic  R.  Coudert  and  Frederic  G.  Dow,  for  respondents.     '^  J^  ^^  ^ 

Daniels,  J.     The  McNab  &  Harlin  Company,  defendant,  was  incor-  ^>^    'S    p^*^'- 
porated  on  or  about  the  28th  of  April,  1871,  under  the  laws  of  this. 


Only  so  much  of  the  case  is  given  as  relates  to  one  point.  —  Ed. 


:/" 


''tjj'/^^      ^\ 


r 


^ 


r)92  McNAB   V.   McNAB   AND    HARLIN   MANUF.   CO. 

state  providing  for  the  incorporation  of  manufacturing  companies.     Its 
business  was  declared  to  be  tliat  of  manufacturing  brass  and  iron  goods 
for  sale,  and  since  its  incorporation  it  has  carried  on  that  business. 
The  plaintiff  was  the  owner  of  8  shares  of  its  capital  stock,   which 
consisted  of  150  shares,  of  $1,000  each,  and  the  other  defendants  were 
officers  and  shareholders  in  the  company.     After  its  formation,  and  in 
or  about  the  3'ear  1877,  the  company*  became  unable  to  pay  its  debts, 
and  a  proceeding  in  bankruptcj'  was  instituted  to  discharge  it  from  its 
debts.    Soon  after  the  proceeding  was  commenced  the  defendant  Harliu 
became  the  president  of  the  company.     He  owned  seventy-eight  shares 
of  its  capital  stock,  and  compromised  the  debts  owing  to  the  creditors  of 
the  compan}'.     The  agreement  for  the  compromise  was  to  pa}'  sevent}'- 
five  per  cent,  within  the  period  of  three  years.     After  he  took  charge 
of  the  affairs  of  the  company  as  its  president,  and  under  his  manage- 
ment, the  business  became  prosperous,  and  the  seventy-five  per  cent, 
was  paid  to  the  creditors,  and  afterwards  they  were  paid  the  additional 
sum  of  twent3--five  per  cent.,  making  payment  of  their  demands  in  full. 
The    prosperity'  of    the   company  continued,   owing   to   the  judicious 
management  of  the  president,  and  for  eight  years  prior  to  the  time 
of  the  trial,  which  took  place  in  May,  1891,  its  net  profits  amounted 
to  the  sum  of  $100,000  a  year,  or  a  sum  slightly-  in  advance  of  that 
amount,  and  from  the  year  1881  to  the  year  1891  it  made  and  paid  a 
dividend  on  its  shares  amounting  to  an  average  exceeding  the  sum 
of  twentj'-five  per  cent.  ;  and,  in  addition  to  the  dividends  made  in 
this  manner,  it  accumulated  a  large  surplus,  which  was  mainly  used 
in  its  business,   but  to   the  extent  of   about  one   hundred   thousand 
dollars  was  in  its  deposit  accounts.     And  it  was  stated  by  the  treas- 
urer in  his  evidence  upon  the  trial  that  there  was  at  that  time  an 
actual  surplus  owned  by  the  company  amounting  to  the  sum  of  $152,209, 
and  the  plaintiff,  whose  action  was  brought  to  secure  the  distribution 
of  the  suri)lus  by  way  of  dividends,  alleged  and  claimed  that  a  still 
larger  surplus  had  been  earned  and  was  owned  by  the  company  ;  and  it 
was  one  of  the  principal  objects  of  the  action  to  secure  the  division  of 
this  surplus  by  way  of  dividends  among  the  shareholders.     But  it  was 
proved  in  the  course  of  the  trial  that  the  surplus  maintained  by  the 
com[)any  was  profitably  employed  in  purchasing  the  material  used  by 
lit  in  the  course  of  its  manufactures,  and  that  it  was  considered  for  the 
'best  interests  of  the  company  not  to  divide  this  surplus  among  the 
shareholders.     The  directors,  in  restricting  the  dividends  as  they  did, 
seem  to  have  been  impressed  with  the  i)ropriety  of  this  conviction,  and 
the  dividends  were  accordingly  limited  to  such  amounts  from  year  to 
year  as  did  not  intrench  upon  the  large  surplus  which  had  been  earned 
and  secured.     In  their  action  upon  this  sul)ject  the  trustees  appear  to 
have  exercised  the  judgment  which  they  deemed  to  be  most  consistent 
with  the  prosperity  and  maintenance  of  the  interests  of  the  company, 
and  the  statute  under  which  the  incori)oration  took  place  delegated  the 
liuthority  of  the  trustees  to  manage  the  stock,  pro[)erty,  and  concerns 


STRINGEIl'S   CASE.  593 

of  the  company  (2  Rev.  St.,  5tli  Ed.,  p.  503,  §  29;)  and  _to  what 
amountJ;he  dividends  shall  be  made,  and  the  extent  of  the  surplus 
wliigh  the  mterests  of  the  company  may  require  to  be  retained,  are 
withm  this,4glegation  of  authority  confided  to  the  trusteesV  And  it 
■was  so  regarded  in  Williams  v.  Telegrajih  Co.,  93  X.  T.'TC2,  where  it 
was  said,  with  the  apparent  approval  of  the  court,  that  "  when  a 
corporation  has  a  surplus,  whether  a  dividend  shall  be  made,  and,  if 
made,  how  much  it  shall  be,  and  when  and  where  it  shall  be  payable, 
rest  in  the  fair  and  honest  discretion  of  the  directors,  uncontrollable  by 
the  courts."  Id.  192.  And  no  broader  principle  than  this  was  either 
stated  or  sanctioned  in  Scott  v.  Fire  Co.,  7  Paige,  198,  or  in  either  of 
the  other  authorities  which  have  been  brought  to  the  attention  of  the 
court.  The  principle  to  be  applied  is  that  which  shall  secure  the 
observance  of  good  faith  on  the  part  of  the  directors,  and  this  principle 
was  neither  denied  nor  intrenched  upon  in  Seeley  v.  Bank,  8  Daly, 
400,  which  was  affirmed  in  78  N.  Y.  608.  The  trustees  are  chosen  by 
the  shareholders,  to  exercise  their  best  judgment,  depending  upon  their 
knowledge  of  the  affairs  and  condition  of  the  company ;  and  when  that 
has  been  done,  the  courts  do  not  undertake  to  control  their  action, 
although  they  might  differ  in  their  views  of  the  proper  management  to 
be  adopted  and  followed.  No  reason  has  been  disclosed  by  the  case 
for  doubting  or  impeaching  the  good  faith  of  these  trustees.  Xeither 
can  it  be  affirmed  justly,  in  view  of  the  large  business  carried  on  by  the 
company,  that  they  acted  unreasonably  or  capriciously  in  declining 
to  order  a  larger  dividend  than  that  which  was  in  fact  paid  to  the 
shareholders. 

[Opinion  on  other  points  omitted.] 

J)     ^\)-  ■  Judgment  affirmed. 


STRINGER'S  CASE^iTip- MERCANTILE  TRADING  CO. 

1869.  L.  R.  4  Chan.  Ap.  475. 

This  was  an  appeal  from  an  order  of  Vice-Chancellor  Ilalins,  made 
in  the  winding  up  of  the  Mercantile  Trading  Company,  Limited. 

The  company  was  registered  under  the  Companies  Jet,  1862,  on 
the  27th  of  June,  1863.  The  objects  of  the  company,  as  stated  in  the 
memorandum  of  association,  were  the  purchase  of  goods  and  ships  for 
export  and  transmission  to  America,  for  sale  or  barter  and  return  and 
sale  of  goods  from  thence,  and  the  chartering  or  freighting  of  ships, 
and  all  other  matters  necessary  for  carrying  on  the  operations  of  the 
company,  or  other  operations  of  a  similar  character.  It  was,  however, 
admitted  that  the  real  object  of  the  company  was  to  trade  with  the 
Confederate  States  of  America,  by  running  the  blockade  then  main- 
tained by  the  government  of  the  Federal  States.   For  this  purpose 


594  steingee's  case. 

the}-  provided  a  line  of  ships  running  from  Bermuda  to  Charleston 
and  Wilmington,  which  were  intended  to  carry  goods  from  England 
to  the  Confederate  government,  and  to  bring  back  cargoes  of  cotton  in 
return. 

The  company  had  a  nominal  capital  of  £150,000,  of  which  about 
£112,000  had  been  paid  up.  The  articles  of  association  embodied  the 
rules  given  in  Table  A  of  the  Companies  Act,  1862,  which  provide,  in 
Rule  73,  that  "  no  dividend  shall  be  payable  except  out  of  the  profits 
arising  from  the  business  of  the  compau}',  except  so  far  as  modified 
by  the  articles  ;"  and  the  articles  provided,  by  Article  5,  that  "the 
directors  shall  declare  a  dividend  on  the  subscribed  capital  of  the  com- 
pany as  soon  and  as  often  as  the  profits  of  the  compan}-  in  hand  are 
sufficient  for  payment  of  a  dividend  of  £5  per  cent,  on  such  capital, 
subject  to  the  resolutions  of  a  general  meeting  of  the  company  called 
with  reference  thereto." 

Shortly  after  the  establishment  of  the  company,  the  directors  entered 
into  a  contract  with  the  Confederate  government,  under  which  the  Con- 
federate government  agreed  to  be  co-owners  of  the  ships  employed  by 
the  compan}',  and  that  the  ships  should  be  owned  in  the  proportion  of 
two-thirds  by  the  Confederate  government,  and  one-third  by  the  com- 
pany ;  the  ownership  of  the  Confederate  government  to  be  paid  for  in 
cotton,  at  Charleston  or  Wilmington,  on  the  basis  of  6(?.  per  pound  for 
'•^Middling  Upland"  cotton. 

Several  successful  trips  were  made  by  the  ships,  and  although  some 
of  them  were  captured  or  lost,  a  considerable  profit  was  at  first  made 
by  the  company  on  their  adventures.  In  May,  1864,  a  balance  sheet 
was  made  out  of  the  state  of  the  compan}-,  down  to  the  29th  of 
February,  1864,  showing  a  profit  of  £42,718  15s.  2^/.,  out  of  which  the 
directors  proposed  a  dividend  to  be  paid  at  the  rate  of  £25  per  cent, 
on  the  capital,  amounting  to  about  £28,000.  This  dividend  was  adopted 
by  a  general  meeting  of  the  company,  held  on  the  17th  of  Ma}-. 

The  balance  sheet  was  submitted  to  the  directors  of  the  Agra  and 
United  Service  Bank,  the  company's  bankers,  and  was  examined  by 
their  accountants.  The  bank  then  advanced  them  upwards  of  £21,000 
towards  the  payment  of  the  dividend  to  the  shareholders,  although 
their  account  was  already  overdrawn  to  the  amount  of  £5000.  The 
dividend  received  by  Mr.  M  P.  Stringer,  the  managing  director,  in 
respect  of  his  shares,  amounted  to  £3560. 

The  termination  of  the  civil  war  in  America,  by  the  success  of  the 
Federal  gowQvumeui,  caused  the  failure  of  the  company,  the  cotton  appro- 
priated to  them  in  the  Confederate  States  being  all  destroyed  or  captured, 
and  the  debt  due  from  the  Confederate  government  turning  out  worthless. 
The  company  was  accordingly  wound  up,  the  only  creditor  of  large 
amount  being  the  Agra  and  Masterma/n^ s  Bank,  which  had  succeeded 
to  the  business  of  the  Agra  and  United  Service  Ba)ik.  The  present 
application  was  made  by  the  official  liquidator  to  obtain  a  repayment 
by  Mr.  Stringer  of  the  dividend  received  by  him,  on  the  ground  that 


stringer's  case. 


595 


the  balance  sheet  was  delusive,  and  the  dividend  really  paid  out  of  the 
capital  of  the  company-.  The  sections  of  the  Companies  Act,  1862, 
under  which  it  was  contended  that  the  Court  had  jurisdiction  to  order 
the  return  of  the  money  upon  this  application,  were  the  101st  and 
165th. 

The  principal  objections  made  to  the  balance  sheet  were  as  follows : 
First,  that  the  directors  had  taken  credit  for  a  sum  of  £51,589  due  to 
the  company  from  the  Confederate  government  as  an  asset  of  the 
company  at  its  full  value ;  secondh^  that  they  had  also  taken  credit  for 
cotton  within  the  Confederate  States,  which  was  all  subsequeutl}'' 
destroyed,  at  the  value  of  £17,000  ;  and,  thirdly,  that  they  had  entered 
the  loss  of  three  ships  as  a  loss  of  only  one-third  of  their  value,  thus 
reckoning  the  guarantee  of  the  Confederate  government  for  the  other 
two-thirds  at  its  full  value. 

The  Vice-Chancellor  was  of  opinion  that  the  dividend  declared  was 
altogether  delusive,  and  that  it  amounted  to  a  return  of  one-third  of 
the  capital  to  the  shareholders ;  but  he  also  held  that  he  had  no  juris- 
diction under  the  101st  or  165th  sections  of  the  Companies  Act,  1862, 
to  make  an  order  for  the  return  of  the  dividend  ;  but  that  it  was 
necessary  for  the  official  liquidator  to  file  a  bill  for  that  purpose.  The 
official  liquidator  appealed  from  this  decision. 

Cotton,  Q.  C,  and  Higgins,  for  appellant. 

The  declaration  of  the  dividend  was  both  in  violation  of  the  articles 
and  delusive,  amounting  to  a  return  of  part  of  the  capital.  Table  A  of 
the  Comp>anies  Act,  1862,  which  was  adopted  by  the  company,  forbids 
payment  of  dividend  out  of  capital,  and  the  5th  clause  of  the  articles 
is  still  further  restrictive,  providing  that  the  dividends  are  to  be  paid 
out  of  '•  profits  in  hand."  So  far  was  the  company  from  having  profits 
in  hand  that  they  were  obliged  to  borrow  part  of  the  money  to  pa}-  the 
dividend  from  the  Agra  and  Masterrnarcs  Bank.  But  the  balance 
could  not  be  called  profits  in  any  sense  until  it  was  known  whether  the 
cotton  in  the  Confederate  States  and  the  debt  of  the  Confederate 
government  could  ever  be  realized.  The  directors  were  not  justified  m, 
putting  a  value  upon  what  they  could  not  realize,  and  which  it  was  ver}'] 
doubtful  whether  they  would  ever  be  able  to  realize.  At  all  events,  the 
value  put  upon  these  items  was  much  too  high.  No  cotton  in  the 
Confederate  States  or  liability  of  the  Confederate  government  bore 
such  a  high  price  in  the  market  at  that  time  as  was  put  upon  these 
items  in  the  balance  sheet. 


,v>V 


^l^ 


Glasse,  Q.  C,  and  H.  M.  Jackson^  for  Stringer. 

There  is  nothing  in  the  articles  to  render  this  dividend  improper. 
The  5th  clause  does  not  mean  that  the  directors  were  only  to  pay 
profits  out  of  mone}'  at  tlicir  bankers.  The}'  were  to  estimate  the 
profits  in  the  usual  mercantile  way,  that  is,  b}'  valuation  of  the  assets 
of  the  company.  This  was  done  ;  there  was  no  concealment  on  the 
balance  sheet,  and  it  was  submitted  to  the  Agra  and  Masterman's 


596  stringer's  case. 

SanJc^  who  understood  all  the  circumstances,  and  would  not  have 
advanced  the  money  unless  the  balance  sheet  had  been  honestly  made. 
And  3'et  they  are  the  very  parties  who  are  now,  through  the  official 
liquidator,  complaining  of  it.  At  that  time  the  prospects  of  the  Con- 
federate cause  and  tlie  security  of  the  government  were  thought  good 
by  most  mercantile  men,  and  it  is  not  right  to  judge  of  the  fairness  of 
the  transaction  by  the  result  of  the  speculation. 

[The  opinion  of  Sir  C-  J.  Selwyn,  L.  J.,  is  omitted.] 
Sir  G.   M.    Giffard,   L.  J.     [After  deciding  that   the  Court  has 
power,  under  the  Companies  Act,  to  order  a  repayment  of  dividends 
declared  and  paid  under  a  delusive  and  fraudulent  balance  sheet :] 

Now,  with  regard  to  this  case,  the  first  important  matter  that  we 
have  to  consider  is  the  effect  of  these  articles  of  association,  and  I 
quite  agree  that  if  the  effect  of  these  articles  was  that  you  could  have 
no  division  of  dividends  until  all  the  transactions  were  wound  up,  that 
you  could  have  no  legal  dividend  except  out  of  what  is  termed  profits 
in  hand,  there  might  be  a  great  deal  to  be  said  in  this  case  ;  but  if  we 
look  at  the  articles  of  association  as  compared  with  Table  A.,  it  is 
clearly  manifest  that  the  articles  of  association  amount  to  nothing  of 
the  kind.  [His  Lordship  then  referred  to  the  provisions  in  Table  A., 
and  in  the  articles  of  association,  which  have  been  before  mentioned, 
and  continued: — ]  I  have  no  hesitation  in  saying  —  especially  if  you 
compare  the  word  "maj' "  in  Table  A.,  and  the  word  "shall"  in  the 
5th  clause,  and  consider  that  there  are  negative  words  in  Table  A.,  and 
that  there  are  none  in  this  clause  —  that  this  clause  was  intended 
simply  to  have  this  effect,  and  no  other,  viz.,  that  when  the  directors 
had  in  their  hands  profits  they  should  not  be  able  to  set  them  aside  for 
a  contingency  fund,  and  that  they  should  then,  at  all  events,  be  com- 
pellable to  make  a  dividend.  It  did  not  prevent  their  making  a 
1  dividend  ;  but  I  agree,  it  must  be  out  of  profits,  although  those  profits 
were  not  profits  in  hand. 

'  Then,  when  we  come  to  the  facts  themselves  —  I  will  not  again  go 
tlirough  them,  for  they  have  been  considered  at  very  considerable 
lengtli,  not  only  in  argument,  but  also  by  my  learned  brother  —  it  was 
not  argued  or  suggested,  nor  could  it  be  argued  or  suggested,  that  it 
was  intended  that  this  thing,  though  in  terms  a  dividend,  should  cover 
what  was  not  really  a  dividend  transaction.  The  mode  in  which  the 
matter  was  done  was  fair  enough.  The  books  were  put  into  the  hands 
of  an  accountant,  calculations  were  made,  and  a  certain  conclusion  was 
arrived  at.  True  it  is,  no  doubt,  that  these  proceedings  were  full  of 
risk  ;  but  although,  on  the  one  hand,  there  might  be  a  great  loss,  every- 
one knows  that  whenever  there  was  a  success  the  profits  were  something 
very  enormous,  and  upon  the  balance  sheets  as  taken  from  the  books  it 
did  appear  tliat  there  was  a  profit  of  £42,000,  and  it  was  proposed  out 
of  that  to  divide  somewhere  about  £28,000,  the  profits,  I  agree,  not 
being  profits  in  hand.     The  fault  that  is  found  with  that  is,  that  the 

22 


STEINGEK'S   CASE.  597 

estimate  was  an  erroneous  estimate ;  that  too  sanguine  a  view  was 
taken  of  tlie  prospects  of  success  ;  and  that  there  ought  to  have  been  a 
ver}'  much  less  sum  put  upon  the  face  of  this  balance  sheet  as  assets 
than  really  was  put  there.  But  I  do  not  think  that  anj'one  can  say  it 
was  not  at  this  date  possible  for  honest  persons  carrying  on  this  trade, 
entertaining  the  view  which  they  did  entertain  as  to  their  prospects, 
honestl}'  to  make  out  such  a  balance  sheet  as  this,  and  houestl}'  to 
believe  that  those  were  profits  fairly  divisible  between  them.  As  I 
have  said  before,  this  was  not  done  in  any  underhand  manner ;  the' 
whole  thing  was  patent  and  open  ;  it  was  known,  or  capable  of  being 
known,  by  every  shareholder,  and  if  the  directors  of  the  Agra  and 
3Iasterman's  Bank  did  not  know  anything  about  it,  the}-  neglected 
their  duty,  and  behaved  most  shamefully  to  their  own  shareholders 
whose  money  they  lent ;  for  the  balance  sheet  was  put  in  their  hands, 
and  they  had  accounts  of  every  description,  and  they  must  have  known 
perfectly  well  that  it  was  neither  more  or  less  than  a  blockade-running 
company  ;  the  very  nature  of  the  accounts  shewed  it ;  and  so  far  from 
there  being  any  concealment,  the  balance  sheet  itself  was  put  into  the 
hands  of  the  auditors,  and  no  person  who  knew  what  the  business  of 
the  company  was  could  look  through  that  balance  sheet  without  seeing 
at  once  that  the  full  value  was  put  upon  the  Confederate  government 
debt,  and  that  the  four  ships  had  been  lost,  and  without  knowing  at 
once  that  if  things  turned  out  adversely  that  which  was  profit  might, 
from  subsequent  events,  become  a  great  loss.  Again,  this  dividend 
was  declared  in  May,  1864,  and  was  actually  paid  in  June,  1864,  and 
I  cannot  forget  that  it  was  actually  paid  by  the  Agra  and  Masterman'a 
Bonk^  who  not  only  advanced  the  money,  knowing  the  affairs  of  the 
compan}',  but  who  paid  the  dividends  through  the  medium  of  cheques 
drawn  upon  them  by  the  shareholders.  I  think  it  would  be  a  gross 
injustice  if  at  this  distance  of  time,  when  a  dividend  has  been  made 
and  paid  in  this  way  so  long  ago  as  the  year  1864,  because  things 
turn  out  adversely  afterwards,  and  the  company  is  wound  up  in 
1867  at  the  instance  of  a  creditor,  such  a  dividend  should  be  repaid. 
I  quite  agree  when  there  has  been  what  can  be  termed  fairly  a  misap- 
propriation of  assets  as  against  a  creditor,  that  creditor  has  a  right  in 
the  winding-up  to  have  those  assets  recouped  ;  but  I  cannot  think  that 
such  a  dividend  as  this  was  in  any  sense  a  misappropriation  as  against 
either  the  Agra  and  Masterrnan' s  Bank  or  any  other  creditors,  or  that 
it  was  in  any  sense  delusive,  or  in  any  sense  a  fraudulent  transaction, 
or  that  it  was  any  other  transaction  than  this,  viz.,  that  mercantile  men 
who  were  engaged  in  adventures  which  might  result  in  very  great  or 
even  total  loss,  and  which  might  also  I'esult  in  very  great  profit,  took  a 
sanguine  view  of  what  the  value  of  the  assets  was,  looking  at  what  at 
that  date  was  the  actual  profit  made,  and  acted  upon  that  hon6,  fide^ 
not  intending  to  defraud  in  any  way  any  person  whatever. 

Therefore,  I  am  of  opinion  that  this  appeal  must  be  dismissed  with 
costs. 


'^i'- 


IT' 


(S. 


v^ 


^ 


^%<tDONA^«.   WILLIAMS. 


(^> 


> 


Keceiver,   v.   WILLIAMS. 


1899.    174  United  States,  397.1 


(w^' 


r 


by  receiver  of  the  Capital  National  Bank  of  Lincoln,  Ne- 
.  y.  braska,  to  recover  from  defendants,    stockholders  in  the  bank,  the 

\P^ lyeA  kJ^    amount  of  certain  dividends  previously  received  by  them. 

'       vr^^^^"^  *^  "^  Upon  a  trial  in  the  U.  S.  Circuit  Court  there  was  a  decree  in  favor 

^^^^        of  plaintiff  for  the  recovery  of  a  part  of  the  sums  claimed.     Both 

parties  appealed.     Upon  the  argument  of  the  appeal  in  the  Circuit 

Court  of  Appeals,  that  court  desired  the  instruction  of  the  Supreme 

Court  on  certain  questions. 

It  appears  from  the  statement  of  facts  made  by  the  court  that  the 
bank  suspended  payment  in  January,  1893,  in  a  condition  of  hope- 
less insolvency,  the  stockholders,  including  the  defendants,  have  been 
. .  -  ,,;)  assessed  to  the  full  amount  of    their  respective  holdings,  but  the 

^J  J-"^     «money  thus  obtained,  added  to  the  amount  realized  from  the  assets, 

'  m 


& 


>* 


j^ 


M 


«money  thus  obtained, 
will  not  be  sufficient  even  if  all  dividends  paid  during  the  bank's  ex- 


^^^ 


istence  were  repaid  to  the  receiver,  to  pay  seventy-five  per  cent,  of 
'^  the  claims  of  the  bank's  creditors. 

This  suit  was  brought  to  compel  the  repayment  of  certain  dividends 
paid  by  the  bank  to  the  defendants  on  that  part  of  the  capital  of  the 
bank  represented  by  their  stock  of  the  par  value  of  $5000,  on  the 
ground  alleged  in  the  bill  that  each  of  said  dividends  was  fraudu- 
lently declared  and  paid  out  of  the  capital  of  the  bank,  and  not  out 
net  profits. 
^'^  A^list  of  the  dividends  and  the  amount  thereof  paid  by  the  bank 
-''^m  January,  1885,  to  July,  1892,  both  inclusive,  is  contained  in  the 
^  statement,  and  it  is  added  that  all  dividends,  except  the  last,  (July 
ji''        '><'      /M  ^^'  1892,)  were  paid  to  the  defendant  Williams,  a  stockholder  to  the 

Af/^  j:^  ^^/n^^jj^^monnt  oi  $5000,  from  the  organization  of  the  bank.  The  last  divi- 
7.'  ''♦^'^^  '^  ^'^'  dend  was  paid  to  the  defendant  Dodd,  who  bought  Williams'  stock, 
^     "■^^^'^i-         -^    and  had  the  same  transferred  to  his  own  name  December  16,  1891. 

When  the  dividend  of  January  6,  1889,  was  declared  and  paid,  and 


ti^   jjC\^      ^^  j      vviieu  Lilt;  uiviuenu  ui  January  o,  iDoy,  was  cteciarea  ana  paia,  ana 

^^  fjA       2/^^/-^ when  each  subsequent  dividend,  down  to  and  including  July,  1891, 

y      J,  '    }>^  X      ^^^^  declared  and  paid,  there  were  no  net  profits.     The  capital  of  the 


(i^ 


^^  ''h 


^ 


IJiy 


'J 


bank  was  impaired,  and  the  dividends  were  paid  out  of  the  capital, 
,but  the  bank  was  still  solvent.     When  the  dividends  of  January  and 
July,  1892,  were  declared  and  paid  there  were  no  net  profits,  the  capi- 
tal of  the  bank  was  lost,  and  the  bank  actually  insolvent. 
I  nj  The  defendants,  neither  of  whom  was  an  officer  or  director,  were 

(>L  ^>L^  '*\^ignorant  of  the  financial  condition  of  the  bank,  and  received  the  divi- 
j»^    .jJ(\J  dends  in  good  faith,  relying  on  the  officers  of  the  bank,  and  believing 
^  J>      ^*^      the  dividends  were  coming  out  of  the  profits.  '^ 

'■'^  U^ I        ^  Statement  abridtjed.    Part  of  opinion  omitted.     The  docket  titl 


Statement  abridtjed.    Part  of  opinion  omitted. 
Receiver,  \.  Willianu.  —  Ed. 


case  is  Hay- 


Mcdonald  v.  williams. 


599 


(2 


V 


Upon  these  facts  the  court  desired  the  instruction  of  this  court  for 
the  proper  decision  of  the  following  questions  : 

First  question.     Can  the  receiver  of  a  national  bank  recover  a  divi-   .     —f  . 
dend  paid  not  at  all  out  of  profits,  but  entirely  out  of  the  capital,  (/OJi-AA^^y^ 
when  the  Stockholder  receiving  such  dividend  acted  in  good  faith,       — "^ 
believing  the  same  to  be  paid  out  of  the  profits,  and  when  the  bank,, 
at  the  time  such  dividend  was  declared  and  paid,  was  not  insolvent  ?    r^^) 

[The  second  qiiestion  is  omitted.] 

Edward  Wlnslow  Paige,  for  appellant. 

Theodore  De  Witt  {George  G.  De  Witt  with  him),  for  appellees. 

Peckiiam,  J.  .  .  .  The  complainant  bases  his  right  to  recover  in 
this  suit  upon  the  theory  that  the  capital  of  the  corporation  was  a 
trust  fund  for  the  payment  of  creditors  entitled  to  a  portion  thereof, 
and  having  been  paid  in  the  way  of  dividends  to  the  shareholders 
that  portion  can  be  recovered  back  in  an  action  of  this  kind  for  the 
purpose  of  paying  the  debts  of  the  corporation.  He  also  bases  his 
right  to  recover  upon  the  terms  of  section  5204  of  the  Revised  Stat- 
utes. 

We  think  the  theory  of  a  trust  fund  has  no  application  to  a  case  of 
this  kind.  When  a  corporation  is  solvent,  the  theory  that  its  capital 
is  a  trust  fund  upon  which  there  is  any  lien  for  the  payment  of  its 
debts  has  in  fact  very  little  foundation.  No  general  creditor  has  any 
lien  upon  the  fund  under  such  circumstances,  and  the  right  of  the 
corporation  to  deal  with  its  property  is  absolute  so  long  as  it  does  not 
violate  its  charter  or  the  law  applicable  to  such  corporation. 

In  Graham  v.  Railroad  Company,  102  U.  S.  148,  161,  it  was  said  by 
Mr.  Justice  Bradley,  in  the  course  of  his  opinion,  that  "  when  a  cor- 
poration becomes  insolvent,  it  is  so  far  civilly  dead  that  its  property 
may  be  administered  as  a  trust  fund  for  the  benefit  of  its  stockhold- 
ers and  creditors,  and  a  court  of  equity,  at  the  instance  of  the  proper 
parties,  will  then  make  those  funds  trust  funds,  which,  in  other  cir- 
cumstances, are  as  much  the  absolute  property  of  the  corporation  as 
any  man's  property  is  his." 

And  in  Hollins  v.  Brierfield  Coal  and  Iron  Company,  150  U.  S.  371, 
383,  385,  it  was  stated  by  Mr.  Justice  Brewer,  in  delivering  the  opin- 
ion of  the  court,  and  speaking  of  the  theory  of  the  capital  of  a  corpo- 
ration being  a  trust  fund,  as  follows  : 

"  In  other  words,  and  that  is  the  idea  which  underlies  all  these  ex- 
pressions in  reference  to  '  trust '  in  connection  with  the  property  of  a 
corporation,  the  corporation  is  an  entity  distinct  from  its  stockhold- 
ers as  from  its  creditors.  Solvent,  it  holds  its  property  as  any  indi- 
vidual holds  his,  free  from  the  clutch  of  a  creditor  who  has  acquired 
no  lien ;  free  also  from  the  touch  of  a  stockholder  who,  though  equi- 
tably interested  in,  has  no  legal  right  to,  the  property.  Becoming 
insolvent,  the  equitable  interest  of  the  stockholders  in  the  property, 
together  with  their  conditional  liability  to  the  creditors,  places  the 
property  in  a  condition  of  trust,  first,  for  the  creditors,  and  then  for 


\f 


-^.x- 
■^ 


600  Mcdonald  v.  williams. 

the  stockholders.  Whatever  of  trust  there  is  arises  from  the  peculiar 
and  diverse  equitable  rights  of  the  stockholders  as  against  the  cor- 
poration in  its  property  and  their  conditional  liability  to  its  creditors. 
It  is  rather  a  trust  in  the  administration  of  the  assets  after  possession 
by  a  court  of  equity  than  a  trust  attaching  to  the  property,  as  such, 
for  the  direct  benefit  of  either  creditor  or  stockholder." 

And  also  : 

"  The  ofiS-cers  of  a  corporation  act  in  a  fiduciary  capacity  in  respect 
to  its  property  in  their  hands,  and  may  be  called  to  an  account  for 
fraud,  or,  sometimes,  even  mere  mismanagement  in  respect  thereto ; 
but,  as  between  itself  and  its  creditors,  the  corporation  is  simply  a 
debtor,  and  does  not  hold  its  property  in  trust,  or  subject  to  a  lien  in 
their  favor,  in  any  other  sense  than  does  an  individual  debtor.  That 
is  certainly  the  general  rule,  and  if  there  be  any  exceptions  thereto 
they  are  not  presented  by  any  of  the  facts  in  this  case.  Neither  the 
insolvency  of  the  corporation,  nor  the  execution  of  an  illegal  trust 
deed,  nor  the  failure  to  collect  in  full  all  stock  subscriptions,  nor  all 
together,  gave  to  these  simple  contract  creditors  any  lien  upon  the 
property  of  the  corporation,  nor  charged  any  direct  trust  thereon." 

Other  cases  are  cited  in  the  opinion  as  holding  the  same  doctrine. 

In  Wabash,  etc.,  Railway  Company  v.  Ham,  114  U.  S.  587,  594, 
Mr.  Justice  Gray,  in  delivering  the  opinion  of  the  court,  said : 

''  The  property  of  a  corporation  is  doubtless  a  trust  fund  for  the 
payment  of  its  debts,  in  the  sense  that  when  the  corporation  is  law- 
fully dissolved  and  all  its  business  wound  up,  or  when  it  is  insolvent, 
all  its  creditors  are  entitled  in  equity  to  have  their  debts  paid  out  of 
the  corporate  property  before  any  distribution  thereof  among  the 
stockholders.  It  is  also  true,  in  the  case  of  a  corporation  as  in  that 
of  a  natural  person,  that  any  conveyance  of  property  of  the  debtor, 
without  authority  of  law,  and  in  fraud  of  existing  creditors,  is  void  as 
against  them." 

These  cases,  while  not  involving  precisely  the  same  question  now 
before  us,  show  there  is  no  well-defined  lien  of  creditors  upon  the 
capital  of  a  corporatio^n  while  the  latter  is  a  solvent  and  going  con- 
cern, so  as  to  permit  creditors  to  question,  at  the  time,  the  disposition 
'of  the  property. 

The  bank  being  solvent,  although  it  paid  its  dividends  out  of 
capital,  did  not  pay  them  out  of  a  trust  fund.  Upon  the  subsequent 
insolvency  of  the  bank  and  the  appointment  of  a  receiver,  an  action 
could  not  be  brought  by  the  latter  to  recover  the  dividends  thus  paid 
on  the  theory  that  they  were  paid  from  a  trust  fund,  and  therefore 
I  ivere  liable  to  be  recovered  back. 
.  ,  It  is  contended  on  the  part  of  the  complainant,  however,  that  if  the 
issets  of  the  bank  are  impressed  with  a  trust  in  favor  of  its  creditors 
when  it  is  insolvent,  they  must  be  impressed  with  the  same  trust 
fy^,,  ty^  when  it  is  solvent ;  that  the  mere  fact  that  the  value  of  the  assets  of 
^     c/y^V  the  corporation  has  sunk  below  the  amount  of  its  debts,  although  as 


i; 


;:\ 


Mcdonald  v.  williams.  GOl 

yet  unknown  to  any  body,  cannot  possibly  make  a  new  contract  be- 
tween the  corporation  and  its  creditors.  In  case  of  insolvency,  how- 
ever, the  recovery  of  the  money  paid  in  the  ordinary  way  without 
condition  is  allowed,  not  on  the  ground  of  contract  to  repay,  but  be- 
cause the  money  thus  paid  was  in  equity  the  money  of  the  creditor  ; 
that  it  did  not  belong  to  the  bank,  and  the  bank  in  paying  could 
bestow  no  title  in  the  money  it  paid  to  one  who  did  not  receive  it 
bona  fide  and  for  value.  The  assets  of  the  bank,  while  it  is  solvent, 
may  clearly  not  be  impressecl  with^  trust  in  favor  of  creditors,  and 
yet  thaFtrust  may^l)e  createcMDj^  the  very  fact  of  the  insolvency,  and 
the  trust  enforced  by  a  receiver  as  the  representative  of  aU  the  cred- 
itors. But  we  do  not  wish  to  be  understood  as  deciding  that  the 
doctrine  of  a  trust  fund  does  in  truth  extend  to  a  shareholder  receiv- 
ing a  dividend,  in  good  faith  _believing  it  is  paid  out  of  profits,  even 
though  the  bank  at  the  time  of  the  payment  be  in  fact  insolvent. 
That  question  is  not  herein  presented  to  us,  and  we  express  no  opin- 
ion in  regard  to  it.  We  only  say,  that  if  svich  a  dividend  be  recover- 
able, it  would  be  on  the  principle  of  a  trust  fund. 

Insolvency  is  a  most  important  and  material  fact,  not  only  with 
individuals  but  with  corporations,  and  with  the  latter  as  with  the 
former  the  mere  fact  of  its  existence  may  change  radically  and 
materially  its  rights  and  obligations.  Where  there  is  no  statute  pro- 
viding what  particular  act  shall  be  evidence  of  insolvency  or  bank- 
ruptcy, it  may  be  and  it  sometimes  is  quite  difficult  to  determine  the 
fact  of  its  existence  at  any  particular  period  of  time.  Although  noi 
trust  exists  while  the  corporation  is  solvent,  the  fact  which  creates 
the  trust  is  the  insolvency,  and  when  that  fact  is  established  at  that 
instant  the  trust  arises.  To  prove  the  instant  of  creation  may  be 
almost  impossible,  and  yet  its  existence  at  some  time  may  very  easily 
be  proved.  What  the  precise  nature  and  extent  of  the  trust  is,  even 
in  such  case,  may  be  somewhat  difficult  to  accurately  define,  but  it 
may  be  admitted  in  some  form  and  to  some  extent  to  exist  in  a  case 
of  insolvency. 

Hence  it  must  be  admitted  that  the  law  does  create  a  distinction 
between  solvency  and  insolvency,  and  that  from  the  moment  when 
the  latter  condition  is  established  the  legality  of  acts  thereafter  per- 
formed will  be  decided  by  very  different  principles  than  in  a  case  of 
solvency.  And  so  of  acts  committed  in  contemplation  of  insolvency. 
The  fact  of  insolvency  must  be  proved  in  order  to  show  the  act  was 
one  committed  in  contemplation  thereof. 

Without  reference  to  the  statute,  therefore,  we  think  the  right  to  | 
recover  the  dividend  paid  while  the  bank  was  solvent  would  not  exist.  / 

But  it  is  urged  on  the  part  of  the  complainant  that  section  5204  ,  ^J>^ 

of   the  Revised  Statutes  makes  the  payment  of  a  dividend  out  of  o  j  o^^ 
capital  illegal  and  xcltni  vires  of  the  corporation,  and  that  money  thus         m   (J  -^^^ 
paid  remains  the  property  of  the  corporation,  and  can  be  followed 
into  the  hands  of  any  volunteer. 


1 


602  Mcdonald  v.  williams. 

The  section  provides  that  "  no  association,  or  any  member  thereof, 
shall,  during  the  time  it  shall  continue  its  banking  operations,  with- 
draw, or  permit  to  be  withdrawn,  either  in  the  form  of  dividends  or 
otherwise,  any  portion  of  its  capital."  What  is  meant  by  this  lan- 
guage ?  Has  a  shareholder  withdrawn  or  permitted  to  be  withdrawn 
in  the  form  of  a  dividend  any  portion  of  the  capital  of  the  bank  when 
he  has  simply  and  in  good  faith  received  a  dividend  declared  by  a 
board  of  directors  of  which  he  was  not  a  member,  and  which  dividend 
he  honestly  supposed  was  declared  only  out  of  profits  ?  Does  he  in 
such  case  within  the  meaning  of  the  statute  withdraw  or  permit  to  be 
withdrawn  a  portion  of  the  capital  ?  The  law  prohibits  the  making  of 
a  dividend  by  a  national  bank  from  its  capital  or  to  an  amount  greater 
than  its  net  profits  then  on  hand,  deducting  therefrom  its  losses  and 
bad  debts.  The  fact  of  the  declaration  of  a  dividend  is  in  effect  the 
assertion  by  the  board  of  directors  that  the  dividend  is  made  out  of 
profits.  Believing  that  the  dividend  is  thus  made,  the  shareholder  in 
good  faith  receives  his  portion  of  it.  Can  it  be  said  that  in  thus  doing 
he  withdraws  or  permits  to  be  withdrawn  any  portion  of  the  capital 
of  the  corporation  ?  We  think  he  does  not  withdraw  it  by  the  mere 
reception  of  his  proportionate  part  of  the  dividend.  The  withdrawal 
was  initiated  by  the  declaration  of  the  dividend  by  the  board  of 
directors,  and  was  consummated  on  their  part  when  they  permitted 
.payment  to  be  made  in  accordance  with  the  declaration.  We  think 
I  this  language  implies  some  positive  or  affirmative  act  on  the  part  of 
Itlie  shareholder  by  which  he  knowingly  withdraws  the  capital  or 
jsome  portion  thereof,  or  with  knowledge  permits  some  act  which 
pesults  in  the  withdrawal,  and  which  might  not  have  been  so  with- 
Idrawn  without  his  action.  The  permitting  to  be  withdrawn  cannot 
/be  founded  upon  the  simple  receipt  of  a  dividend  under  the  facts 
(  stated  above. 

One  is  not  usually  said  to  permit  an  act  which  he  is  wholly  igno- 
rant of,  nor  would  he  be  said  to  consent  to  an  act  of  the  commission 
of  which  he  had  no  knowledge.  Ought  it  to  be  said  that  he  with- 
draws or  permits  the  withdrawal  by  ignorantly  yet  in  entire  good 
faith  receiving  his  proportionate  part  of  the  dividend^  Is  each 
shareholder  an  absolute  insurer  that  dividends  are  paid  out  or^rofits  ? 
Must  he  employ  experts  to  examine  the  books  of  the  bank  previous 
to  receiving  each  dividend  ?  Few  shareholders  could  make  such 
examination  themselves.  The  shareholder  takes  the  fact  that  a  divi- 
dend has  been  declared  as  an  assurance  that  it  was  declared  out  of 
profits  and  not  out  of  capital,  because  he  knows  that  the  statute  pro- 
hibits any  declaration  of  a  dividend  out  of  capital.  Knowing  that  a 
dividend  from  capital  would  be  illegal,  he  would  receive  the  dividend 
as  an  assurance  that  the  bank  was  in  a  prosperous  condition  and  with 
unimpaired  capital.  Under  such  circumstances  we  cannot  think  that 
Congress  intended  by  the  use  of  the  expression  "  withdraw  or  permit 
|to  be  withdrawn,  either  in  the  form  of  dividends,  or  otherwise,"  any 


Mcdonald  v.  Williams.  603 

portion  of  its  capital,  to  include  tlie  case  of  the  passive  receipt  of  a 
dividend  by  a  shareholder  in  the  bona  fide  belief  that  the  dividend 
was  paid  out  of  profits,  while  the  bank  was  in  fact  solvent.  We  think 
it  would  be  an  improper  construction  of  the  language  of  the  statute 
to  hold  that  it  covers  such  a  case. 

We  are  strengthened  in  our  views  as  to  the  proper  construction  of 
this  act  by  reference  to  some  of  its  other  sections.  The  payment  of 
the  capital  within  a  certain  time  is  provided  for  by  sections  5140  and 
5141.  Section  5151  provides  for  the  individual  responsibility  of  each 
shareholder  to  the  extent  of  his  stock  at  the  par  value  thereof  in 
addition  to  the  amount  invested  therein.  (These  shareholders  have 
already  been  assessed  under  this  section.)  And  section  5205  pro- 
vides for  the  case  of  a  corporation,  whose  capital  shall  have  become 
impaired  by  losses  or  otherwise,  and  proceedings  may  be  taken  by  the 
association  against  the  shareholders  for  the  payment  of  the  deficiency 
in  the  capital  within  three  months  after  receiving  notice  thereof  from 
the  Comptroller.  These  various  provisions  of  the  statute  impose  a 
very  severe  liability  upon  the  part  of  holders  of  national  bank  stock, 
and  while  such  provisions  are  evidently  imposed  for  the  purpose  of 
securing  reasonable  safety  to  those  who  deal  with  the  banks,  we  may 
nevertheless  say,  in  view  of  this  whole  system  of  liability,  that  it  is 
j^innecessary,  and  that  it  would  be  an  unnatural  construction  of  the 
language  of  section  5204  to  hold  that  in  a  case  such  as  this  a  share- 
holder, by  the  receipt  of  a  dividend  from  a  solvent  bank,  had  with- 
drawn or  permitted  to  be  withdrawn  any  portion  of  its  capital. 

We  may  concede  that  the  directors  who  declared  the  dividend 
under  such  circumstances  violated  the  law,  and  that  their  act  was 
therefore  illegal,  but  the  reception  of  the  dividend  by  the  shareholder 
in  good  faith,  as  mentioned  in  the  question,  was  not  a  wrongful  or 
designedly  improper  act.  Hence  the  liability  of  the  shareholder 
should  not  be  enlarged  by  reason  of  the  conduct  of  the  directors. 
They  may  have  rendered  themselves  liable  to  prosecution,  but  the 
liability  of  the  shareholder  is  different  in  such  a  case,  and  the  receipt 
of  a  dividend  under  the  circumstances  is  different  from  an  act  which 
may  be  said  to  be  generally  illegal,  such  as  the  purchase  of  stock  in 
one  national  bank  by  another  national  bank  for  an  investment  merely, 
which  is  never  proper.  Concord  First  National  Bank  v.  Hawkins, 
just  decided,  ante,  364. 

The  declaration  and  payment  of  a  dividend  is  part  of  the  course  of 
business  of  these  corporations.  It  is  the  thing  for  which  they  are 
established,  and  its  payment  is  looked  for  as  the  appropriate  result 
of  the  business  which  has  been  done.  The  presumption  of  legality 
attaches  to  its  declaration  and  payment,  because  declaring  it,  is  to 
assert  that  it  is  payable  out  of  the  profits.  As  the  statute  has  pro- 
vided a  remedy  under  section  5205  for  the  impairment  of  the  capital 
which  includes  the  case  of  an  impairment  produced  by  the  payment 
of  a  dividend,  we  think  the  payment  and  receipt  of  a  dividend  under 


604  HEIGHT   V.   LOED. 

the  circumstances  detailed  in  tlie  question  certified  do  not  permit  of 
its  recovery  back  by  a  receiver  appointed  upon  the  subsequent  insol- 
vency of  the  bank. 

The  facts  in  the  various  English  cases  cited  by  counsel  for  com- 
plainant are  so  entirely  unlike  those  which  exist  in  this  case  that  no 
useful  purpose  would  be  subserved  by  a  reference  to  them.  Not  one 
holds  that  a  dividend  declared  under  such  facts  as  this  case  assumes 
can  be  recovered  back  in  such  an  action  as  this.  T  ~  wJ" 

We  answer  the  first  question  in  the  negative.^         /  J-  ^  ^  ^ 

^      1^'        S^    /^    O-W     ^  ^^"^-     ^'^  Indiana,  212.     y^U>    y    ^  xf  / 

>       ^^v*'^^^  N  4  From  the  Marion  Superior  Court.  \       ^    f 

^       .jju^    ^  J.   £J.   3IcDonald,   J.   31.   Butler,   IT.    W.   Harrington    and    H. 

Aj^      ,./^'      /      Francisco,  for  appellant. 
-        >.  >     \jy\  ^  B.   Taylor,  F.  Band,  E.    Taylor,  B.  Harrison,  C.  C.  Hines 

rK     (^ ^    aijji  |T7.  H  H  Miller,  for  appellees. 
^     SJ^    Biddle,  C.  J. — The  facts  averred  in  the  appellant's  complaint  are 

'     2X^^  ' '  (^  Jp^^  follows  : 

"■^^  j-\A^  ■  c)-*^       That  on   the   1st  da}'  of  April,  1873,  the  appellant  entered  into  a 

^v**     I'   JJ"^'^  \^      provisional  contract  with  John  M.  Lord,  John  Lord,  and  Charles  M. 

t--*^  ^P^  Lord,  by  which  the\'  agreed  to  sell  to  the  appellant  five  hundred  and 

'  ^  •  '^'*^  /  \  twenty  shares  of  the  capital  stock  of  the  Indianapolis  Rolling  Mill 

^2,^-^"''''*^  .  -^  Company,  of  fifty  dollars  each,  for  the  sum  of  thirteen  thousand  dol- 

^^"^  "yJ^        lar's,  at  the  option  of  the  appellant,  to  be  by  him  taken  at  any  time  on 

Uuk^-  I         I  "        or  before  the  18th  day  of  June,  1873,  to  be  paid  for  on  delivery  ;  that 

t '    .J^^^  /7^.->^efore  the  expiration  of  said  oi)tion,  on  the  14th  da}'  of  June,  1873, 

^/jb^  T/        t^^*-'*'^     the  said  Lords,  for  the  consideration  of  one  hundred  dollars,  to  them 

1^^     ^'^    -^^  (o-*^  paid  by  appellant,  extended  the  time  of  said  provisional  contract  for 

^   in/i^^^'^^  ((^A**^4hirty  days,  within  which  time  the  appellant  paid  the  Lords  thirteen 

^^^     '  yj^  vi  thousand  dollars,  and  received  the  stock,  which,  on   the   16th  day  of 

\r-^^  L,         July,  1873,  was  duly  transferred  to  him  on  the  books  of  the  Rolling 

Lj^l/J'^  Mill  Company  ;   that  the  appellant   purchased   the  stock  without  the 

reservation  of  any  dividends  or  earnings,  and  with  all  the  benefits  and 

interests  that  pertain  to  the  same ;  that  on  the  3d  of  July,  1873,  the 

board  of  directors  of  the  Rolling  Mill  Company  declared  a  dividend  on 

the  capital  stock  of  the  company  of  five  per  cent.,  to  be  paid  on  the  1st 

day  of  August  ensuing,   amounting,  on  the  stock,  etc.,  purchased  by 

1  After  the  Supreme  Court  had  pfiven  the  above  opinion,  the  Circuit  Court  of  Appeals 
rendered  judgment  against  the  receiver  as  to  the  dividends  in  the  j'ears  when  the  bank 
was  still  solvent,  and  against  the  defendant  stockholders  for  the  dividends  paid  during  in- 
solvencj-.  Lacomue,  J.,  said:  "No  (juestion  was  propounded"  (i.e.,  to  the  Supreme 
(Jourt)  "as  to  the  dividends  paid  when  the  bank  was  actually  insolvent,  as  we  had  no 
doubt  the  receiver  could  recover  them  in  a  proper  action."  Ilnyden  v.  Williams,  9(5  Federal 
Keporter,  279,  pp.  283,  284.     See,  also,  Grant  v.  Ross,  a.  d.  18'JG,  100  Kentucky,  44.  —Ed. 


BEIGHT  V.    LORD.  605 

the  appellant,  to  thirteen  hundred  dollars,  which  the  appellant  claims ; 
that  the  company  was  about  to  pay  the  said  thirteen  hundred  dollars  to 
the  Lords,  who  also  claimed  the  amount.  Prayer  to  restrain  the  com- 
pany from  paying  the  thirteen  hundred  dollars  to  the  Lords,  to  decree 
the  amount  to  the  appellant,  and  for  general  relief. 

The  Rolling  Mill  Company  was  served  with  process,  but  made 
default. 

Interlocutory  proceedings  were  had  after  complaint  and  before 
answer,  but  as  no  question  is  raised  upon  them,  they  are  not  stated. 

The  Lords  answered  by  a  general  denial.  The  case  was  submitted 
to  the  court  for  trial,  which  resulted  in  a  finding  for  the  defendants. 
Motion  for  a  new  trial  overruled.  Exception.  Appeal  to  the  general 
term,  where  the  judgment  was  affirmed,  from  which  an  appeal  was 
taken  to  this  court. 

The  only  error  assigned  here  is  in  affirming  the  judgment  at  the 
general  term.  The  evidence  is  before  us,  and  we  think  it  fairly  proves 
the  allegations  in  the  complaint. 

Wasjhe  appellant  entitled  to  the  dividend  declared  while  it  wag       -^  l^ 
opjdonaj^jwiyi^liiii]Lio_purchase^j^^  and  before  the  //^vft 

purchase  was  completed  ?    This  is  the  j^ole  question  in  the  case. 

Where  a  stockholder  in  a  railroad  assigned  and  transferred  his  stock 
after  two  years  interest  had  accrued,  which,  by  a  resolution  of  the 
compan}'  was  payable  annually,  and  had  been  carried  to  the  account  of 
the  stockholder,  it  was  held  that  the  interest  did  not  pass  hy  the 
assignment  of  the  stock;  the  court  stating  the  rule  to  be,  that  "the 
interest  follows  the  principal,  as  an  incident  to  it,  so  long  as  it  remains 
an  incident :  but  when  it  is  separated  and  set  apart  from  the  principal 
by  actual  payment,  or  by  being  carried,  when  due,  to  the  credit  of  the 
owner  of  the  principal  in  his  account  with  the  debtor,  and  this  in  pur- 
suance of  a  provision  in  the  contract  creating  and  defining  the  principal 
debt,  it  is  so  separated  and  disjoined  from  the  principal  as  to  cease  to 
be  an  incident  to,  and  does  not  follow  it."  The  City  of  Ohio  v.  The 
Cleveland,  etc.,  R.  E.  Co.,  6  Ohio  St.  489.  And  in  the  case  of  Jones 
V.  The  Terre  Haute  tjb  Michmond  M.  R.  Co.,  29  Barb.  353,  it  was 
held,  that  "  where,  by  a  resolution  of  the  board  of  directors,  a  dividend 
is  made  to  the  persons  then  holding  stock,  without  any  discrimination, 
out  of  the  surplus  earnings  of  the  corporation  for  a  given  period,  pa\-- 
able  at  a  future  day,  all  who  are  stockholders  on  the  books  of  the 
compan}',  at  the  time  the  dividend  is  declared,  are  entitled  to  sliare 
therein."  This  case  seems  to  us  as  being  remarkably  similar  to  the 
one  before  us.  It  has  also  been  held  that  the  purchaser  of  a  share  of 
stock  in  a  corporation  has  the  right  to  receive  all  future  dividends, 
ft'ora  whatever  source  the  profits  ma}-  arise,  provided  he  remain  a 
toember  of  the  corporation  until  a  dividend  is  made.  March  v.  TJie 
JUastern  B.  B.  Co.,  43  N.  H.  515. 

The  same  rule  was  recentl}'  held  in  England.  Tiie  testatrix  was 
t  mer  of  certain  shares  in  the  South  Australian   Banking  Company. 


606 


BRIGHT  V.    LORD. 


On  the  7tli  daj"  of  June,  1865,  dividends  were  declared  T)y  the  com- 
pany, pajable  on  the  15th  of  July,  1865,  and  on  the  15th  of  January, 
1866.  On  the  31st  of  December,  the  testatrix  died,  having  made  her 
will,  devising  the  stock,  in  1863. 

The  question  arose  as  to  whether  the  dividend  due  on  the  15th  of 
January,  1866,  passed  to  the  devisee,  or  belonged  to  her  residuary 
estate. 

Sir  W.  Page  Wood,  V.  C,  said:  "As  soon  as  the  dividend  was 
declared,  although  payment,  for  convenience  of  the  company,  was 
postponed  until  the  following  January,  from  that  moment  the  testatrix 
became  entitled  to  it,  although  she  could  not  have  then  recovered  it, 
and  it  would  have  passed  to  her  legatee  had  she  specifically  bequeathed 
it."     De   Gendre  v.  £ent,  4  Equity  Cases,  283. 

In  an  American  case,  still  later,  it  was  held  that  a  dividend  belongs 
to  the  owner  of  the  stock,  at  the  time  the  dividend  is  actually  declared, 
and  that  dividends  made  to  the  stockholders  after  the  death  of  a 
testator  belong  to  the  widow  who  owns  the  stock,  but  if  made  before, 
although  payable  afterwards,  they  will  pass  by  the  devise.  Jirundage 
V.  Bru7idage,  65  Barb.  397. 

In  support  of  this  general  principle,  see,  also.  In  re  Foote,  22  Pick. 
299  ;  Clapp  v,  Astor,  2  Edwards  Ch.  379  ;  Phelps  v.  Farmers  and 
Mechanics  Bank,  26  Conn.  269  ;  Hyatt  v.  Allen,  56  N.  Y.  553. 

From  the  authorities  and  upon  principle,  we  think  the  rule  may  be 
deduced,  that  whoever  owns  the  stock  in  a  corporation  at  the  time  a 
dividend  is  declared  owns  the  dividend  also ;  and  a  sale  of  the  stock 
afterwards  will  not  carry  the  dividend  with  it,  though  it  may  not  be 
paid,  or  payable,  until  after  the  sale.  The  same  rule  governs  in  the 
sale  of  bonds  or  other  securities,  where  the  interest  is  payable  at 
stated  periods,  as  upon  coupon  bonds  ;  but  when  the  interest  is  accruing 
from  day  to  day,  whatever  is  due  on  the  bond  or  other  security  at  the 
time  it  is  sold,  will  pass  with  it.  The  reason  of  the  distinction  is,  that 
when  the  interest  accrues  from  day  to  daj^,  it  is  divisible  and  payable 
at  an}'  time  ;  but  when  the  interest  is  payable  at  stated  periods,  no  part 
of  it  is  due  until  the  period  arrives ;  and  in  the  earnings  or  profits  of 
stocks,  it  is  impossible  to  know  what  amount  is  due  until  the  dividend 
is  declared. 

In  the  case  before  us,  Bright  did  not  become  the  owner  of  the  stock 
until  the  16th  day  of  July,  1873.  Up  to  that  time,  it  was  optional 
with  him  to  purchase  it  or  refuse  it.  The  Lords  would  have  had  no 
remed}^,  if  Brigiit  had  refused  the  stock,  and  Bright  would  have  suffered 
no  loss,  except  the  consideration  he  had  paid  for  the  option,  and 
incurred  no  liability,  whatever.  The  dividend  had  been  declared  on 
the  3d  day  of  Jul}',  1873,  and  the  amount  fixed,  by  which  it  became 
the  property  of  the  Lords  at  that  time,  although  not  payable  until  the 
1st  da}'  of  August  ensuing ;  and  there  is  notliing  in  the  complaint  to 
inform  us  but  what  Bright  knew  all  these  facts  at  the  time  lie  com- 
pleted the  purchase  of  the  stock.     At  least,  ordinary  business  diligence 


TAFT  V.    HARTFORD,   PROVIDENCE,   &  FISBKILL  R.   CO. 


607 


would  have  informed  him  of  the  facts>  if  he  did  not  actually  know  them, 
and  then  he  could  have  purchased  the  stock,  as  it  then  stood,  or  not,  at 
his  option.  As  he  has  not  averred  in  his  complaint  that  he  did  not  know 
these  facts,  and  could  not  have  ascertained  them  by  ordinary  business 
diligence,  he  must  be  held  to  Uve  known  them,  and  to  have  made  his 
purchase  accordipgly.  ^J\ 

The  judgment  is  affii;ifieU\ 


J  ^' 


1866 


PROVIDENCE,  &  FISHKILL  R.  CO. 

8  Rhode  Island,  310.1 


ssumpsit  for  the  recovery  of  the  amount  of  dividends,  at  ten  per 
cent,  per  aniiGm,  for  eight  years,  upon  402  shares  of  the  capital  stock 
of  the  defendant  corporation,  (as  the  plaintiff  argues,)  "  not  as  arrears 
of  dividends  unpaid,  but  as  their  equivalent,  as  damages,  for  the  non- 
performance of  the  defendants'  contract  that  they  should  be  paid."  The 
case  was  submitted  upon  the  pleadings  and  a  statement  in  writing  of 
the  facts. 

On  Oct.  25,  1854,  the  corporation  had  only  common  stock.     At  a 
meeting  of  the  stockholders  held  that  da}',  acting  under  an  amendment  fr^ 
to  the  charter,  the  following  votes  were  passed  :  —  -  fl 

'^  Voted,  That  five  thousand  shares  of  one  hundred  dollars  each  be  and 
the  same  are  hereby  created  and  added  to  the  capital  stock  of  this  com- 
pan}',  and  that  the  same  be  a  preferred  and  guaranteed  stock,  entitling 
the  holder  thereof  to  preferred  and  guaranteed  dividends  equal  to  ten^    ^^.^ 
per  cent,  per  annum,  payable  semi-annuall3\     And  no  dividend  shall  j^r^^iii 
be  paid  on  the  remaining  shares  of  said  stock  until  such  semi-annual  '^  -.Jb 

dividends,  at  the  rate  of  ten  per  cent,  per  annum,  above  mentioned,^    .  />•    ^     i«( 
shall  first  have  been  paid  on  said  guaranteed  or  preferred  stock.    J'ro-U      j^  4^     i 
vided,  that  said  preferred  stock  shall  be  issued  on  tlie  express  con- j^i^.j^     J    \ 
dition  following,  viz.  :  that  at  any  time  after  the  first  day  of  April,  j^**^  i^   ^ 
1860,  or  after  the  first  day  of  April,  1865,  as  the  directors  shall  decide,  _t, 
said  company  reserve,  and  shall  have  the  right  to  redeem  and  extin-  '-^ 
guish  the  whole  or  any  part  of  said  preferred  stock,  b}'  paying  to  the  ^  AiAil      i  '  [,a 
holder  thereof,  on  the  books  of  said  compau}',  the  par  value  of  one  hun-  ^    i^      ^     a)' 

dred  dollars  for  each  and  every  share  held  by  him,  her  or  them,  and      i^^^'^^^'^i  %r^ 
that,  at  au}^  time  after  the  time  or  times  fixed  by  the  directors,  any'T*'^      j^  \ 
holder  of  said  preferred  stock  shall  have  the  right  to  demand  and  ve-*'-^ ^„j^^^''^^ cr^     i 
ceive  for  the  whole  or  any  part  thereof,  one  hundred  dollars  for  e^c\v^^  jj^r^ y^'^^f^^jJ 
share,  and  all  right  to  further  dividends  on  said  preferred  stock,  thatX*-^^  i.   '^t"-^ 
shall  have  been  so  paid  for  or  redeemed,  shall  tliereafter  cease  and  '*_^ 
determine. 

' '  YoUd,  That  the  guaranteed  dividend  of  ten  per  cent,  on  such  pre 

1  Statement  abridged.     Portions  of  argument  omitted.  —  Ed, 


.«5^C 


^ 


608 


TAFT  V.    HAKTFORD,   PROVIDENCE,   &   FISHKILL   R.  CO. 


4 


ferred  stock,  to  all  subscribers  who  pay  for  the  same  in  raone}-  previ. 
ous  to  said  first  day  of  April  next,  shall  begin  to  accrue  on  and  from 
the  day  when  the  mone}^  for  said  stock  shall  have  been  paid  to  said 
compan3\" 

Subsequently  a  circular  was  issued  oflTering  the  new  stock  to  subscrib- 
ers, and  containing,  i?iter  alia,  the  following  statement :  — 

"  Guaranteed  dividends,  at  the  rate  of  ten  per  cent,  a  year,  will 
commence  from  the  time  when  the  money  is  actually  paid  for  said  pre- 
ferred stock." 

Subscribers  for  the  new  stock  received  certificates  in  the  following 
form  :  — 

Be  it  known,  That  entitled  to  shares  in  the  preferred 

and  guaranteed  stock  of  the  Hartford,  Providence  and  Fishkill 
Railroad  Company,  on  which  one  hundred  dollars,  on  each  share, 
have  been  paid,  subject  to  the  provisions  of  the  charter,  and  the  by- 
laws of  the  corporation,  the  same  being^  entitled  to  preferred  and  guar- 
anteed  dividends,  at  the  rate  of  ten  per  cent  per  annum,  payable 
semT^innuallvrbefore  any  dividend  shall  bejiaid^on  other  stock  of  said 

Icom])any ;  and  being  redeemable  by  the  company,  and  the  par  value 
thereof  demandable  by  the  holder  of  the  same,  from  the  company,  at 
any  time  after  April  1st,  1865. 

No  dividends  were  earned  by  the  corporation. 
Durfee  and  Eames,  for  plaintiff. 


The  word  guarantee,  though  most  usually  employed  to  designate  a 
contract  by  which  one  person  becomes  answerable  for  another,  is  not 
unfrequently  employed  to  express  an  unusually  emphatic  assurance  of 
a  party  in  his  own  behalf,  as  in  Section  4,  Article  IV.,  of  the  Federal 
Constitution.  Will  the  Court  say  that  a  word  which  is  constantly 
selected  by  the  company  to  characterize  and  denominate  the  subject  to 
which  it  applies,  is  simply  tautological  ? 


Could  the  company  have  supposed  that  the  subscribers  for  stock 
would  expurgate  or  ignore  the  word  "  guaranteed,"  or  would  interpo- 
late after  it,  the  incompatible  qualification,  "  if  the  net  earnings  of  the 
road  suffice  for  the  payment  of  such  dividends  ?  " 


Suppose  that,  for  ten  years  after  the  issue  of  the  new  stock,  the  corn- 
pan}^  barel}'  make  enough  to  pa}-  interest  and  expenses  ;  and  that  at  the 
end  of  ten  years  they  redeem  the  new  stock  and  the  road  becomes 
prosperous.  According  to  the  view  which  we  are  combating,  the  sub- 
scribers are  not  entitled  to  dividends  for  the  ten  years  that  are  gone, 
because  none  were  earned  ;  and  they  arc  not  entitled  to  dividends  for 
the  future,  because  they  have  ceased  to  be  stockholders. 


And,  as  to  the  word  "dividends,"  we  maintain  that  it  was  not  used 
b}'  the  parties  in  its  ordinary  sense,  as  signifying  a  certain  proportion 


TAFT  V.    HARTFORD,   PROVIDENCE,   &  FISHKILL   R.   CO.  609 

of  the  earned  profits  of  the  road ;  but  as  signif^'ing  that  the  holders 
should  be  entitled  to  receive,  in  value,  what  was  equivalent  to  ten  per  cent 
on  the  amount  which  they  had  paid  from  the  time  of  payment ;  .  .  . 
The  expression  is  equivalent  to  the  word  interest  at  the  fixed  rate. 

But  even  if  the  word  "dividends,"  as  used  in  connection  with  the 
word  "guaranteed,"  means,  in  its  true  import,  dividends  out  of  the 
net  earnings  of  the  road,  as  claimed  b}-  the  defendants,  the  defendants 
do  not  advance  a  step  in  the  defence  to  the  action.     If  the  dividends 
■were  to  be  paid  out  of  the  net  earnings  of  the  road,  they  were,  never- 
theless, guaranteed  or  stipulated  to  be  paid  out  of  such  net  earnings. 
In  other  words,  the  guaranty  was,  that  the  net  earnings  should  be  suf- 
ficient to  pay  a  dividend  equal  to  ten  per  cent  per  annum  ;  and  if  the  | 
result  was  that  such  earnings  were  insufficient  for  that  purpose,  there  I 
was  none  the  less  a  breach  of  the  guaranty,  on  the  part  of  the  defend-/ 
ants,  that  they  should  be  sufficient,  for  which  an  action  will  lie  to  recover,! 
by  wa}'  of  damages,  the  amount  which  the  plaintiff  would  have  received/ 
if  such  net  earnings  had  been  sufficient  to  pay  the  stipulated  ten  per 
cent. 

Currey  {Blake  with  him),  for  defendants. 

[Argument  omitted]. 

Bradley,  C.  J.  The  defendant  corporation  was  authorized,  by  an 
amendment  to  its  charter,  to  issue  five  thousand  shares  of  additional 
stock,  and  to  provide  that  the  same  be  "  a  preferred  and  guaranteed 
stock,  entitling  the  holder  to  preferred  and  guaranteed  dividends  equal 
to  ten  per  cent,  per  annum,  payable  semi-annually."  Pursuant  to  this 
authority  this  stock  was  issued,  and  the  certificates  entitled  ' '  preferred 
and  guaranteed  ten  per  cent,  stock,"  contained  the  expression,  "  the 
same  being  entitled  to  preferred  and  guaranteed  dividends  at  the  rate 
of  ten  per  cent,  per  annum,  payable  semi-annually,  before  any  dividend 
shall  be  paid  on  any  other  stock  in  said  company."  This  suit  is  brought 
to  compel  the  company  to  pay  the  plaintiff,  holding  a  portion  of  said 
stock,  a  sum  of  mone}'  equal  to  ten  per  cent,  per  annum  on  his  stock, 
though  no  dividends  have  been  earned. 

The  question  presented  is,  what  is  the  meaning  and  engagement  of 
the  company,  as  expressed  in  these  words?  The  relations  between 
these  parties  are  obviously  those  between  shareholders  and  tlie  corpora- 
tion. Thej'  are  not,  on  the  face  of  the  contract,  those  of  creditor  and 
debtor,  A  corporation  may  issue  bonds  or  other  obligations  convert- 
ible at  certain  times  and  upon  certain  contingencies  into  stock.  The}' 
may  issue  stock,  as  in  this  case,  redeemable  at  a  certain  time  and  upon 
certain  conditions.  But  until  such  change  is  made  in  eiihcr  case,  the 
original  relation  remains.  A  holder  of  the  stock  retains  his  right  to 
share  in  the  management  of  the  corporation  and  to  participate  in  its 
profits.  He  is  not  its  crcditorby  virtue_of_this  relation.  If  be  is  /  . 
to  be  constitutedltrCTeditdrrEIieFe  are  welFknown  modes  and  wbrd^-b^  /  O-^ 


GIO  TAFT   V.    HAKTFORD,   PROVIDENCE,   &   FISHKILL   E.    CO. 

which  that  relation  can  be  expressed.  If,  instead  of  adopting  them,  he 
receives  a_  certificate  of  stock,  and_then  claims  tg_be  botlTTts  creditor 
and  stockholder  b^^  virtue  of  the  samejionti'act,  thejburden  is  uponbim. 
^  y^\  to  showthat^sucb  anomalous  relation  exists.  The  presumptions  of  law 
and  the  usual  course  of  business  are  against  him.  In  thls^case,  the 
evidence  of  the  relation  is  a  certificate  of  stock,  and  the  subject  of  the 
engagement  or  contract  is  the  dividends,  so  called,  to  be  paid  upon  it. 
A  dividebdis  money  paid  out  of  profits  b}'  a  corporation  to  its  share- 
Iholders!  A  preferred  dividend  is  that  which  is  paid  to  one  class  of_ 
shareholders  in  priorit}'  to  that  to  be  paid  to  another  cl,ass. 

The  word  over  which  the  controversy  arises  in  this  case  is  "  guaran- 
teed." Guaranteed,  in  addition  to  preferred,  applied  to  dividends, 
means  what?  It  is  certainly  not  used  in  the  strict  and  proper  sense  of 
the  word,  for  there  is,  in  this  contract,  no  third  part}-  promising  to 
make  good  an  engagement  by  the  corporation  to  its  stockholders.  Is 
it,  on  the  one  hand,  an  instance  of  that  tautology  so  common  in  legal 
proceedings,  —  a  synonym  for  "  preferred,"  and  not  increasing  its  sig- 
nificance? Or  does  it,  on  the  other  hand,  when  it  is  added  to  tlie  word 
dividend,  entirely  change  its  character  and  meaning,  and 'convert  a 
dividend,  which,  in  its  nature,  cannot  legally  exist  except  when  origi- 
nating in  profits,  into  a  liability  entirely  independent  of  the  pre-exist- 
ence  of  such  profits?  Or  has  it  still  a  third  signification,  b}'  which, 
added  to  the  idea  of  a  simple  preference  out  of  dividends,  it  shall  be 
considered  as  an  engagement  that  a  dividend,  equal  to  the  sum  of  ten 
per  cent,  per  annum,  shall  be  charged  upon  all  the  profits  which,  from 
year  to  year,  may  accrue,  thus  binding  and  pledging  the  total  sum  of  all 
the  earnings  of  the  compan}',  so  long  as  the  engagement  lasts,  to  the 
payment  of  a  dividend  "  equal  to,"  as  the  amended  charter  says,  — 
' '  at  the  rate  of,"  as  the  compan}-  express  it,  —  as  much  as  ten  per  cent, 
per  annum,  if  semi-annually  paid,  would  amount  to,  and  this  amount  to 
,be  paid  before  the  other  stock  receives  anything. 

Intervening  the  two  arguments  in  this  cause,  the  Court  examined, 
and  desired  the  counsel  to  examine,  beyond  our  own  libraries,  the  de- 
cisions of  the  courts  upon  this  subject,  to  see  if  this  somewhat  anoma- 
lous expression  had  received  a  judicial  or  practical  construction.  Among 
the  emergencies  so  common  to  these  railway  companies  in  our  countrv, 
and  in  that  from  which  we  derive  our  language  and  so  much  of  our  law, 
we  thought  it  not  unlikely  that  similar  circumstances  had  induced  simi- 
lar contracts,  and  that  the  language  used  by  this  company',  doubtless 
under  the  advice  of  counsel,  might  have  been  taken  from  railway  legis- 
lation, or  contracts  elsewhere,  and  with  a  full  knowledge  of  its  legal 
and  practical  meaning.  In  this  country  we  found  no  decision  throw- 
ing light  on  this  question.  In  England,  however,  there  are  several. 
The  most  apt  of  these  cases  is,  perhaps,  Henry  v.  The  Great  North- 
ern Railway  Company,  3  .Jurist,  part  i.  p.  1,133.  An  act  of  Parliament 
in  that  case  authorized  the  company  "  to  guarantee  the  payment  of 
dividends,"  not  exceeding  a  certain  per  cent.,  "  and  in  preference  to  the 


TAFT  V.    HARTFORD,   PROVIDENCE,   &  FISHKILL   R.    CO.  Gil 

payment  thereof  on  other  shares."  The  question  in  this,  as  in  the  other 
English  oases  over  similar  words,  was  between  wliat  we  have  indicated 
as  the  first  and  third  construction.  It  has  never  been  even  claimed  in 
tlie  English  courts  that  the  construction  secondly  stated  by  us,  and 
urged  by  the  plaintiff,  could  be  adopted,  and  the  court  decides  that 
these  statutes  guarantee  to  the  favored  stockholders  "  a  charge  on  all 
accruing  profits  at  the  stipulated  rates,  before  anything  is  divided  among 
the  ordinary  shareholders.  This  is  substantially  interest  chargeable 
exclusively  on  profits."  And  they  further  hold  that  if  the  profits, 
accrued  when  the  dividend  is  declared,  are  insufficient  to  furnish 
the  stipulated  amount,  the  deficiency  is  a  charge  upon  subsequent 
profits.  Again,  in  Crmcford  v,  North  Eastern  Railway  Comjyany, 
3  Jurist,  N.  S.  part  i.  p.  1,093,  Vice-Chancellor  Wood  says,  in  conclu- 
sion:  "Of  course,  I  do  not  mean  to  saj*  that  it  is  a  guaranty  in  an}' 
other  sense  than  that  you  are  to  be  paid  these  sums  out  of  the  profits 
of  the  company.  That  is  the  only  fund  }ou  are  to  look  to.  If  the  com- 
pany make  no  profits  you  will  have  no  dividend,  but,  I  apprehend,  the 
profits  in  perpetuity."  In  Matthews  v.  Great  Northern  Railway  Com- 
pany, 5  Jurist,  N.  S.  part  i.  p.  284,  the  Vice-Chancellor  says  of  the 
term  "  guaranteed  share :  "  "It  must  be  a  guaranty  limited,  at  least, 
to  the  whole  profits  made  by  the  railway." 

"Without  dwelling  longer  upon  this  and  similar  authorities,  it  is  per- 
fectly apparent  that  the  guaranty  of  a  dividend  by  a  railvva}'  company 
is  considered  by  the  courts,  and,  it  seems  from  the  course  of  the  argu- 
ment by  the  counsel  in  these  causes,  who,  doubtless,  faithfully  represent 
the  interests  and  wishes  of  their  clients,  b^^  the  business  community  also, 
to  mean  nothing  more  than  a  pledge  of  the  funds  legalh'  applicable  to 
the  purposes  of  a  dividend ;  that,  in  short,  it  is  a  divide^njl,  and  not  a 
(leStTwhich  is  thus  preferred  and  guaranteed ;  and  as  the  statement  of 
facts  admits  that  dividends  have  not  been  earned  in  this  case,  the  plam- 
tiflf,  if  there  were  no  other  diflSculties  in  his  way,  could  not  recover,  and 
we  must  give  judgment  for  the  defendant,^ 


Ordinarily,  preferred  shareholders  have  no  preference  in  the  dis- 
t£ibution_oFTIie~company's  capital,  when_the  busin e s s_isjwound  up. 
A  right  of  this  kind  cannot  be  presumed  from  the  fact  that  a  prefer- 
ence has  beeu  given  in  the  payment  of  dividends  ;  but,  ujider  ^n^ 
ex£ress_agTeernent,  a  preferred  shareholder  may  be  entitled  to  with- 
draw the  amount  of  his  shares  before  the  other  shareholders  can  take 
anything.  The  rights  of  the  preferred  member  are  thus  assimilated 
in  many  respects~to~those  of  a  cifiditai-.  1  Morawetz  on  Corporations, 
2a^."s.  461. 

1  "There  is  a  sense  in  which  every  shareholder  is  a  creditor  of  the  corporation  to  the 
extent  of  his  contribution  to  the  capital  stock.  In  that  sense  every  corporation  includes  its 
capital  stock  among  its  liabilities.  But  that  creditor  relation  is  one  which  exists  only 
between  the  corporation  and  its  shareholders.  It  is  a  liability  which  is  postponed  to  every 
other  liability,  and_rio  part_oXthe  capital  stock  can  be  lawfully  returned  to  the  stockholders 
until  all  debts^^arejSl^pr  provided  for."  Lurton,  J.,  in  Hamlin  v.  Toledo,  ^c,  R.  Co., 
A.  D.  'l89Y,  T8  Federal  Reporter,  664,  p.  671.  —Ed. 


.^ 


612  DUNCUFT   V.    ALBKECHT. 


CHAPTER  XVI. 

TRANSFER  OF  SHARES. 


DUNCUFT  V.   ALBRECHT.      . 

1841.     \2Simons,\m^  \r^ 

Bill  in  equity,  praying  that  defendant  be  decreed  to  specificall}'  per- 
form an  oral  contract  for  the  sale  to  the  plaintiff  of  shares  in  a  railway 
company. 

Defendant  demurred  to  the  bill,  for  want  of  equity. 
j      G.  Michards^  and  Myloie,  in  support  of  the  demurrer. 

Secondly  :  the  Court  will  not  enforce  the  agreement  in  this  case  ;  for 
shares  in  a  railway  company,  fall  within  the  description  of  goods,  wares 
and  merchandizes;  and,  by  the  17th  section  of  the  Statute  of  Frauds 
(29  Car.  2,  c.  3)  it  is  enacted  that  no  contract  for  the  sale  of  any  goods, 
wares  and  merchandizes,  for  the  price  of  10/.  or  upwards,  shall  be  al- 
lowed to  be  good,  except  the  buyer  shall  accept  part  of  the  goods  so 
sold  and  actually  receive  the  same,  or  give  something  in  earnest  to  bind 
the  bargain  or  in  part  of  payment,  or  that  some  note  or  memorandum 
in  writing  of  the  said  bargain,  be  made  and  signed  b}'  the  parties  to  be 
charged  by  such  contract,  or  their  agents  thereunto  lawfully  authorized. 
In  this  case,  none  of  those  requisites  has  been  complied  with.  Shares 
in  a  public  company,  have  been  held  to  be  goods,  within  the  purview 
of  the  72d  section  of  the  Bankrupt  Act  (6  Geo.  4,  c.  16).  Cooper  v. 
Ehton;  ^  Smith  v.  Sarman;  ^  Mussell  v.  Cooke.'^  All  that  the  case 
of  Bradley  v.  Iloldstoorth  ^  decides,  is  that  railway  shares  are  not  an 
interest  in  or  concerning  lands,  tenements  or  hereditaments,  and,  there- 
fore, not  within  the  4th  section  of  the  statute. 

Knight  Bruce,  and  Piggott,  appeared  in  support  of  the  bill,  but 

1  Statement  abridged.  Part  of  argument  omitted.  Only  so  much  of  the  opinioa 
is  given  as  relates  to  a  single  point.  —  Ed. 

2  7  T.  R.  14. 

»  9  Barn.  &  Cress.  561.     See  the  Judgment  of  Litllcdale,  J.,  p.  571. 
*  Free.  Ch.  .533.  »  3  Mees.  &  Wels.  422. 


TISDALE   V.   IIAEPJS. 


G13 


The  Vice  Chancellor  [Shadwell],  without  hearing  them,  said  : 
I  do  not  feel  any  difficulty  about  this  case  ;  because  I  think  that  the 
verbal  agreement,  as  it  is  stated,  is  quite  sufficient. 

In  my  opinion  tliis  is  a  case  to  which  the  17th  section  of  the  Statute 
of  Frauds  does  not  apph' ;  because  it  is  impressed  upon  m}'  mind  that, 
in  the  decisions  which  have  been  made  with  respect  to  the  17th  section, 
it  has  been  held  to  apply  only  to  goods,  wares  and  merchandizes  which 
are  capable  of  being  in  part  delivered.  If  there  is  an  agreement  to  sell 
a  quantity  of  tallow  or  of  hemp,  you  may  deliver  a  part ;  but  the  deliv- 
ery of  a  part  is  not  a  transaction  applicable,  as  I  apprehend,  to  such  a 
subject  as  railway  shares.  The}'  have  been  decided  not  to  be  land. 
They  have  been  decided  to  be,  in_effect,  personal  estate^;  but  nqt^ger- 
sonal  esfateoTthe  quality  ofgoods,  wares  and^jnerchandizes  within  the 
meauTng  of  the^TTtlTsection. 


h 


Then  there  is  nothing,  as  I  understand,  either  in  the  Statute  of  Frauds 
or  in  the  law  of  this  Court,  which  prevents  the  execution  of  such  an 
agreement  as  is  here  stated :  and,  though  it  may  be  true  that  the  Plain- 
tiff has  asked  more  than  this  Court  would  give  or  might  give  under  cer- 
tain circumstances  ;  my  opinion  is  that  he  has  stated  quite  enough  to  show 
that  he  is  entitled  to  some  relief :  ^  and,  therefore,  the  demurrer  must  be 
overruled.^ 


TISDALE  V.   HARRIS. 

1838.     20  Pickering  {Mass.),  9.3 

Assumpsit  on  an  oral  agreement  of  the  defendant,  to  sell  to  the 
plaintiff  two  hundred  shares,  with  all  the  earnings  thereon,  in  a  Con- 
necticut corporation. 

Verdict  for  plaintiff.  Motion  to  set  aside  verdict.  One  ground  of 
the  motion  was,  because  the  contract  set  up  was  within  the  statute  of 
frauds. 

Bartlett  and  F.  C.  Loring,  for  the  motion. 

C.  P.  Curtis,  and  B.  R.  Curtis,  contra. 

Shaw,  C.  J.  [After  deciding  another  question.]  But  by  far  the  most 
important  question  in  the  case,  arises  on  the  objection,  that  the  case  is 

1  See  Hibhlewhite  v.  M 'Marine,  6  Mees.  &  Welsh.  200  ;  Adderhy  v.  Dixon,  1  Sim 
&  Stu.  607  ;  Ex  parte  The  Lancaster  Canal  Company,  Montagu's  B.  C.  116  ;  and  Hum 
He  V.  Mitchell,  2  Railway  Cases,  70;  S.  C.  11  Ad.  &  Ell.  205. 

2  On  the  23d  of  July,  1841,  The  Lord  Chancellor  affirmed  the  decision  in  the  case 
ahove  reported. 

3  Statement  abridged.     Citations  of  counsel  omitted.  —  Ed. 


o^ 


^ 


614  TISDALE   V.   H ARRIS. 

within  the  statute  of  frauds.  This  statute,  which  is  copied  precisel}' 
from  the  English  statute,  is  as  follows  :  "  No  contract  for  the  sale  of 
goods,  wares  or  merchandise  for  the  price  of  ten  pounds  ($33.33)  or 
more,  shall  be  allowed  to  be  good,  except  the  purchaser  shall  accept 
part  of  the  goods  so  sold,  and  actuall}^  receive  the  same  or  give  some- 
thing in  earnest  to  bind  the  bargain,  or  in  part  payment,  or  that  some 
■ooteor  memorandum  in  writing  of  the  said  bargain,  be  made  and  signed 
bj^  the  parties  to  be  charged  by  such  contract,  or  their  agent,  thereunto 
lawfully  authorized." 

This  being  a  contract  for  the  sale  of  shares  in  an  incorporated  com- 
pany in  a  neighboring  State,  for  the  price  of  more  than  ten  pounds,  and 
no  part  having  been  delivered,  and  no  purchase  money  or  earnest  paid, 
the  question  is,  whether  it  can  be  allowed  to  be  good,  without  a  note  or 
memorandum  in  writing,  signed  b}-  the  party  to  be  charged  with  it. 
This  depends  upon  the  question,  whether  such  shares  are  goods,  wares 
or  merchandise  within  the  true  meaning  of  the  statute. 

It  is  somewhat  remarkable  that  this  question,  arising  on  the  /St.  29 
Car,  2,  in  the  same  terms,  which  ours  has  copied,  has  not  been  defini- 
tively settled  in  England.  In  the  case  of  Pickering  v.  Applehy.,  Com. 
Rep.  354,  the  case  was  directly  and  fully  argued,  before  the  twelve 
judges,  who  were  equally'  divided  upon  it.  But  in  several  other  cases 
afterwards  determined  in  Chancery,  the  better  opinion  seemed  to  be, 
that  shares  in  incorporated  companies,  were  within  the  statute,  as  goods 
or  merchandise.  Mussell  v.  Cooke,  Prec.  in  Ch.  538  ;  Crull  v.  Dod- 
soti^  Sel.  Cas.  in  Ch.  41. 

We  are  inclined  to  the  opinion,  that  the  weight  of  authorities,  in  mod- 
ern times,  is,  that  contracts  for  the  sale  of  stocks  and  shares  in  incor- 
porated companies,  for  more  than  ten  pounds,  are  not  valid,  unless 
there  has  been  a  note  or  memorandum  in  writing,  or  earnest  or  part 
payment.  4  Wheaton,  89,  note  ;  3  Starkie  on  Evid.  4th  Amer.  Edit. 
608. 

Supposing  this  a  new  question  now  for  the  first  time  calling  for  a 
construction  of  the  statute,  the  Court  are  of  opinion  that  as  well  by 
its  terms,  as  its  general  policy,  stocks  are  fairl}'  within  its  operation. 
The  words  "goods"  and  "  merchandise,"  are  both  of  very  large  sig- 
nification. Hona,  as  used  in  the  civil  law,  is  almost  as  extensive  as 
personal  property  itself,  and  in  many  respects  it  has  nearly  as  large  a 
signification  in  the  common  law.  The  word  "merchandise"  also,  in- 
cluding in  general  objects  of  traflfic  and  commerce,  is  broad  enough  to 
include  stocks  or  shares  in  incorporated  companies. 

There  are  man^'  cases  indeed  in  which  it  has  been  held  in  Elngland, 
that  buying  and  selling  stocks  did  not  subject  a  person  to  the  operation 
of  the  bankrupt  laws,  and  thence  it  has  been  argued  that  the}'  cannot 
be  considered  as  merchandise,  because  bankruptcy  extends  to  persons 
using  the  trade  of  merchandise.  But  it  must  be  recollected  that  the 
bankrupt  acts  were  deemed  to  be  highlj^  penal,  and  coercive,  and 
tended  to  deprive  a  man  in  trade  of  all  his  property.     But  most  joint 


TISDALE   V.   HARRIS. 


615 


^ 


\/fi 


> 


stock  companies  were  founded  on  the  hypothesis  at  least,  that  most  of 
the  shareholders  took  shares  as  an  investment  and  not  as  an  object  of 
traffic  ;  and  the  construction  in  question  only  decided,  that  by  taking 
and  holding  such  shares  merely  as  an  investment,  a  man  should  not  be 
deemed  a  merchant  so  as  to  subject  himself  to  the  highl}'  coercive  pro- 
cess of  the  bankrupt  laws.  These  cases,  therefore,  do  not  bear  much 
on  the  general  question. 

The  main  argument  relied  upon,  hy  those  who  contend  that  shares 
are  not  within  the  statute,  is  this.     That  statute  provides  that  such  con- 
tract shall  not  be  good  «S:c.,  among  other  things,  except  the  purchaser  I /^''[^  "1^ 
shall  accept  part  of  the  goods.     From  this  it  is  argued,  that  by  neces-li^r     ^r^ 
sary  implication,  the  statute  applies  onl}'  to  goods,  of  which  part  may  '\r    jti\ 
be  delivered.     This  seems  however  to  be  rather  a  narrow  and  forced     |v^ 
construction.     The  provision  is  general,  that  no  contract  for  the  sale 
of  goods  &c.  shall  be  allowed  to  be  good.     The  exception  is,  when  part 
are  delivered  ;  but  if  part  cannot  be  delivered,  then  the  exception  can- 
not exist  to  take  the  case  out  of  the  general  prohibition.     The  provision 
extended  to  a  great  variety  of  objects,  and  the  exception  may  well  be 
construed  to  apply  only  to  such  of  those  objects  to  which  it  is  appli- 
cable, without  affecting  others,  to  which  from  their  nature  it  cannot 
apply. 

There  is  nothing  in  the  nature  of  stocks,  or  shares  in  companies,  which 
in  reason  or  sound  policy  should  exempt  contracts  in  respect  to  them 
from  those  reasonable  restrictions,  designed  by  the  statute  to  prevent 
frauds  in  the  sale  of  other  commodities.  On  the  contrary,  these  com-i 
panics  have  become  so  numerous,  so  large  an  amount  of  the  property  of 
the  communit}'  is  now  invested  in  them,  and  as  the  ordinary  indicia  of 
property,  arising  from  deliver}-  and  possession,  cannot  take  place,  there 
seems  to  be  peculiar  reason  for  extending  the  provisions  of  this  statute/ 
to  them.  As  the}'  ma}'  properly  be  included  under  the  term  goods,  as 
they  are  within  the  reason  and  policy  of  the  act,  the  Court  are  of 
opinion,  that  a  contract  for  the  sale  of  shares,  in  the  absence  of  the 
other  requisites,  must  be  proved  by  some  note  or  memorandum  in  writ- 
ing ;  and  as  there  was  no  such  memorandum  in  writing,  in  the  present 
case,  the  plaintiff  is  not  entitled  to  maintain  this  action.  As  to  the  argu- 
ment, that  here  was  a  part  performance,  by  a  payment  of  the  money  on 
one  side,  and  the  delivery  of  the  certificate  on  the  other,  these  acts  took 
place  after  this  action  was  brought,  and  cannot  therefore  be  relied  upon 
to  show  a  cause  of  action  when  the  action  was  commenced. 

Verdict  set  aside  and  plaintiff  nonsint. 


Y 


\ 


i^.. 


^y^^^ 


WHITE   V,    SALISBURY, 


WHITE,  Executor,  v.  SALIS 

1862.     33  Missouri,  150.1 


^i^E  appellant  sued  the  respondents  upon  the  following  instrument 
JT^  oi  writing : 


^  "  We,  the  undersigned,  agree  to  pa}'  and  deliver  to  William  White, 
or  order,  seven  hundred  and  seventy-seven  dollars  and  sixteen  and 
thpe-fourths  cents  in  railroad  stock  of  the  North  Missouri  Railroad 
ompany,  the  same  to  be  delivered  to  him  on  or  before  the  fifteentb 
day  of  July  next,  which  amount  is  understood  to  be  seven  shares  and 
^,r^77f  of  a  share.  The  above  shares  are  given  in  discharge  of  a  note 
given  by  L.  W.  Salisbury  to  William  White  for  6616.72,  and  dated 
February  21,  1853.  L.  W.  Salisbury,  H.  D.  Brown.  Test:  W.  G. 
Shackelford.     Dated  22d  June,  1857." 

Plaintiff  averred  in  his  petition  that  the  defendants  had  failed  to 
comply  with  their  contract,  in  not  delivering  the  railroad  stock  on  or 
before  the  fifteenth  day  of  July,  1857,  the  time  agreed  upon  for  its 

the  amount  of  the  consideration 


o^ 


AA 


h 


[a^        \  delivery,   and  claimed  damages  to 

^)r^ ^    advanced  by  White  to  Salisbury  &  Brown,  being  the  note  he  (White) 
held  on  Salisbury  for  the  sum  of  $616.72. 

The  answer  of  the  defendants  denied  that  plaintiff  was  entitled  to 
damages,  as  claimed,  or  in  any  sum  ;  that  defendants  did,  in  compli. 
ance  with  the  terms  of  their  contract,  on  the  fifteenth  day  of  July,  1857, 
Lave  the  requisite  number  of  shares  entered  in  the  name  of  William 
White  upon  the  books  of  the  North  Missouri  Railroad  Compan}-. 

This  cause  was  submitted  to  the  court  without  a  jury,  and  the  follow- 
ing  declarations  of  law  were  prayed  by  plaintiff  : 

1.  That,  under  the  terms  of  the  contract  read  in  evidence  between  the 
^olaintiff's  testator  and  defendants,  the  defendants  were  bound  to  deliver 
on  or  before  the  fifteenth  day  of  July,  1857,  a  certificate  of  the  stock 
contracted  to  be  delivered,  and  that  a  transfer  upon  the  books  of  the 
compan}',  on  the  fifteenth  day  of  July,  1857,  or  at  any  previous  time, 
without  any  notice  to  White,  is  not  in  law  a  sufficient  deliver}'  under 
said  contract. 

The  Court  refused  tlie  instructions,  and  gave  a  judgment  for  the 
defendants. 

Jones  &  Ilayden,  for  appellant. 

I.  That  under  the  contract  a  transfer  or  entr\'  upon  the  books  of  the 
company  of  the  amount  of  stock  contracted  to  be  delivered  was  no 
delivery,  either  actual  or  symhoUcal. 

[Remainder  of  argument  omitted.] 

Sharp  tjb  Broadhead,  for  respondents. 

I.  The  act  of  respondent  Salisbury,  in  procuring  a  transfer  of  the 
imount  of  the  stock  called  for  bv  the  contract  on  the  books  of  the 


1  Part  of  case  omitted.  —  Ed. 


WHITE   V.    SALISBURY.  CI 7 

North  Missouri  Railroad  Company,  is  a  substantial  compliance  with 
the  contract.  It  may  be  safely  stated,  that  upon  an  agreement  for  the 
sale  of  personal  chattels,  where  the  property  is  in  its  nature  intangible 
and  incapable  of  manual  or  actual  deliver}',  that  if  the  vendor,  b^-  his 
act,  passes  the  title  to  the  vendee  and  puts  it  out  of  his  power  to  recall 
it,  that  it  amounts  to  a  deliver}'.  (Acts  of  1853,  pp.  325  &  326,  sec.  8.) 
This  was  done  by  act  of  the  company,  and  the  mere  fact  that  the  new 
certificates  of  stock  were  handed  to  defendant  did  not  vest  him  with 
any  authority  or  control  over  them  ;  they  were  issued  to  "White,  and 
White  alone  could  control  the  stock  or  re-assign  it.  (5  W.  &  Serg. 
p.  106.) 

[Remainder  of  ai-gument  omitted.] 

Drydek,  J.     The  defendants,  b}'  the  contract  sued  on,  agreed  to 
deliver  to  the  plaintiff's  testator,  on  or  before  the  fifteenth  of  July,  1857, 
seven  77-100  shares  of  stock  in  the  North  Missouri  Railroad  Company. 
The  main  ground  of  controversy  in  the  court  below  was  as  to  what  was^ 
required  to  be  done  by  the  defendants  to  comply  with  their  engage-l 
nient,  the  plaintiff  maintaining  that  the  delivery  of  certificates  of  stocla 
to  his  testator  was  essential ;  while  it  was  insisted  b}'  the  defendantsA 
that  a  transfer  of  the  stock  to  him  on  the  books  of  the  compan}'  wasj 
what  was  necessary,  and  all  that  was  requisite.     We  think  the  defend-| 
ant's  theory  the  correct  one.     The  end  the  parties  intended  to  accom- 
plish waa_to_confex  upoiijthejxhiint^^'^  testator  the  title  ancLQwi^ership 
ofthe  stock  contracted  for.     Tlie  delivery  of  the  certificates  from  one 
party  to  the  other  wouFd  leave_the^  title  to^e  stock  just  where  it  was 
before.     The  onT}-  eflfectual  mode  of  Jiansferring  Jlie  title  was  b}^ 
trans^Ton^the  books  of  tlie  company,  and  b}'  that  means  only. 

The  Eighth  section  of  the  amended  charter  of  tlieT^sortir  Missouri 
Railroad  Compan}',  (Sess.  Acts  of  1853,  p.  325-6,)  provides  that,  "  when 
payment  for  the  stock  of  any  subscriber  or  stockholder  shall  be  fully 
made,  the  president  and  directors  shall  deliver  one  or  more  certificates 
of  such  stock,  signed  by  the  president,  and  countersigned  by  the  treas- 
urer, under  the  seal  of  the  company,  to  such  subscriber  or  stockholder, 
for  the  number  of  shares  belonging  to  him  or  her,  which  certificates 
shall  be  transferable  in  a  book  to  be  kept  for  that  purpose  by  the  com- 
pany, and,  when  transferred,  shall  be  delivered  up  to  the  president  and 
directors  and  be  cancelled,  and  new  certificates  be  issued  to  the  as- 
signee." In  the  Agricultural  Bank  v.  Burr,  11  Shepley  (Mc.)  R.  2C3, 
shares  of  bank  stock  had  been  transferred  to  the  defendant  on  the  books 
of  the  bank,  but  no  certificate  of  stock  had  been  issued  to  him.  The 
question  arose  whether  he  was  a  stockholder.  Mr.  Justice  Sheple}-,  in 
delivering  the  opinion  of  the  court,  saj's,  "  a  person  becomes  legally 
entitled  to  shares  so  transferred  to  him  upon  the  books  of  the  bank. 
The  certificate  is  but  additional  evidence  of  his  titles."  Same  Bank  v. 
Wilson  et  al.  273,  is  to  the  same  effect.  (Ellis  v.  Essex  Merrimack 
Bridge  Co.  2  Pick.  243  ;  Chester  Glass  Co.  v.  Dewey,  16  Mass.  94.) 

[Remainder  of  opinion  omitted.] 

Judgment  affirmed* 


A 


«» 


>.<^A 


boatmen's  ins.  and  trust  CO.  V.   ABLE. 


t^, 


C/ 

^ 


y^ 


^  ^Jf     >^     ^/vBbATMEN'S   INSURANCE  AND   TRUST   CO.  v.  ABLE. 

jU^  .    J-^'^^^^^     Jr'^  jy  1871.     48  Missouri,  136  ^ 

/  •      ^  ^^     ^  ^^  kj 
^"^  ^'      ijJ^  ^        ixEjcrob,  to  St.  Louis  Circuit  Court. 

^lY  <    Isy     ^P  Glover  &  Shepley^  for  plaintiff  in  error. 
\iijJ    jy^    Sharp  t&  Broadhead.  for  defendants  in  error. 

^ tj>^-^    Bliss,  J.     Defendants  were  indebted  to  the  plaintiff  by  a  promissory 

atJ^       note  for  $4,000  and  Able,  the  principal  upon  the  note,  owned  stock  in 

"n  (5c''     the  company.     Upon  maturity  of  the  note,  defendant  Able  proposed 

to  sell  the  plaintiff  his  stock  in  part  payment,  and  to  his  proposition 

Received  the  following  reply  : 

"Dear  Sir:  I  am  instructed  to  receive  your  eighty  shares  of  Boat- 
men's Insurance  stock  at  fifteen  dollars  per  share,  and  credit  the  amount 
on  30ur  new  note  for  $4,000  payable  at  thirty  days  after  date.  If  the 
above  proposition  meets  your  views,  a'Ou  will  please  send  your  note  and 
your  stock  certificate  by  your  boy,  and  step  in  yourself  and  transfer 
the  same  on  the  books  of  the  compan3^ 

Yours  respectfully,  Edw.  Brooks,  Sec'y. 

The  new  note  was  sent  in  without  the  certificate,  and  a  few  days 

certificate  was  mislaid,  but 
^in/^  g^  that  he  would  look  it  up,  and  signed  upon  the  stock-book  of  plaintiff 
lA^    e^  yC/' '  A      the  usual  blank  transfer  of  his  stock,  to  be  filled  up  by  plaintiffs  ofii- 
cers.     Not  being  able  to  find  his  certificate,  he  again  calls  and  asks 
-tnat  the  price  of  the  stock  be  indorsed  upon  the  note  without  its  pro- 
duction ;  but  plaintiff's  secretary  refused  to  make  the  indorsement  unless 
Ir.  Able  would  obtain  a  new  certificate  and  assign  it  by  complying  with 
^      ii^  terms  of  one  of  the  company's  by-laws.     This  Mr.  Able  would  not 
\,y^do.     The  new  note  went  to  protest,  and  this  suit  is  brought  to  recover 


^jjH  *^    ^  p    ^^"^  ILe  new  note  was  sent  ui  wittiout  tne 

l'^*^ijy     .Af^-^  after,  Mr.  Able  called  and  said  his  stock 
' .     ^^^in/^ (^  that  he  would  look  it  up,  and  signed  upon 


its  amount.  The  answer  sets  up  part  pa3'ment  b}'  a  transfer  of  the  stock, 
and  the  reply  denies  the  transfer.  The  onh'  question  of  fact  put  in 
issue  was  whether  the  stock  was  actual!}'  transferred  or  not ;  and  the 
court,  finding  the  affirmative  of  that  issue,  gave  judgment  for  the  bal- 
ance due  on  the  note.  Even  if  we  thought  that  the  preponderance  of 
evidence  showed  that  plaintiffs  officers  took  the  assignment  condition- 
ally, and  never  intended  to  receive  the  stock  unless  the  certificate  was 
given  up,  and  hence  that  it  was  not  in  fact  transferred,  yet  the  court 
below  found  otherwise,  and  that  finding  we  cannot  review,  but  can  only 
inquire  whether  the  court  was  justified  in  refusing  the  following  declara- 
tion of  law  asked  by  plaintiff:  "  If  the  court  find  that  plainfifl'  agreed 
with  defendant  Able  to  take  eighty  shares  of  stock,  standing  on  their 
books  in  his  name,  and  credit  81,200  on  tlie  debt  in  suit,  without  know- 
ing said  Able  could  not  produce  his  certificate  for  said  shares  for  cnn- 
cellation,  plaintiffs  were  not  bound  to  enter  said  credit  without  such 

1  Arguments  oiuiLted.  —  Ed. 


boatmen's   ins.   and   trust   CO.   V.   ABLE.  C19 

production  of  said  certificate  for  cancellation  ;  and  if  said  Able  would 
neither  produce  said  certificate  for  cancellation  nor  take  steps  provided 
by  plaintiff's  by-laws  to  procure  another  certificate  in  case  of  loss,  the 
verdict  should  be  for  plaintitfs." 

This  declaration,  if  made,  would  have  been  defective  in  ignoring 
several  facts,  among  which  was  the  actual  assignment  upon  the  com- 
pany's books ;  nor  does  it  seem  to  have  been  drawn  with  a  careful 
reference  to  the  issue.  The  question  was  transfer  or  no  transfer, 
purchase  or  no  purchase,  and  it  only  touches  that  question  argumenta- 
tively.  With  reference  to  this  issue,  the  scope  and  effect  of  the  instruc-  ^ 
tion  must  be  understood  to  be  that  there  could  have  been  no  transfer 
of  the  stock  without  a  surrender  of  the  stock  certificate,  unless  such 
surrender  was  waived  by  the  purchaser,  and  that  this  stock  was  not  in 
fact  transferred  for  want  of  compliance  with  the  requirements  of  the 
company's  by-laws  in  obtaining  a  new  certificate  for  surrender.  Had 
the  declaration  predicated  the  agreement  to  purchase  upon  such  surren- 
der, as  a  condition  of  receiving  the  stock,  it  would  have  been  so  far 
clearly  right,  for  the  plaintiff's  officers  had  a  right  to  affix  an}-  condition 
to  their  agreement  they  saw  fit.  They  certainly  had  a  right  to  insist 
that  the  outstanding  stock  certificate  should  be  given  up,  and  to  refuse 
to  receive  a  transfer  until  it  was  done.  But  the  declaration  does  not 
do  that ;  and  if  the  construction  I  have  given  it  be  the  correct  one,  the 
plaintiff  is  made  to  claim  that  no  credit  should  be  given  for  the  stock, 
although  it  may  have  been  legally  transferred.  We  have,  then,  onh'  to 
consider  whether  the  transfer  could  have  been  in  fact  made  without 
the  production  of  the  certificate,  and  not  whether  defendant  Able  failed 
to  comply  with  a  reasonable  condition  in  an  agreement  to  purchase. 
Upon  this  point  there  can  be  no  doubt.  Plaintiffs'  charter,  approved 
January  26,  1864  (§  8),  expressly  provides  that  the  stock  shall  "be 
assignable  only  on  the  books  of  the  company,"  and  thus  adopts  the 
rule  applicable  to  the  transfer  of  corporation  stock,  whether  expressed 
in  the  charter  or  not,  with  its  corollary  that  such  assignment  upon  the 
books  passes  the  title.  (White,  Ex'r,  v.  Salisbury,  33  Mo.  150.)  It  is 
also  a  recognized  rule  in  the  sale  of  stock  that  an  assignment  or  trans- 
fer of  a  stock  certificate  will  not  of  itself  pass  the  title  to  the  stock, 
although,  like  an  agreement  in  writing  to  sell  land,  it  gives  an  equity, 
and  the  assignee  of  the  certificate  can  compel  a  transfer  upon  the  books 
except  as  against  a  bona  fide  purchaser  who  has  acquired  a  title  by 
such  transfer.  (Sargent  v.  Franklin  Ins.  Co.,  8  Pick.  90 ;  Sargent  v. 
Essex  M.  R.  C,  9  Pick.  202  ;  Com.  Bank  v.  Cartwright,  22  Wend. 
348  ;  Chouteau,  etc.,  v.  Harris,  20  Mo.  382.) 

The  fear  that  there  might  be  such  outstanding  equity  that  would  give 
trouble  to  the  purchaser,  would  be  a  very  good  reason  on  his  part  for 
insisting,  as  a  condition  of  purchase,  that  the  certificate  be  surrendered. 
But  when  no  such  condition  was  insisted  orij  and  lUiJlransfer  was  in 
ft,ct_made,  such  fear  would  be  no  excuse  for  refusing  payment  The 
purchaser  in  that  case  would  assume  the  risk  of  all  the  trouble  that 


C!_ 


A 


f|\  jjr '  ^^  o<?      ^  620C:T   »>^  *      commonwealth  v.  crompton. 


OsS. 


^ght  arise  fr6m  the  outstanding  certificate.  The  court  below  found 
vthis  fact  against  the  plaintiff,  and,  having  so  found  it,  committed  no 
error  fn  refusing  the  declaration  of  law  he  sought. 

The  judgment  will   be   affirmed.     Judge  Wagner   concurs^(^lB5ge 
fCurrier  not  sitting. 


s^ii^  ^  ,.i^ 


^ 


OMMONWEALTH  v.   CROMPT' 


ir^   ^J  t^    h..aJ^  ^  J^  1890.     137  Pa.  5fa«e,  138.1 

-^  ^  i^  ^  H/^    \-      In  the  matter  of  the  escheat  of  the  estate  of  Alex^j^er  McNaugh- 

<^^y^J  ^0°'  t^eceased.  /^^'>, 

jij    '         i^     >^^      Issue  between  the  Commonwealth  and  Mrs.  Susan  Crompton,  admin- 

{    1l        ^"■"^^'^         istratrix.     McNaughton  died  intestate,  unmarried,  without  issue  ;  and, 

^       i         ,jy^       *,  so  far  as  known,  leaving  no  kindred.     Proceedings  for  an  escheat  were 

/    f-*^  ^     ^y^      instituted  in  behalf  of  the  Commonwealth.     Mrs.  Crompton  introduced 

%   ^,f^  J^     ^  evidence  that  McNaughton  had  boarded  in  her  family  for  man}-  years, 

9f '^      ^^  2f}  that  she  did  his  washing  and  mending,  and  that  he  said  he  would  pay 

(r*^"    H/^.,^  "*   r-j^hev  some  day  ;  also  that,  some  months  before  his  death,  he  gave  her  a 

j<y  '  '  X^ 'jj^'^^^   box,  telUng  her  it  would  be  of  some  use  to  her  after  he  died.     She  took 

l^*A         ''g/IP^     ^^®  y^O's.,  but  did  not  open  it  until  after  his  death,  when  it  was  found  to 

nf^  ^j^  contain  a  United  States  bond,  and  certificates  of  various  shares  of  rail- 

A^'  road  stock  [standing  in  the  name  of  McNaughton,  and  without  any 

^^    ^^  *  P^transfer  signed  by  him]. 

-y"   i»  T  r^ly^  "^^^  j^^'^'  ^^^^  instructed  that  if  McNaughton  did  give  her  the  prop- 

f  j<Mi       <    A    X       ^^^y  ill  t^®  box  in  the  manner  testified  to,  or  any  other  manner,  the 
'  ^  *^     %-A        '^verdict  must  be  for  the  defendant. 

tV    ^       V'  Judgment  having  been  rendered  on  the  verdict,  the  plaintiff  appealed. 

^^       ^*\  Samuel  Gormley  {John  E.  Faunce  and  Frederick  Gaston^  with  him), 

i^y    i/A  for  appellant. 

1^    »    7^  fT.  Henry  Mclntire  and  F.  Carroll  Brewster,  for  appellee. 

i'    ]^     .  *i\IcCoLLUM,  J.     [After  deciding  other  points.]     A  gift  needs  no  con- 

(\.        r  sideration  to  support  it,  yet  in  the  present  case  there  was  a  valuable  one 

acknowledged  by  the  donor,  and  impelling  him  to  the  action  which  is  the 
subject  of  this  controversy.  For  twenty-one  years  he  lived  in  the  fam- 
ily  of  the  donee  as  a  boarder,  and  had  his  washing  and  mending  done 
there,  and  for  these  he  promised  to  pay  her.  Lie  was  in  poor  health 
the  last  four  years  of  his  life,  and  required  and  received  from  her  and 
her  children  considerate  care  and  attention.  lie  often  manifested 
grateful  appreciation  of  these  services,  and  exjjressed  a  purpose  to 
make  compensation  for  them.  In  execution  of  this  purpose,  he  de- 
livered to  her  the  box  containing  the  government  bond  and  the  ccr- 

*  Statement  abridged.    Arguments  and  part  of  opinion  oinittcd.  —  Ed. 


r 


COMMONWEALTH  V.   CROMPTON.  621 

tificates  of  railroad  stock.  It  is  apparent  from  tlie  evidence  that  he 
intended  to  make  an  absolute  gift  of  these  securities  to  her,  and  that 
he  supposed  the  delivery,  and  the  words  accompanying  it,  invested  her 
with  the  exclusive  control  and  ownership  of  them.  There  remains  for 
consideration  the  question  whether  the  failure  to  make  a  formal  written 
transfer  of  the  securities  to  the  donee  will  defeat  the  purpose  of  the 
donor  and  give  them  to  the  commonwealth  as  an  escheat. 

It  is  now  settled  that  a  valid  gift  of  non-negotiable  securities  may  be 
ma^le  by  delivery^of  Jhemjo  the  done_e  without  assignment^rjndorse; 
ment  in  writiiig.  This  principle  has  been  applied  to  notes,  bonds,  stock 
and  deposit  certificates,  and  life-insurance  policies.  In  Pennsylvania, 
Wells  V.  Tucker,  3  Binn.  36G  ;  Licey  v.  Lice}-,  7  Pa.  251,  and  Madeira's 
App.,  17  W.N.  202,  are  illustrations  of  and  rest  upon  it,  and  it  has  dis- 
tinct recognition  and  approval  in  other  deliverances  of  this  court.  In 
Walsh's  App.,  122  Pa.  177,  we  refused  to  extend  it  to  a  depositor's 
bank-book,  but  acknowledged  "that,  in  the  case  of  notes  and  other 
instruments  payable  to  order,  a  deliver}-  accompanied  b}-  words  import- 
ing a  present  absolute  gift  would  invest  the  donee  with  the  ownership 
of  the  fund."  The  bank-book  was  regarded  as  on  the  same  footino"  as 
a  book  of  original  entries,  and  the  mere  delivery  of  it  to  the  donee  as 
insufficient  to  pass  any  title  to  the  accounts  appearing  ujjon  it.  But 
"  a  certificate  of  deposit  is  a  subsisting  chose  in  action,  and  represents 
the  fund  it  describes,  as  in  case  of  notes,  bonds,  and  other  securities, 
so  that  delivery  of  it  as  a  gift  constitutes  an  equitable  assignment  of 
the  mone}'  for  which  it  calls:"  Basket  v.  Hassel,  107  U.  S.  602.  In 
the  case  last  cited,  Mr.  Justice  Matthews,  after  an  exhaustive  exami- 
nation of  the  authorities,  said  :  ''The  point  which  is  made  clear  by  this 
review  of  the  decisions  on  the  subject,  as  to  the  nature  and  effect  of  a 
delivery  of  a  chose  in  action,  is,  as  we  think,  that  the  instrument  or 
document  must  be  the  evidence  of  a  subsisting  obligation,  and  be  deliv- 
ered to  the  donee  so  as  to  vest  him  with  an  equitable  title  to  the  fund 
it  represents  and  to  divest  the  donor  of  all  present  control  and  dominion 
over  it,  absoli^tel}^  and  irrevocabl}-,  in  case  of  a  gift  inter  vivos,  but 
upon  the  recognised  conditions  subsequent,  in  case  of  a  gift  mortis 
causa." 

The^hares  of  stock^re_cboses  jn  a^yon,  and_the  certificates  evidence 
of  Ihe  title  to  them  :  Slaj^maker  v.  Bank,  10  Pa.  373.  Why  may  not  a 
dcjiyer}'  of  the  certificates,  coupled  with  words  of^bsolute  and  present 
gift,  invest  the  donee  with  an  equitable  title  to  the  stock,  which  the 
donox^or  a  -v^plunteer  cannot  successfully  assail?  A  stockholder  may 
clothe^  another  with  the  complete  equitable  title  to  his  stock  without 
compliance  with  the  forms  printed  by  the  corporation :  United  States 
v.  Vaughan,  3  Binn.  394  ;  Commonwealth  v.  Watmough,  6  Wh.  117  ; 
Building  Ass'n  v.  Sendmeyer,  50  Pa.  67;  Finney's  App.,  59  Pa.  398  ; 
Water-Pipe  Co.  v.  Kitchenman,  108  Pa.  630. 

As  the  gift  in  question  was  supported  by  a  valuable  consideration, 
and  the  instruments  which  represented  the  ownership  of  the  donor  ia 


622 


MATTHEWS   V.   HOAGLAND. 


;>-^ 


^.^ 


"-'€ 


the  subject-matter  of  the  gift  were  delivered  to  the  donee,  we  think  she 
has  a  title  to  the  securities  which  cannot  be  destroyed  in  a  proceeding 
b}-  the  commonwealth  to  escheat  them. 

^^it*'^'^^\^  V  ,  ^       Judgment  affirmed. 

r"^^ — =/ 


u 


N 


/■'• 


/I 


\cy 


A^ 


A     y^  One 

"^^  P  I  &  Am: 

:^    \     /fflHenrv 


MATTHEWS  ^.'.  HOAGLAND. 

1891.     'i^  New  Jersey  Equity,  Abb)- 


One  question  in  this  case  was  whether  certain  shares  in  the  Camden 
Amboy  R.  R.  Company  were  the  property  of  the  estate  of  the  late 
/jT  >^    1     (j^j^j  Henry  Matthews.     It  was  claimed  on  behalf  of  two  of  his  children  that 
/       ,    (j^  he  gave  these  shares  to  them.     Mrs.  Hoagland,  one  of  the  children, 

l^Q.^    Il         .  testified   in  substance,  that  her  father  handed   the   certificate  of  this 
('       fp'^    1^  stock  to  her  brother,  John  H.  Matthews,  in  her  presence,  telling  him 
4     Jt      ^P-^      (^'-  that  this  was  for  his  sister  and  himself,  and  that  he  (the  father)  wanted 
^  -  IP^         T*^  "^  ^^®  brother  and  sister  to  have  it  whilst  he  was  living. 
^^'^n.  gJ^^  t^^-^^^  3Iartin  L.  Trimmer  and  Charles  A.  Skillman,  for  plaintiff. 
*^^    \^^^^~^ i,'^     t^f^'  N'ewton  Voorhees  and  Albert  D.  Anderson,  for  various  defendants. 
Cj4ieen  v.  C. 


A^ 


\^ 


(y 


A.x^ 


i^ 


These  shares  are  on  the  face  of  the  certificate  in  the  name  of  Henry 

atthews,  and  declared  to  be  "transferable  only  by  him,  or  by  his 
legal  representatives,  on  the  books  of  the  compan}-,  on  the  surrender 
of  this  certificate."  The  certificate  has  on  its  back  a  printed  blank 
assignment  and  power  of  attorney  for  the  transfer  of  the  stock  b}'  the 
record  owner. 

The  provisions  of  charters,  or  of  by-laws,  under  the  statute  {Rev. 
p.  181  §  26),  that  stock  of  the  corporation  shall  be  transferable  only 
on  the  books  of  the  company,  are  held  to  be  intended  merely  for  the 
protection  of  the  company. 

It  is  settled  that  one  in  possession  of  a  certificate  of  stock  in  an 
incorporated  company,  accompanied  by  an  assignment  in  blank,  exe- 
cuted by  the  record  owner,  with  an  irrevocable  power  of  attorne}-, 
authorizing  the  transfer  of  the  stock,  is  presumptively  the  equitable 
owner  of  the  shares,  whose  title  thereto  cannot  be  impeached  if  he  has 
gi^en  value  for  them  without  notice  of  any  intervening  equity.  liof/ers 
v.  New  Jersey  Insurance  Co.,  4  JIalst.  167;  Broadwaij  Bank  v. 
McElrath,  2  JBeas.  24 ;  affirmed  in  Hunterdon  Connty  Batik  v.  JVas' 
sau  Bank,  2  C.  E.  Gr.  496  ;  3fount  Holly  Co.  v.  Ferree,  2  C.  E.  Gr. 
117  ;  Prall  v.  Tilt,  1  Stew.  Eq.  479  ;  Del.  &  All.  B.  B.  v.  Irick,  3  Zab. 
321  ;  State,  Bush,  v.  Warren  F.  Co.,  3  Vr.  439. 


*  The  greater  part  of  the  case  is  omitted.  —  Ed. 


MATTHEWS   V.   HOAGLAND.  623 

The  reason  of  the  rule  is,  that  the  record  owner  has  done  everything 
in  his  power  to  effect  the  transfer,  and  by  such  act  has  assigned  all  in- 
terest he  may  have  had,  and  surrendered  all  indicia  of  ownership  —  as 
to  third  parties,  holders  for  value,  he  is  estopped  from  asserting  owner- 
ship (McNeil  V.  Te)ith  National  Bank,  -iG  N  Y.  325  ;  Williams  v. 
Col.  Bank,  L.  B.  (38  Ch.  Biv.)  388 ;  affirmed  Z.  B.  (lo  A])]).  Cas.) 
267  —  as  to  volunteers,  the  gift  is  complete  and  irrevocable  if  inter 
vivos. 

In  England,  stocks,  shares,  bonds,  debentures  and  other  securities 
which  are  not  assignable  at  law  unless  duly  transferred,  must  be  duly 
transferred,  and  not  merely  assigned  or  covenanted  to  be  transferred, 
to  constitute  a  valid  gift.  Mai/  Fraud.  Conv.  *413  ;  Antrobus  v. 
Smith,  12  Ves.  39;  Dillon  v.  Cojqnn,  4  Myl.  &  C.  647;  Searle  \. 
Laio,  15  Sim.  95.  The  Companies  Clauses  act  of  1845  requires  such 
assignments  to  be  by  deed,  and  to  be  delivered  to  the  officer  of  the 
company,  without  which  formalities  the  legal  title  will  not  pass.  Nan- 
ney  v.  Morgan,  L.  B.  (37  Ch.  Biv.)  346.  The  English  cases  proceed 
on  the  ground  that  the  title  not  having  passed  b}'  a  legal  assignment, 
equity  will  not  interfere  to  enforce  an  equitable  title  of  a  volunteer. 

The  same  is  the  effect  of  the  decisions  in  Maryland,  unless  the  trans- 
fer is  made  complete  in  the  lifetime  of  the  donor,  on  the  ground  that 
the  power  of  attorne}'  does  not  survive  him  {Pennington.  Admr.,  v. 
Gitting's  Exrs.,  2  Gill,  ci'  J.  209  ;  Bait.  Betort  and  Fire  Brick  Co. 
v.  Mali,  65  3Id.  93),  while  in  other  states  the  mere  dehver}'  without 
endorsement  or  written  assignment  of  the  certificate  of  stock  with 
words  of  gift  are  held  sufficient.  Commonioealth  v.  Cronipton  {Pa.), 
20  Atl.  Bep.  417;  Bidden  v.  Thrall  {N.  Y.),  26  N.  E.  Bep.  627; 
Hopkins  v.  Manchester  {B.  I.),  19  Atl.  Bep.  243. 

Smith  V.  Burnet,  8  Steio.  Eq.  314,  in  the  court  of  errors  and  appeals, 
on  the  question  of  gift,  turned  on  the  point  that  there  was  no  such  de- 
livery of  the  stock  as  implied  an  intention,  on 'the  part  of  the  donor,  to 
give  it  absolutely,  or  to  abandon  control  of  its  proceeds. 

The  ordinary,  in  Bilts  v.  Stevenson,  2  C.  E.  Gr.  407  (at  p.  413), 
says :  "  To  constitute  a  perfect  gift  the  donor  must  part  with  the  pos- 
session and  dominion  of  the  propert}'.  And  if  the  thing  given  be  a 
chose  in  action,  the  law  requires  an  assignment,  or  some  equivalent 
instrument,  and  the  transfer  must  be  actually  executed"  —  citing 
2  Kent  Com.  *439.  The  rule,  thus  broadly  given  in  the  last  sentence, 
has  undoubtedl}',  since  Chancellor  Kent  so  stated  it  in  his  commenta- 
ries, been  greatly  relaxed  in  man}'  jurisdictions  with  reference  to  money 
obligations,  and  in  others  to  all  choses  in  action,  while  Judge  Grover, 
In  Grag  v.  Ba7'to7i,  bb  N.  Y.  (at  p.  73),  quotes  the  same  extract  with 
approval.  In  man}'  cases  in  that  state  the  principle  socms  to  be  disre- 
garded. There  is  great  diversity  of  opinion  evinced  by  the  decisions 
in  other  jurisdictions,  but  I  am  unable  to  find  any  authority  in  this 
state  which  would  indicate  a  departure  from  the  principle  stated. 

The  relaxation  of  the  rule  elsewhere  seems  to  have  resulted  from  the 
(uling  as  to  money  obligations,  and  gifts  causa  mortis. 


624  MATTHEWS   V.   HOAGLAND. 

There  seems,  however,  to  be  CA^ery  reason  why  it  should  be  adhered 
to  ill  a  case  of  an  alleged  gift  ititer  vivos  of  stock,  both  from  the  nature 
of  the  subject-matter,  and  from  the  incidents  of  such  gifts. 

There  is  a  wide  difference  in  the  character  of  property  in  shares  of 
stock  and  that  in  money  obligations. 

Chief-Justice  Shaw,  in  Fisher  v.  Essex  Bank^  5  Gray  373  (at  p.  377), 
speaking  of  the  character  of  property  in  shares  of  stock,  and  wherein 
it  differs  from  a  money  obligation,  sa^'s  :  "A  nearer  analogy,  perhaps, 
is  that  of  a  chose  in  action,  capable,  like  this,  of  being  assigned  in 
equity',  by  a  delivery  over  of  the  certificate,  which  is  the  assignor's  mu- 
niment of  title,  with  an  assignment  duly  executed,  transferring  to  the 
assignee  all  the  assignor's  right,  title  and  interest.  And  yet  it  is  not 
like  the  assignment  of  a  chose  in  action,  which  is  the  transfer  of  the 
assignor's  interest  in  a  debt,  and  vests  in  the  assignee  an  equitable 
right  to  collect  the  debt  in  the  name  of  the  assignor. 

''The  right  is,  strictl}'  speaking,  a  right  to  participate,  in  a  certain 
proportion,  in  the  immunities  and  benefits  of  the  corporation  ;  to  vote 
in  the  choice  of  their  officers,  and  the  management  of  their  concern  ;  to 
share  in  the  dividends  of  profits,  and  to  receive  an  aliquot  part  of  the 
proceeds  of  the  capital,  on  winding  up  and  terminating  the  active  ex- 
istence and  operations  of  the  corporation.  Again,  when  a  transfer  is 
rightfully  made  and  complete,  it  vests  a  right  in  the  transferee  not 
merely  to  act  in  the  place  of  the  vendor  and  in  his  name,  but  substitutes 
fiim,  in  all  respects,  as  the  legal  and  only  holder  of  the  shares  trans- 
ferred to  the  same  extent  to  which  they  were  before  held  by  the  vendor. 
The  title,  therefore,  by  which  such  interest  is  held  is  strictly  a  legal 
title  ;  it  is  created  and  defined  hy  law  ;  its  benefits  are  secured  b}'  law  ; 
it  is  transferable  by  operation  of  law,  and  may  be  attached  on  mesne 
process  and  seized  on  execution  and  sold  by  legal  authorit}'  to  satisfy 
the  debts  of  the  owner." 

The  incidents  of  gifts  m^e/*  vivos  call  for  the  observance  of  the  rule 
as  laid  down  hy  Chancellor  Kent.  Cogent  reasons  are  given  by  Mr. 
Justice  Gilbert  in  Johnson  v.  Spies^  5  Him,  468,  why  the  law  might 
well  overlook  an  informality  or  incompleteness  in  a  gift  causa  mortis^ 
which  it  would  not  tolerate  in  respect  to  a  gift  inter  vivos.  15  Alb. 
L.  J.  40. 

A  gift  inter  vivos  must  be  complete  in  present i ;  it  has  no  reference 
to  the  future ;  there  must  be  a  deliver}',  and  it  must  be  an  actual  one, 
"  so  far  as  the  subject  is  capable  of  delivery.  It  must  be  secundum 
suhjectam  materiarn,  and  be  the  true  and  eflTectual  way  of  obtaining  the 
command  and  dominion  of  the  subject."     2  Kent  Com.  *'139. 

In  Basket  v.  JIassell,  107  U.  S.  602,  Mr.  Justice  Matthews  (at 
p.  G14)  says:  "The  point  which  is  made  clear  by  this  review  of  the 
decisions  on  the  subject,  as  to  the  nature  and  effect  of  a  delivery  of  a 
chose  in  action,  is,  as  we  think,  that  the  instrument  or  document  must 
be  the  evidence  of  a  subsisting  obligation,  and  be  delivered  to  the  donee, 
60  as  to  vest  him  with  an  equitable  title  to  the  fund  it  represents,  and 


MATTHEWS   V.   HOAGLAND. 


625 


to  divest  the  donor  of  all  present  control  and  dominion  over  it,  abso- 
lutely and  irrevocably,  in  ease  of  a  gift  inter  vivos,  but  upon  the  recog- 
nized conditions  subsequent,  in  cases  of  a  gift  mortis  causa  /  and  that 
a  delivery  which  does  not  confer  upon  the  donee  the  present  right  to 
reduce  the  fund  into  possession  by  enforcing  the  obligation,  according 
to  its  terms,  will  not  suffice." 

As  delivery  is  necessary'  to  the  validity  of  a  gift  inter  vivos,  and  as/ 
the  certificate  of  stock  is  the  only  thing  connected  with  its  ownership 
that  is  capable  of  manual  tradition,  it  would  seem  that  an  assignment 
and  power  to  transfer,  which  are  necessar}^  to  make  the  certificate  at 
once  available,  inheres  in  its  effectual  delivery. 

There  appears  to  be  a  controlling  distinction  between  a  transfer  in- 
volving the  delivery  of  a  certificate  of  stock  with  an  assignment  and 
power  to  transfer  the  shares,  with  words  of  gift,  and  a  deliver}'  of  the 
certificate  unassigned  and  unaccompanied  by  an  act  or  writing  empow- 
ering its  transfer ;  for  a  gift  inter  vivos  being  incomplete  so  long  as 
an}'  act  of  the  donor  remains  undone  which  is  necessary  to  confer  on 
the  donee  the  power  of  the  present  control  and  enjoj'ment  of  the  sub- 
ject of  the  gift,  the  failure  of  the  record  owner  of  the  stock  to  clothe  the 
donee  with  the  means  of  at  once  acquiring  the  benefits  of  the  stock, 
leaves  unperformed  an  act  which  prevents  the  gift  from  taking  effect  in 
presenti  which  is  vital  to  it  as  a  gift  inter  vivos. 

Again,  it  is  necessary  to  the  validity  of  a  gift  inter  vivos  that  all  of 
the  title  of  the  donor,  whatever  it  may  be,  should  be  transferred  at  once 
to  the  donee.     He  cannot  retain  any  interest  therein  without  destroying      I    ^^^**^  t^ 
Its  character  as  a  gift.      Young  v.  Toimff,  80  iV!  r:  422.  '      (jLV^  f^J!^^t^^^ 

The  handing  over  of  a  certificate  of  stock  without  a  written  assign-"^''     " 
ment  or  power  certainly  does  not  transfer  the  legal  title.     If  we  admit 
it  confers  an  equitable  title,  the  legal  has  remained  in  the  donor,  and 
cannot  be  enforced,  for  equit}'  recognizes  and  makes  effective  only  as- 
signments founded  on  a  valuable  consideration  and  does  not  aid  a  vol-  ->.-    •  ^v 
unteer.     ^lay  Fraud.  Conv.  *40G  ;    Weale  v.  OlHve,  \1  lieav.  252.      '/jL;  ^\\y^ 

Nor  under  the  decisions  will  equity  build  up  a  trust  with  the  frag-   '^y^  \/^ 
ments  of  an  incomplete  gift.     Antrobus  v.  Smith,  12  Ves.  39  ;  Richards' .-^^^^J^ 
V.  Dolbridge,  L.  E.  (18  Eq.  Cas.)  11  ;  Moore  v.  3Toore,  L.  R.  (18  Eq\  "^  .V^^^'^ 
Cas.)  474 ;  Milroy  v.  Lord,  4  DeG.,  F.&  J.  274  ;  Hertley  v.  Nichol- 
son, L.  R.  (19  Eq.  Cas.)  233  ;    Young  v.  Young,  suqjra. 

In  ra}'  judgment  the  character  of  the  property  in  shares  of  a  corpora- \ 
tion,  as  well  as  the  distinctive  qualities  of  a  gift  inter  vivos,  forbid  a 
departure  from  the  rule,  that  a  valid  gift  of  such  property  cannot  be 
made  by  the  delivery  of  the  certificate  of  stock,  without  formal  transfer, 
or  an  assignment  and  power  in  writing  to  transfer  the  shares. 

But,  independent  of  the  legal  question,  the  rule  that  the  possession 
of  the  certificate  assigned  or  accompanied  b}-  authority  to  transfer  is 
evidence  of  ownership,  is  now  the  recognized  law  of  all  mercantile  com- 
munities in  this  country,  and  under  it  all  transactions  in  the  sale  or 
pledge  of  stocks  are  carried  on.    The  usage  is  so  universal  that  the  trans- 


,JI( 


/fji 


•&\ 


-^' 


D 


62G 


EAST   BIKMINGHAM   LAND   CO.   V.   DENNIS. 


fers  are  printed  on  the  certificates,  as  on  the  one  in  question.  If  the 
decisions  in  this  state  did  not  seem  to  require  an  assignment  in  writing, 
I  would  be  satisfied  that  the  failure  of  Henry  Matthews  to  execute  the 
transfer  and  power  of  attorney'  on  the  back  of  the  certificate,  was  con- 
clusive evidence  that  he  did  not  intend  to  make  a  present  gift  of  the 
stock,  and  to  divest  himself  of  all  control  and  dominion  over  it  or  its 
proceeds.  There  was  no  haste  in  the  matter  ;  he  had  taken  the  time  to 
execute  the  deed  to  John  Matthews  with  all  formality ;  he,  it  must  be 
assumed,  knew  that  the  company  would  require  his  assignment  in  writ- 
ing to  transfer  the  stock,  and  notwithstanding  anything  he  may  have 
said  indicating  an  intention  to  give  it,  the  fact  of  his  not  making  the 
paper  effective  shows  that  he  intended  to  retain  some  dominion  over  the 
propert}'.  If  so,  it  is  fatal  to  the  transaction  as  a  gift  inter  vivos.  The 
stock  of  the  Camden  and  Amboy  railroad  I  am  of  opinion  was  not  efl'ec- 
tually  given  by  the  intestate,  and  belonged  at  his  death  to  his  estate. 


"^/"^      ..L^"" 


1^    I   f^ 


P 


^^o 


Xv 


f< 


(/S^ 


h 


E^ST 


y-' 


ENNIS. 


..■y 


r^. 


^fj 


'^-^%  ^r-', 


BIRMINGHAM   LAND   C( 

i,  1888.     85  Alabama,  565.1 

Appeal  from  the  City  Court  of  Birmingham,  in  equity. 
Heard  before  the  Hon.  H.  A.  Sharpe. 

The  bill  in  this  case  was  filed  on  the  13th  April,  1888,  b}^  J.   F. 
Dennis,  against  J.  P.  Mudd,  and  the  East  Birmingham  Land  Compan}', 
yo^         a  private  corporation  ;  and  sought  to  compel  the  transfer,  on  the  books 
Kj>     _J^i  the  corporation,  of  a  certificate  for  ten  shares  of  stock,  of  which  the 
complainant  claimed  to  be  the  owner,  and  to  compel  the  delivery  of  the 
certificate  to  him  b}-  said  Mudd,  who  had  possession  of  it  under  claim 
of  ownership.     The  certificate  was  issued  in  the  name  of  A.  R.  Dear- 
ie *  A'^'    born,  and  was  indorsed  by  him  in  blank.     The  complainant  claimed 
A\  that  he  had  bought  the  certificate,  with  the  blank  indorsement  thereon, 
^       f  from  a  holder  wlio  had  acquired  it  by  purchase  from  said  Dearborn  ; 
,  «     and  that  it  was  lost  b}''  him,  or  stolen  from  him,  without  fault  on  his 
part.     Mudd  purchased  the  certificate,  for  full  value,    from  Wilson, 
Sage  &  Clark,  stock-brokers  in  Birmingham  ;  and  while  denying  com- 
plainant's ownership,  claimed  that  he  acquired  a  good  title  b}'  the  cus- 
tom and  usage  of  brokers  and  merchants  in  Birmingham.     A  decree 
pro  coiifesso  was  taken  against  the  corporation.     On  final  hearing,  on 
pleadings  and  proof,  the  court  rendered  a  decree  for  the  complainant ; 
and  this  decree  is  now  assigned  as  error,  by  each  of  the  defendants 
Beparatcly. 

S.  D.  Weakley,  for  appellants.  • 

W.  11.  IIoiKjfiion.,  contra. 

7i 


>r.. 


Citatious  of  counsel  omitted.  —  Ed. 


EAST   BIEMINGHAM   LAND   CO.   V.   DENNIS. 


G27 


\ 


SoMERviLLE,  J.  We  concuF  in  the  conclusion  reached  by  the  judge 
of  the  City  Court,  that  the  appellee,  Dennis,  complainant  in  the  bill,  is 
the  owner  of  the  ten  shares  of  stock  which  are  the  subject  of  litigation 
in  the  present  suit.  The  testimony  satisfactorily  proves  that  the  certifi- 
cate of  stock,  indorsed  in  blank  by  Dearborn,  who  was  the  owner  on  the 
books  of  the  defendant  corporation,  was  the  property  of  the  appellee, 
and  was  taken  or  stolen  from  his  possession,  without  an}-  negligence  on 
his  part  whatever,  several  months  before  it  was  purchased  by  the  de- 
fendant Mudd,  who  innocently  bought  and  paid  value  for  it,  some  time 
in  March,  1888. 

The  onl}'  question  is,  whether  Mudd,  who  paid  full  value  for  this 
stock,  without  notice  of  the  complainant's  claim  to  it,  acquired  a  title 
superior  to  that  of  complainant. 

The  established  rule  is  that  no  person  can  ordinarily  be  deprived  of  his 
ownership  of  property  save  by  his  own  consent,  or  his  negligence.  Thei 
only  exception  to  this  rule  is  the  case  of  a  honajide  purchaser  for  value 
of  negotiable  paper.  We  have  no  reference,  of  course,  to  the  taking  of 
property  for  pubUc  uses  b}'  judicial  condemnation,  which  may  be  done 
without  the  owner's  consent. 

It  can  not  be  contended,  with  an}'  degree  of  plausibility,  that,  under 
the  facts  of  this  case,  the  complainant  was  guilty  of  negligence,  or  the 
want  of  ordinary  care  in  the  custody  of  the  certificate.  He  kept  it  in  a 
box  in  the  vault  of  a  banking-house,  whence  it  was  abstracted  by  some 
unknown  person,  apparently,  without  any  fault  on  his  part. 

Nor  does  any  question  arise  involving  the  rights  of  a  subsequent  bona 
fide  purchase  of  stock,  from  one  shown  to  be  owner  on  the  corporate 
books,  who  has  already  made  a  prior  unregistered  transfer  of  it  to  an- 
other purchaser.  All  such  transfers  made  by  the  true  owner,  and  not 
registered  on  the  books  of  the  corporation  within  fifteen  days,  are  de- 
clared by  statute  to  be  "  void  as  to  bona  fide  creditors,  or  purchasers 
without  notice." — Code  1886  §  1671;  Fisher  \.  Jones,  82  Ala.  117. 
If  the  defendant  Mudd  had  claimed  by  a  subsequent  purchase  from 
Dearborn,  the  owner  of  the  stock  on  the  corporate  books,  this  question 
would  arise.  But  he  does  not  so  claim,  his  title  being  derived  through  the 
complainant  Dennis  himself,  by  two  or  more  intermediate  transferees, 
the  first  of  whom  was  a  fraudulent  holder  without  title.  Whether  Mudd's 
title  to  the  stock,  therefore,  is  superior  to  that  of  Dennis,  depends  on 
whether  a  certificate  of  stock,  indorsed  in  blank  by  the  owner,  is  to  be 
treated  as  negotiable  paper. 

The  rule  is  well  settled,  that  a  bona  fide  purchaser  of  a  negotiable 
bill,  bond  or  note,  although  he  buys  from  a  thief,  acquires  a  good  title,  S 
if  he  pays  value  for  it  without  notice  of  the  infirmity  of  his  vendor's 
title.  The  authorities  are  clear  in  support  of  the  view,  that  a  certificate 
of  corporate  shares  of  stock,  in  the  ordinary  form,  is  not  negotiable 
paper,  and  that  a  purchaser  of  such  certificate,  although  indorsed  in 
blank  by  the  owner,  where  no  question  arises  under  the  registration 
laws,  obtains  no  better  title  to  tlie  stock  tlinn  his  vendor  had,  in  the 


i 


i\ 


'> 


628  EAST    BIRMINGHAM   LAND    CO.    V.   DENNIS. 

absence  of  all  negligence  on  the  pnrt  of  the  owner,  or  his  authority  to 
make  the  sale.  This  question  arose,  and  was  decided  by  the  New  York 
Court  of  Appeals,  in  Mechanics'  Bank  v.  New  York  &  New  Haven 
B.  R.  Co,,  13  N.  Y.  (1856),  599.  It  was  there  held,  that  such  a  cer- 
tificate does  not  paj;take  of  the  character  of  a  negotiable  instrument,  and 
that  a.  bo7ia  fide  assignee,  with  full  power  to  transfer  the  stock,  takes 
the  certificate  subject  to  the  equities  which  existed  against  his  assignor. 
Such  certificales,  said  ComstockTJ.,  "  contain  no  words  of  negotia. 
Ijility.  They  declare  simply  that^the  person  named  is  entitled^ to  c_er^ 
tain  shares  of  stock.  They  do  not,  like  negotiable  instruments,  run  tQ. 
the  bearer7or  order  of  the^party  to  whom  they  are  given."  They  :were_ 
said  to  be,  in  some  respects,  like  a  bill  of  lading,  or  warehouse  receipt, 
Being  "  the  representative  of  property  existing  under  certain  conditions, 
ami  the  documentary  evidence  of  title  thereto."  The  most  that  can  be 
said  is,  that  all  such  instruments  possess  a  sort  of  quasi  negotiability, 
dependent  on  the  custom  of  merchants  and  the  convenience  of  trade. 
They  are  not,  in  the  matter  of  transferability,  protected  strictl}'  as 
negotiable  paper. 

In  Shaw  v.  Spencer^  100  Mass.  382  ;  s.  c,  97  Amer.  Dec,  1  Araer^ 
Rep.  115  (18G8),  it  was  also  decided  that  a  certificate  of  corporate 
stock,  transferred  in  blank  on  its  back,  was  clearly  not  a  negotiable 
Instrument.  "  No  commercial  usage,"  it  was  said,  "  could  give  to  such 
an  instrument  the  attribute  of  negotiability.  However  many  interme- 
diate hands  it  may  pass  through,  whoever  would  obtain  a  new  certifi- 
cate in  his  own  name,  must  fill  out  the  blanks,  .  .  so  as  to  derive 
title  to  himself  directly  from  the  last  recorded  stockholder,  who  is  the 
only  recognized  and  legal  owner  of  the  shares."  The  case  of  SevKtll  v. 
Boston  Water  Poicer  Co.,  A  Allen,  282  ;  s.  c,  81  Amer.  Dec.  701,  de- 
cided by  the  same  court  a  few  years  before,  is  referred  to  as  a  precedent 
in  support  of  this  conclusion. 

The  precise  point  in  the  present  case  was  also  decided  in  Barstow  v. 
Savage  Mining  Co.,  64  CaL  388  ;  s.  c,  49  Amer.  Rep.  705,  where  it 
was  expressly  held  that  a  bona  fide  purchaser  of  stock  standing  on  the 
compan^^'s  books  in  the  name  of  the  former  owner,  regularly  indorsed 
by  him,  and  stolen  from  the  present  owner  without  his  fault,  gets  no 

i title.  The  decision  was  based  on  the  fact,  that  such  certificates  are  not 
negotiable  instruments,  but  simply  muniments  of  title,  and  evidences 
of  the  holder's  right  to  a  given  share  in  the  property  and  franchises  of 
the  corporation.  It  was  observed,  in  regard  to  the  matter  of  negli- 
gence, as  follows:  "But,  if  the  purchaser  from  one  who  has  not  the 
title,  and  has  no  authority'  to  sell,  relies  for  his  protection  on  the  negli- 
gence of  the  true  owner,  he  must  show  that  such  negligence  was  the 
proximate  cause  of  the  deceit." 

The  same  principle  was  applied  to  bills  of  lading,  in  Gurney  v.  Beh- 
rend,  3  Ellis  &  Bl.  622,  decided  by  the  English  Queen's  Bench,  where 
an  instrument  of  that  kind,  indorsed  in  blank  by  the  consignor,  and 
Bent  by  him  to  his  correspondent,  had  been  misappropriated.     The 


EAST   BIRMINGHAM  LAND   CO.   V.  DENNIS.  629 

correspondent,  without  authority,  fraudulently  transferred  the  bill  for 
value ;  and  it  was  held  by  Lord  Campbell,  that  for  the  want  of  the 
element  of  negotiability  in  the  paper,  the  title  to  the  goods  was 
unaffected  by  the  transaction. 

The  doctrine  of  Barstow  v.  Savage  Mining  Co.,  siqyra,  is  well  sup- 
ported by  authority-,  and,  in  our  judgment,  announces  a  correct  prin- 
ciple of  law,  and  we  fully  approve  it.  —  Woolley  v.  Sargeant,  14  Amer. 
Dec,  Note,  on  page  427,  and  cases  there  cited;  Cook  on  Stock  and 
Stockholders,  sec.  368,  437,  192,  7,  10;  2  Daniel's  Keg.  Instr.  (3d  Ed.), 
§  1708y.     It  harmonizes  entirely'  with  the  declaration  of  our  statute,! 
that  shares  of  stock  in  private  corporations  "are  personal  property,! 
transferrable  on  the  books  of  the  corporation  "  in  accordance  with  the  | 
rules  and  regulation  of  the  corporation.  — Code  1886,  §  1669  ;   Camp' 
hell  V.  Woodstock  Iron  Co.,  83  Ala.  451. 

There  is  a  class  of  cases,  not  to  be  confounded  with  the  one  in  hand, 
where  the  holder  of  such  a  certificate  of  stock,  indorsed  in  blank,  is  clothed 
with  power  as  agent  or  trustee,  to  deal  with  such  stock  to  a  limited  ex- 
tent, and  transfers  it  b}'  exceeding  his  powers,  or  in  breach  of  his  trust. 
In  such  cases,  it  has  often  been  held  that  the  true  owner,  having  con- 
ferred on  the  holder,  by  contract,  all  the  external  indicia  of  title,  and 
an  apparently  unlimited  power  of  disposition  over  the  stock,  "is  es- 
topped to  assert  his  title  as  against  a  third  person,  who,  acting  in  good 
faith,  acquires  it  for  value  from  the  apparent  owner."  —  2  Dan.  Keg. 
Inst.  (3d  Ed.),  §  1708^/  McNeil  v.  Tenth  Nat.  Bank,  46  N.  Y.  325; 
Mount  Holly  Turnpike  Co.  v.  Ferree,  17  N.J.  Eq.  117;  Prall  v. 
Tilt,  28  lb.,  479  :  Merchant's  Nat.  Bank  v.  Livingston,  74  N.  Y.  223. 
These  cases  rest  on  the  principle,  that  it  is  more  just  and  reasonably 
where  one  of  two  innocent  parties  must  suffer  loss,  that  he  should  be 
the  loser  who  has  put  trust  and  confidence  in  the  deceiver,  than  a 
stranger  who  has  been  negligent  in  trusting  no  one." —  Allen  v.  Maury 
tjb  Co.,  66  Ala.  10. 

It  being  an  established  principle  of  law,  that  certificates  of  stock  are 
not  to  be  regarded  as  negotiable  paper,  it  is  not  permissible  to  prove  a 
custom  or  usage  among  stock-brokers  to  the  contrary.  No  usage  is 
good  which  conflicts  with  an  established  principle  of  law,  any  more  than 
one  which  contravenes  or  nullifies  the  express  stipulations  of  a  contract. 
Dickinson  v.  Gay,  83  Amer.  Dec.  656,  and  note,  664  \  E.  T.,  Ya.  cfc 
Qa.  R.  R.  Co.  V.  Jofinston,  75  Ala.  576  ;  Lehman  v.  Marshall,  47 
Ala.  362. 

The  decree  of  the  court  below  is  in  accordance  with  these  views,  and 
must  be  affirmed. 


)[c 


6<  1 


> 


-4Mck 


>^ 


NTH   NATIONAL   BANK/ /       /  (^  J 


s 


^  /. 


lEIL 


V.  TENTH  NATIONAL  BANK. 

1871.     46  iVew;  Fori,  325.1  ^       ; 


v^     ^/ji/i^ppEAL  from  a  judgment  of  the  General  Term  in  the  fourth  district, 

^      .latrirming  a  judgment  entered  in  Montgomery  count}',  in  favor  of  the 

(^yKa/^plaintiff  on  the  report  of  a  referee. 

J^^  "^^^  action  was  brought,  to  compel  the  surrender  to  the  plaintiff  of 

(/T^      134  shares  of  the  capital  stock  of  the  First  National  Bank  of   St. 

\}^    ^     Johnsville,  which  had  been  acquired  by  the  appellant  in  the  following 

^<t^^  (    ^  •)  9'^ iJ^  I  ^"^  November,  1866,  the  plaintiff  then  being  the  owner  of  the  shares 
'^  ■-■        '>       in  question,  had  an  account  with  Goodyear  Brothers  &  Durant,  of  tlie 

city  of  New  York,  stock  brokers,  relating  to  other  stocks,  which  they 
had  purchased  and  were  carrying  for  him.  For  the  purpose  of  secur- 
ing any  balance  which  might  become  due  them  on  that  account,  tlie 
plaintiff  delivered  to  and  left  with  them,  the  certificate  of  the  134  shares 
j(>in  dispute,  with  a  blank  assignment,  and  power  of  attorney  to  transfer 
indorsed  thereon,  signed  by  the  plaintiff,  in  the  following  words  : 

For  value  received,  the  undersigned  hereby  assigns  and  transfers 
unto  .  .  .  shares  of  the  capital  stock  of  the  First  National  Bank  of 
/St.  Johnsville,  and  do  hereby  constitute  and  appoint  .  .  .  true  and 
lawful  attorney,  irrevocable  for  .  .  .  and  in  .  .  .  name  and  behalf,  to 
make  and  execute  all  necessary  acts  of  assignment  and  transfer  re- 
quired by  the  regulations  and  bj'-laws  of  said  bank. 

In  witness  whereof,  I  have  hereunto  set  my  hand  and  seal,  this 

day  of . 

(Signed.)  B.  McNEIL. 

l^    Sealed  and  sworn  in  presence  of . 

^^  On  the  18th  of  June,  1868,  at  the  city  of  New  York,  the  appellant 

r/*'  ■  1^^,  at  the  request  of  Goodyear  Brothers  &  Durant,  paid  the  sum  of  $45,135 
-t/iA^L^vJ  ^  f to  Fred.  Butterficld,  Jacobs  &  Co.,  receiving  from  them  certain  securi- 
^  ib'^    ^V'^ies,  including  the  certificate  and  power  for  the  134  shares  in  question, 


A' 


Ijy 


-A 


/ 


1^  .^ 


which  had  been  previously  pledged  by  Good3'ear  Brothers  &  Durant  to 


/^ 


\^ 


Fred.  Butterfield,  Jacobs  &  Co. 

f  ^r/^  Goodyear  Brothers  &  Co.  were  at  that  time  insolvent,  and  indebted 

(ir        to  the  appellant.     In  pledging  the  plaintiff's  shares,  they  had  acted 

without  actual  authority  from  him,  and  without  his  knowledge.     He 

was  indebted  to  them,  on  the  account  for  which  the  shares  were  pledged 

'^1       to  them,  in  the  sum  of  $3,000  with  interest  from  December  1,  1866; 

^  .     but  the  account  liad  not  been  rendered,  or  any  demand  made. 

^         The  appellant,  at  the  time  of  receiving  the  shares,  had  no  knowledge 
.ly^  ^  Tty^'    ,JuJbf  the  plaintiff's  interest  therein. 
A/A   ^       yf  ^    .r^ 
I  -^  "^    r  jJ>  >  1  Arcruments  and  part  of  opinion  omitbetl." 

*~   .1  ;f  ■*      t^U  ■'</■<'  1.^         i 


h^ 
f' 


v^ 


1^ 


h<^ 


W-' 


^ 


/K^ 


,yir       P)^ 


^v 


ll.'  °  ^' 


'h<k^^ 


'J^. 


i.^ 


\,i} 


\^ 


^y  W 


^K-'^^V 


fe  '^ 


^""i. 


McNEIL   V.   TENTH   NATIONAL   BANK.  631 

The  cashier  of  the  appellant,  within  a  few  da3-s  after  receiving  the 
certificate,  assignment  and  power,  filled  in  the  blank  in  the  assignment 
and  power  with  "  I.  H.  Stout,  cashier.  Tenth  National  Bank,  New  York, 
one  hundred  and  thirty-four,"  and  dated  the  same  the  19th  da}'  of 
June,  1868,  and  sent  the  scrip  to  the  First  National  Bank  of  St.  Johns- 
ville,  for  the  purpose  of  having  the  shares  transferred  on  the  books 
accordingly  ;  but  such  transfer  was  prevented  by  an  order  of  injunction 
in  this  action. 

The  plaintiff  demanded  of  the  appellant  a  surrender  of  the  scrip,  on 
payment  of  the  balance  due  by  him  to  Goodyear  Brothers  &  Durant ; 
which  demand  was  refused. 

The  value  of  the  shares  was  $17,420.  The  balance  of  the  advance 
made  by  the  appellant  thereon  ($45,135,  less  the  proceeds  of  the  other 
securities  received  therewith,  $29,915.19),  was  $15,219.81,  besides 
interest. 

When  the  certificate  and  power  came  to  the  possession  of  the  appel- 
lant, they  bore  the  proper  revenue  stamp,  duly  cancelled  with  the  stamp 
of  Goodyear  Brothers  &  Durant,  and  the  name  of  Ch.  Goodj'car  as 
subscribing  witness  to  the  power.  The  referee  found,  that  when  the 
plaintiff  delivered  them,  they  were  not  stamped  or  witnessed,  and  that 
the  plaintiff  had  never  authorized  those  acts. 

The  referee  found  in  favor  of  the  plaintiff,  and  in  conformit}-  with 
his  report,  a  judgment  was  entered,  requiring  a  surrender  of  the  scrip 
to  the  plaintiflT,  on  payment  by  him  of  the  $3,000  and  interest  due  by 
him  to  Goodj'ear  Brothers  &.  Durant. 

This  judgment  was  affirmed  at  General  Term,  and  an  appeal  taken 
to  the  late  Court  of  Appeals,  where,  after  argument,  that  court  was 
divided  and  a  re-argument  ordered.  The  case  now  comes  up  on  the 
re-argument. 

E.  L.  Fancher,  for  appellant. 

S.  Sand,  for  respondent. 

Rapallo,  J.  The  pledge  of  the  plaintifl"s  shares  b}'  bis  brokers,  for 
a  larger  sum  than  the  amount  of  their  lien  thereon,  was  a  clear  viola- 
tion of  their  dut}',  and  excess  of  their  actual  power.  And  if  the  effect 
of  the  transaction  was  merely  to  transfer  to  the  appellant,  through 
Fred.  Butterfield,  Jacobs  &  Co.,  the  title  or  interest  of  Goodyear 
Brothers  &  Durant  in  the  shares,  the  judgment  appealed  from  was 
right. 

It  must  be  conceded,  that  as  a  general  rule,  applicable  to  propertj' 
other  than  negotiable  securities,  the  vendor  or  pledgor  can  convey  no 
greater  right  or  title  than  he  has.  But  this  is  a  truism,  predicable  of  a 
simple  transfer  from  one  party  to  another  where  no  other  element  inter- 
venes. It  does  not  interfere  with  the  well-established  principle,  that 
where  the  true  owner  holds  out  another,  or  allows  him  to  appear,  as 
the  owner  of,  or  as  having  full  power  of  disposition  over  the  propertv, 
*nd  innocent  third  parties  are  thus  led  into  dealing  with  such  apparent 
owner,  they  will  be  protected.  Their  rights  in  such  cases  do  not  depend 


C32 


McNEIL   V.   TENTH  NATIONAL   BANK. 


(^ 


>- 


upon  the  actual  title  or  authority  of  the  party  with  whom  they  deal 
directly,  but  are  derived  from  the  act  of  the  real  owner,  which  precludes 
him  from  disputing,  as  against  them,  the  existence  of  the  title  or  power 
which,  through  negligence  or  mistaken  confidence  he  caused  or  allowed 
to  appear  to  be  vested  in  the  party  making  the  conveyance.  (Picker- 
ing V.  JBusk,  15  East,  38  ;  Gregg  v.  Wells,  10  Adol.  &  El.,  90  ;  Saltus 
V.  Everett,  20  Wend.,  268,  284 ;  Mowrey\.  Walsh,  8  Cow.,  238  ;  Root 
V.  French,  13  Wend.  570.) 

The  true  point  of  inquiry  in  this  case  is,  whether  the  plaintiff  did 
confer  upon  his  brokers  such  an  apparent  title  to,  or  power  of  disposi- 
tion over  the  shares  in  question,  as  will  thus  estop  him  from  assert- 
ing his  own  title,  as  against  parties  who  took  bona  fide  through  the 
brokers. 

Simply  jn trusting  the  possession  of  a  chattel  to  _anotIier-^s  deposi-. 
tar}',  pledgee  ^r^  other  bailee,  or  even  under  a_cgnditional  executory 
contract  of  sale,  is  clearly  insufficient  to  preclude^the^real_05mer_from 
reclaiming  his  propert}^  in  case  of  an  unauthorized  disposition_of  it  by 
the  person  so  intrusteil.  {.Ballard  v.  Burgett,  40  N.  Y.  R.  314.)  "The 
mere  possession  of  chattels,  by  whatever  means  acquired,  if  there  be  no 
other  evidence  of  property  or  authority  to  sell  from  the  true  owner^ 
will  not  enable  the  possessor  to  give  a  good  title."  Per  Denio,  J.  in 
Covill  v.  Hill  (4  Den.,  323). 

But  if  the  owner  intrusts  to^another,  not  merely  the  possession  of 
the~property,  but  j,lso  written  evidence,  over  his  own  signature,  oftitle 
tEereto,  and  of  an  unconditional  power  of  disposition  over  it,  the  case 
is  vasUy  different.  There  can  be  no  occasion  for  the  delivery  of  sucli 
J  documents,  unless  it  is  intended  that  they  shall  be  used,  either  at  the 
pleasure  of  the  depositar}',  or  under  contingencies  to  arise.  If  the. 
conditions_upon  which  this  apparent  right  of  control  is  to  be  exercised, 
are  not  expressed  on  the  face  of  the  instrument,  but  remain  in  confi- 
dence between  the  owner  and  the  depositary,  the  case  cannot  be  dis- 
tinguished in  principle,  from  that  of  an  agent  who  receives  secret 
*  Tiistructions  qualifying  or  restricting  ^n  apparently_absolute  j)ower. 

In  the^p resent  case,  the  plaint! flf  delivered  to  and  left  with  his 
brokers,  the  certificate  of  the  shares,  having  indorsed  thereon  the 
form  of  an  assignment,  expressed  to  be  made  "for  value  received," 
and  an  irrevocable  power  to  make  all  necessary  transfers.  The  name 
of  the  transferee  and  attorney,  and  the  date,  were  left  blank.  This 
document  was  signed  by  the  plaintiff,  and  its  effect  must  be  now 
considered. 

It  is  said  in  some  English  cases,  that  blank  assignments  of  shares  in 
corporations  are  irregular  and  invalid ;  but  that  opinion  is  expressed 
in  cases  where  the  shares  could  only  be  transferred  by  deed  under  seal, 
duly  attested,  and  is  placed  upon  the  ground  that  a  deed  cannot  be 
executed  in  blank. 

Without  referring  to  the  American  doctrine  on  that  subject,  it  is  suf- 
ficient to  say  that  no  such  formality  was  requisite  in  this  ease.     It  was 


McNEIL  V.   TENTH   NATIONAL   BANK.  C33 

only  necessary  to  a  valid  transfer  as  between  the  parties,  that  the 
assignment  and  power  should  be  in  writing.  The  common  practice  of 
passing  the  title  to  stock  by  delivery  of  the  certificate  with  blank  assign- 
ments and  power,  has  been  repeatedly  shown  and  sanctioned  in  cases 
which  have  come  before  our  courts.  Such  was  established  to  be  the 
common  practice  in  the  city  of  New  York,  in  the  case  of  the  New  York 
w id  New  Haven  Railroad  Company  v.  Schuyler  (34  N.  Y.,  41),  and 
the  rights  of  parties  claiming  under  such  instruments  were  fully  recog- 
nized in  that  case.  And  in  the  case  of  Kortright  v.  The  Commercial 
Bank  of  Buffalo  (20  Wend.,  91,  and  22  Wend.,  348),  the  same  usage 
was  established  as  existing  in  New  York  and  other  States,  and  it  was 
expressly  held  that  even  in  the  absence  of  such  usage,  a  blank  transfer 
on  the  back  of  the  certificate,  to  which  the  holder  has  affixed  his  name, 
is  a  good  assignment;  and  that  a  party  to  whom  it  is  delivered  is 
authorized  to  fill  it  up,  by  writing  a  transfer  and  power  of  attorney  over 
the  signature. 

It  has  also  been  settled,  by  repeated  adjudications,  that,  as  between 
the  parties,  the  delivery  of_the  certificate,  with  asjignment_and  power 
indorsgd,  passes  the  entire  title,  legal  and  equitable,  in  the  shares,  not- 
withstanding that,  by  the  terms  of  the  charter  or  by-laws  of  the  corpora- 
tion, the  stock  is  declared  to  be  transferable  only  on  its  books ;  that 
such  provisions  are  intended  solely  for  the  protection  of  the  corpora- 
tion, and  can  be  waived  or  asserted  at  its  pleasure,  and  that  no  effect 
is  given  to  them  except  for  the  protection  of  the  corporation  ;  that  they 
do  not  incapacitate  the  shareholder  from  parting  with  his  interest,  and 
that  his  assignment,  not  on  the  books,  passes  the  entire  legal  title  to  the 
»tock,  subject  onl}'  to  such  liens  or  claims  as  the  corporation  may  have 
upon  it,  and  excepting  the  right  of  voting  at  elections,  etc.  (Angell 
and  Ames  on  Corporations,  8th  ed.,  §  354  ;  Bank  of  Utica  v.  SmaUey, 
2  Cow.,  770  ;  Gilbert  v.  Manchester  Co.,  11  Wend.,  627  ;  Kortright  v. 
Com.  Bank  of  Buffalo,  22  Wend.,  362  ;  N.  Y.  and  N.  H.  B.  E.  Co. 
V.  Schuyler,  34  N.  Y.,  80.) 

In  the  case  of  Kortright  v.  Com.  Bank,  Chancellor  Walworth,  in 
a  dissenting  opinion,  strenuousl}'  maintained,  in  conformit}'  with  his 
previous  decision  in  Stehbins  v.  Phoenix  Ins.  Co.  (3  Paige,  356),  that 
by  a  transfer  not  on  the  books,  the  transferee  acquired  only  an  equi- 
table right  to  or  lien  on  the  shares ;  and  that,  having  but  an  equitable 
right  or  lien,  he  took  subject  to  all  prior  equities  which  existed  in  favor 
of  any  other  person  from  whom  such  assignment  was  obtained.  (22 
Wend.,  352,  353,  355.)  But  his  view  was  overruled  by  the  majority 
of  the  court.  The  action  was  at  law  in  assumpsit,  brought  hy  the 
holder  of  the  certificate  and  power,  for  a  refusal  to  permit  him  to  make 
a  transfer  on  the  books,  and  the  question  of  his  legal  title  was  neces- 
sarily involved  in  the  case.  The  judgment  therein  must  therefore  be 
regarded  as  a  direct  adjudication  that,  as  between  the  parties,  the  legal 
title  to  the  shares  will  pass  by  delivery  of  the  certificate  and  power 
(See  20  Wend.,  362.) 


t 


V 


634  McNEIL   V.   TENTH   NATIONAL   BANK, 

This  was  reasserted  in  this  court  in  the  JVew  Haven  Railroad  Case 
(34  N.  Y.,  80),  notwithstanding  what  was  said  in  the  Mechanics'  Bank 
Case  (13  id.,  625). 

By  omitting  to  register  his  transfer,  the  holder  of  the  certificate  and 
power  fails  to  obtain  the  right  to  vote,  and  ma^^  lose  his  stock  bj-  a 
fraudulent  transfer  on  the  books  of  the  compan}',  by  the  registered 
holder,  to  a  bona  fide  purchaser  (34  N.  Y.,  80) ;  but  in  this  respect  he 
is  in  a  condition  analogous  to  that  of  the  holder  of  an  unrecorded  deed 
of  land,  and  possesses  a  no  less  perfect  title  as  against  the  assignor 
and  others.  And  he  would  have  an  action  against  the  corporation,  for 
allowing  such  a  transfer  in  violation  of  his  rights.  (Id.)  He  also 
takes  the  risk  of  the  collection  of  dividends  by  his  assignor,  or  of  any 
lien  the  corporation  may  have  on  the  shares.  But  in  other  respects 
his  title  is  complete. 

The  holder  of  such  a  certificate  and  power,  possesses  all  the  external 
indicia  of  title  to  the  stock,  and  an  apparently  unlimited  power  of  dis- 
position over  it.  He  does  not  appear  to  have,  as  is  said  in  some  of 
the  authorities  cited,  concerning  the  assignee  of  a  chose  in  action,  a 
mere  equitable  interest,  which  is  said  to  be  notice  to  all  persons  dealing 
with  him  that  they  take  subject  to  all  equities,  latent  or  otherwise,  of 
third  parties ;  but,  apparentl}^,  the  legal  title,  and  the  means  of  trans- 
ferring such  title  in  the  most  effectual  manner. 

,  Such,  then,  being  the  nature  and  effect  of  the  documents  with  which 
the  plaintiff  intrusted  his  brokers,  what  position  does  he  occupy-  toward 
persons  who,  in  reliance  upon  those  documents,  have  in  good  faith 
advanced  money  to  the  brokers  or  their  assigns  on  a  pledge  of  the 
shares?  When  he  asserts  his  title,  and  claims,  as  against  them,  that 
he  could  not  be  deprived  of  his  property  without  his  consent,  cannot  he 
be  truly  answered  that,  by  leaving  the  certificate  in  the  hands  of  his 
brokers,  accompanied  by  an  instrument  bearing  his  own  signature, 
which  purported  to  be  executed  for  a  consideration,  and  to  convey 
the  title  away  from  him,  and  to  empower  the  bearer  of  it  irrevocably 
to  dispose  of  the  stock,  he  in  fact  "  substituted  his  trust  in  the  honest}^ 
of  his  brokers,  for  the  control  which  the  law  gave  him  over  his  own 
property,"  and  that  the  consequences  of  a  betrayal  of  that  trust,  should 
fall  upon  him  who  reposed  it,  rather  than  upon  innocent  strangers  from 
whom  the  brokers  were  thereby  enabled  to  obtain  their  money?  }\Xj 

These  principles,  in  substance,  were  applied  in  the  case  oi  Kortright 
V.  The  Commercial  Bank.  But  it  is  sought  to  distinguish  that  case 
from  this  ;  and  it  is  argued,  that  there  the  certificate  was  intrusted  to  an 
agent,  with  authority  from  his  principal  to  borrow  money  upon  it  for 
the  benefit  of  his  principal,  and  that  he  simply  exceeded  his  authority  by 
borrowing  more  than  he  was  authorized  to  borrow,  and  absconding  with 
the  excess. 

[After  commenting  on  Kortright  v.  Ba7ik.'\ 

The  principles  of  agency  are,  however,  applicable  to  this  case.  In 
disposing  of  a  pledge,  the  pledgee  acts  under  a  power  from  the  pledgor. 


MCNEIL  V.   TENTH   NATIONAL   BANK. 


635 


The  distinction  between  a  lien  and  a  pledge  is  said  to  be,  that  a  mere 
lien  cannot  be  enforced  by  sale  by  the  act  of  the  party,  but  that  a 
pledge  is  a  lien  with  a  power  of  sale  superadded.  (Story  on  Bailments, 
7th  ed.,  §  311,  note  2;  Wasso?i  y.  Smith,  2  B.  &  Aid.,  439.)  The 
pledgee  in  selling,  is  bound  to  protect  the  interests  of  the  pledgor,  and 
as  to  the  surplus,  represents  the  pledgor  exclusively.  Now,  for  what 
purpose  was  the  apparent  ownership  and  power  of  disposition  of  this 
stock  vested  in  the  brokers?  Surely  for  the  purpose  of  enabling  them, 
effectuall}'  and  summarily,  to  execute  this  power  under  certain  con- 
ditions. If  the  Ijower  jwas  absolute  on  its  face,  or  if  the  wholejegal 
title  was  by  the  instrument^apparentl^ivested  in„the^  pledgee,  and  _thfi_ 
condition^as  secret,  wherein  does  the  case  differ  in  principle  from  one 
of  ordinary  agency. 

I  am  at  a  loss  to  conceive  on  what  principle  it  can  be  claimed,  that 
an  apparent  naked  authority'  is  more  effectual  to  bind  the  party  giving 
it,  than  an  apparent  ownership  as  well  as  authority. 


V/ 


V 


I  have  reviewed  the  authorities  at  much  more  length  than  usual,  by 
reason  of  the  difference  of  opinion  expressed  in  the  late  Court  of  Ap- 
peals in  this  case,  and  for  the  purpose  of  meeting  the  positions  so  ably 
maintained  in  the  opinions,  in  favor  of  the  respondent,  delivered  in  the 
court  below,  and  in  the  late  court,  on  the  former  hearing. 

My  conclusion  is,  that  the  Tenth  National  Bank  must,  on  the  facts 
found,  be  deemed  to  have  advanced  bona  fide  on  the  credit  of  the 
shares,  and  of  the  assignment  and  power  executed  by  the  plaintiff,  and 
is  entitled  to  hold  the  stock  for  the  full  amount  so  advanced,  and  re- 
maining unpaid  after  exhausting  the  other  securities  received  for  the 
same  advance. 

The  points  relative  to  the  stamp  and  subscribing  witness  were  fully 
answered  in  the  opinions  delivered  on  the  first  argument,  and  do  not 
appear  to  have  been  the  subject  of  dissent.  I  do  not  deem  it  neces- 
sary again  to  discuss  them  here. 

The  judgment  of  the  General  Term,  and  that  entered  on  the  report 
of  the  referee,  should  be  modified,  so  as  to  allow  the  plaintiff  to  redeem, 
on  payment  of  the  balance  due  to  the  Tenth  National  Bank,  on  its  ad- 
vance of  June  19th,  1868,  and  the  costs  of  the  action. 

All  concur  except  Allen  and  Folger,  JJ  ,  not  voting. 

Judym&nt  modified^ 


■^1/V 


4' 


p^^' 


^ 


i^ 


t^ 


U^' 


y    Y 


0 


•^  0  h|:rron  v.  gray. 


?^^ 


x^ 


.> 


J. 
L. 


O'HEKKON 
O'HEREON 


V. 


grayAVV 

SAME 


^/ 


V  / 


y^ 


0^> 


1897.    168  Massachusetts,  573. 


(/. 


K^ 


^>^ 


WO  bills  in  equity,  filed  November  21,  1894,  to  compel  the  de- 
fendants to  transfer  and  deliver  to  the  plaintiffs  certain  certificates 
of  the  capital  stock  of  the  Boston  and  Albany  Railroad  Company. 
The  cases  were  heard  in  this  court  on  an  agreed  statement  of  facts, 
■"    i^fcthe  material  portions  of  which  appear  in  the  opinion,  and  a  decree 
f'l   was  entered  in  favor  of  each  plaintiff,  requiring  the  defendants  to 
transfer  and  deliver  to  them  a  certificate  for  thirty-one  and  twelve 
shares,  respectively,  of  the  capital  stoqk  of  the  Boston  and  Albany 
Eailroad  Company,  and  to  pay  to  them  the  amount  of  the  dividends 
received  by  the  defendants  upon  such  stock.     The  defendants,  in  each 
jii^  case,  appealed. 

±A^ '  ^JlJ-'^    The  case  was  argued  at  the  bar  in  January,  1897,  and  afterwards 
^y^    X    M  ,      ,   was  submitted  on  briefs  to  all  the  justices. 
'f  jA^         .      '*^'^\>^'>  ■^'  '^-  Dewey,  for  the  defendants. 

J      /r^^l^).    ^'  Fo^^^^'^  for  the  plaintiffs. 
,M^     .     A^'^'^  lr<f^^  Knowlton,  J.     Each  of  the  plaintiffs  is  the  owner  of  stock  in  the 


Boston  and  Albany  Railroad  Company,  represented  by  certificates  in 


C^ 


(Att^ 


^' 


yj-' 


the  possession  of  Gray,  Dewey,  and  Company,  the  defendants.     The 
tt^**"^^^  plaintiff  in  the  first  case  owned  two  certificates,  — one  for  nineteen 
^^    shares,  and  one  for  twelve  shares, — both  of  which  passed  into  the 
hands  of  the  defendants,  and  were  surrendered  by  them  in  exchange 
*         for  a  new  certificate  for  thirty-one  shares,  issued  in  their  own  names. 
The  plaintiff  in  the  second  case  is  the  owner  of  one  certificate  for 
twelve  shares,  which  the  defendants  received,  and  which  has  not  been 
surrendered.     Both  of  the  plaintiffs  are  minors,  and  their  respective 
certificates  were  made  in  their  own  names.     These  certificates  were 
deposited  for  safekeeping  by  their  mother,  who  was  their  guardian, 
in  the  Pittsfield  National  Bank.     While  the  certificates  were  in  the 
bank,  the  guardian  borrowed  money  from  the  bank  for  her  personal 
use,  for  which  she  gave  her  notes,  and  at  the  same  time  signed  upon 
the  back  of  each  of  her  son's  certificates  a  blank  form  of  transfer, 
with  a  signature  as  follows  :  "  Simon  John  O'Herron,  by  Mrs.  Cather- 
ine O'Kerron,  Guardian."     In  like  manner  on  her  daughter's  certifi- 
cate,  she  signed  with  the  signature,  "  Nora  L.  O'Herron,  by  Mrs. 
^    Catherine  O'Herron,  Guardian,"  and  left  the  certificates  as  collateral 
^jct-^  security  for  the  payment  of  her  notes.     This  transaction  occurred  on 
or  about  December  17,  1889.     On  or  about  December  20,  1889,  the 
cashier  of  the  bank,  one  Francis,  who  had  access  to  the  vault  where 
these  certificates  were  kept,  took  them,  without  authority  from  any- 
body, and  delivered  them  to  the  defendants,  as  security  for  one  of  his 
personal  debts.     In  May,  1890,  the  guardian  paid  her  notes  at  the  bank. 


D 


0  HERRON  V.    GRAY. 


G37 


Some  time  in  the  year  1891,  the  defendants  took  the  two  certificates 
standing  in  the  name  of  Simon  John  O'Herron  to  the  oflRce  of  the 
Boston  and  Albany  Kailroad  Company,  and  asked  to  transfer  the 
stock,  and  have  a  new  certificate  issued  in  their  own  names.  The  cor- 
poration refused  to  permit  a  transfer  of  the  stock  or  the  issue  of  new 
certificates  without  a  decree  of  the  Probate  Court  authorizing  the  sale 
of  the  stock.  Thereupon  the  defendants  requested  Francis  to  procure 
such  a  decree.  He  then  had  a  petition  prepared  by  the  registrar  of 
the  Probate  Court  for  the  county  of  Berkshire,  in  the  name  of  the 
guardian,  praying  for  leave  to  sell  and  transfer  the  certificates,  and 
he  signed  the  petition  as  follows :  "  Catherine  O'Herron, Guardian,  by 
E.  S.  Francis."  On  this  petition,  on  July  21,  1891,  the  Probate  Court 
issued  a  decree  in  the  usual  form,  authorizing  the  guardian  to  sell  or 
transfer  the  whole  or  any  part  of  the  stock.  All  this  was  done  with- 
out notice  of  the  petition  by  publication  or  otherwise,  either  to  the 
plaintiffs  or  to  their  guardian,  and  without  the  knowledge  of  either  of 
them.  The  transfer  of  the  stock  was  then  made  on  the  books  of  the 
Boston  and  Albany  Eailroad  Company,  and  a  new  certificate  for  thirty- 
one  shares  issued  to  the  defendants.  Francis  continued  to  act  as 
cashier  of  the  bank  until  his  death  by  suicide,  on  or  about  July  27, 
1893,  when  his  fraudulent  conduct  was  discovered,  and  his  estate  was 
found  to  be  insolvent.  He  paid  the  dividends  on  the  stock  to  the 
plaintiffs'  guardian  regularly  as  long  as  he  lived.  At  the  time  of 
receiving  the  certificates  the  defendants  supposed  that  Francis  was 
rightfully  in  possession  of  them,  and  they  had  no  notice  of  his  want 
of  authority  to  pledge  them,  except  the  form  of  the  certificates  and  of 
the  transfers.  The  question  is  whether  the  defendants  acquired  a 
good  title  to  the  stock  as  against  the  plaintiffs.  It  is  not  necessary 
to  consider  the  original  claim  of  the  bank  to  the  stock  as  security  for 
the  loans  to  the  guardian,  as  the  loans  were  paid.  It  is  clear  that  the 
guardian  had  no  right  to  pledge  the  stock,  and  we  do  not  intimate 
that  the  bank  acquired  a  valid  title  to  it. 

Francis,  under  whom  the  defendants  derived  their  title,  had  no 
right  to  the  certificates,  but  held  them  feloniously.     They  were  the 
general  property  of  the  plaintiffs,  and  the  special  property  of  the 
bank,  which  had  the  possession  of  them  as  bailee.     The  actj)f  Francis  j 
ijijtakingjthera^  andjpledging  them  as  his  own,  if  not  larceny  at  com-7 
mon  law,  was  at  least  embezzlement,  whicITby  our  statute  is  deemed/ 
tobelarceny.     Pub.  Sts.  c.  203,  §§  37,  41.     A  io7zaj?c?epurchaser  fori 
\^alue_Jrojn_one  who  has  taken  property  in  such  a  way,  acquires^jiol  ' 
title  to  it.     The  only  exception jto_thisrule  is  when  the  property  con^- 
sists  of  negotiable  securities.     Heckle  v.  Lurvey,  101  Mass.  344,  345. 
Spooner  v.  Holmes,  102  Mass.  503,  507.     But  certificates  of  stock,  even  ) ! 
when  indorsed  in  blank  for  the  purpose  of  authorizing  the  making  of  ( 
an   instrument   of   transfer   over  the  signature,  are  not  negotiable     ' 
jjecurities.     This  is  settled  by  the  highest  authority^   Shaw  v.  Speri'^ 
eer,  100  Mass.  382,  388.     Shaw  v.  Eailroad  Co.,  101  U.  S.  557,  565, 


Cf 


638 


0  HEREON  V.    GRAY. 


566.  Knox  v.  Eden  Musee  American  Co.,  148  N.  Y.  441.  Bangor 
Electric  Light  &  Power  Co.  v.  Robinson,  52  Fed.  Eep.  520.  London  & 
County  Banking  Co.  v.  London  &  River  Plate  Bank,  20  Q.  B.  D.  232. 
It  is  plain,  therefore,  that  the  defendants  cannot  maintain  their  claim 
on  the^foiind'that  the  nature  of  the  property  takes  it  out  of  the  gen- 
eral  rule  that  no  title  can  be  acquired  fronij)ne  whojias  no  title.  „ 

It  is  contended  that  St.  1884,  c.  229,  is  applicable  to  these  cases. 
If  we  assume  in  favor  of  the  defendants  that  this  statute  will  protect 
a  bona  fide  purchaser  or  pledgee  for  value,  to  whom  a  certiiicate  of 
stock  has  been  delivered  with  a  written  transfer  of  it,  or  a  written 
power  of  attorney  to  sell,  assign,  or  transfer  it,  signed  by  the  owner, 
it  does  not  help  the  defendants.  The  signature  on  the  back  of  these 
certificates  was  not  that  of  the  owner,  but  of  a  guardian  whose  trust 
relation  to  the  property  was  disclosed  on  the  face  of  the  papers.  In 
their  report  on  the  revision  of  the  statutes  (1834),  the  commissioners 
say,  in  a  note  to  chapter  79,  §  22  (which  is  section  21  in  the  final  en- 
actment), that  they  have  made  the  provision  as  to  sales  of  property 
by  guardians  the  same  as  that  for  trustees  appointed  under  wills.  The 
provision  for  trustees  under  wills  is  found  in  Kev.  Sts.  c.  69,  §  11,  in 
Gen.  Sts.  c.  100,  §  14,  and  with  certain  broader  provisions  from  more 
recent  legislation  in  Pub.  Sts.  c.  141,  §  20.  The  provision  in  regard 
to  guardians  is  found  in  Gen.  Sts.  c.  109,  §  22.  As  a  part  of  the  his- 
tory of  the  legislation,  see  also  St.  1817,  c.  190,  §  35,  and  St.  1820,  c 
54,  §  3.  It  Js  the  duty  of  one  purchasing  property  held  by  a  trustee 
to  ascertain  whether  the  transaction  appears  tolSe  within  the  trustee's 
authority.  Atkinson  v.  Atkinson,  8  Allen,  157  iShaw  v.  Spencer,  100 
Mass.  382.  Loring  v.  Salisbury  Mills,  125  Mass.  138.  Smith  v.  Bur- 
gess, 133  Mass.  511.  Loring  v.  Brodie,  134  Mass.  453.  Colonial  Bank 
V.  Cady,  15  App.  Cas.  267.  Duncan  v.  Jaudon,  15  Wall.  165.  The 
statute  does  not  protect  the  purchaser  in  a  case  like  the  present. 

It  is  contended,  further,  that  the  plaintiffs  are  estopped  from  re- 
claiming their  property  by  the  negligence  of  their  guardian  in  leaving 
Uheir  certificates  at  the  bank,  indorsed  with  her  signature.  The 
(principle  which  the  defendants  invoke  is  not  applicable  to  the  facts. 
Negligence  which  will  work  an  estoppel  of  this  kind  must  be^jgroxi- 
mate  cause  of  the  purchase  or  advancement^f  money  by  the  holder  of 
the  property,  and  must  enter  into  the  transaction  itself.  Stvan  v. 
North  British  Australasian  Co.,  7  H.  &  N.  603 ;  S.  C.  2B..  &  C.  175. 
Colonial  Bank  v.  Cady,  15  App.  Cas.  267,  282.  Baxendale  v.  Ben- 
nett,  3  Q.  15.  D.  525,  530.  Picker  v.  London  &  County  Banking  Co , 
18  Q.  B.  D.  515.  Knox  v.  Eden  Musee  American  Co.,  148  N.  Y.  441. 
Arnold  V.  Cheque  Bank,  1  C.  P.  D.  578,  587,  588.  Scholfield  v.  Lon- 
desborough,  [1895]  1  Q.  B.  530 ;  S.  C.  [1896]  App.  Cas.  514.  Tel- 
egra-ph  Co.  v.  Davenport,  97  U.  S.  369.  Bangor  Electric  Light  &  Power 
Co.  V.  Robinson,  52  Fed.  Hep.  520.  If  the  negligence  is  such  as  might 
be  an  appropriate  foundation  for  an  action  at  law  to  recover  damages 
by  one  who  advances  his  money,  it  may  be  availed  of  by  way  of  estop- 


o'herron  v.  gray.  039 

pel,  to  avoid  circuity  of  action.  But  the  facts  of  this  case  fall  short  of 
showing  such  negligence.  The  guardian  intrusted  the  certificates  to 
a  national  bank  of  good  reputation.  Neither  she  nor  anybody  else 
had  any  reason  to  anticipate  larceny  or  embezzlement  of  the  property, 
and  a  fraudulent  use  of  it,  to  deceive  others,  by  a  trusted  officer  of  the 
bank.  She  had  no  reason  to  expect  that,  if  the  certificates  were  stolen, 
anybody  would  take  them  without  inquiring  whether,  as  trust  pro- 
perty, they  had  been  disposed  of  by  the  guardian  for  the  benefit  of  her 
wards.  The  conduct  of  the_guardian  was  not^a^cause,  but  a  mere  con- 
ditionj^of  the  defendants'  advance  of  .money  upon  the  faith  of  the/  Q 
certificates.  A  criminal^ct  of  j'rancis  interyenedjas  the  cause  of  the]  ^y^ 
defendants'  loss,  and Jbhisjthe  guardian  had  no  reason  to  anticipate.      '  ' 

When  the  certificates  of  stock  came  into  the  hands  of  the  de- 
fendants, they  showed  on  their  face  that  they  had  not  been  assigned 
or  transferred  by  their  owners,  but  only  by  one  who  stood  in  a  rela- 
tion of  trust  to  the  owners.  The  transfer  had  not  been  completed, 
and  the  stock  still  stood  in  the  names  of  the  plaintiffs  on  the  books 
of  the  corporation.  There  was  only  a  signature  of  the  guardian  upon 
each  certificate,  appended  to  a  blank  which  contained  nothing  to  show 
the  nature  of  the  transaction  by  which  it  came  into  the  hands  of 
Francis.  There  was  nothing  to  indicate  that  the  plaintiffs  had  re- 
ceived value  for  the  stock.  Francis,  who  presented  the  certificates, 
-was  using  them  solely  for  his  personal  benefit.  On  the  face  of  the 
paper  there  was  notice  to  the  defendants  that  they  were  trust  property  / 
while  in  the  hands  of  th^  giiardian.  The  defendants  were  put  upon 
inquiry,  and  they  had  no  right  to  receive  them  as  a  pledge  fgrj  55^ 
Francis's  debt,  without  at  least  having  information  of  facts  which  ^ 
would  warrant  them  in  believing  that  the  plaintiffs'  interests  had  ^^ 
been  protected  in  the  transaction  by  which  they  came  into  the  hands 
ofFrancis.  Apparently  they  made  no  inquiry,  but  took  them  as  they 
were,  knowing  that  the  plain-tiffs  were  to  receive  nothing  from  the 
disposition  which  Francis  then  made  of  them.  We  are  of  opinion 
that  there  is  no  principle  of  estoppel  that  can  be  iavoked  in  favor  of 
the  defendants  to  deprive  the  plaintiffs  of  their  property. 

The  decree  of  the  Probate  Court  does  not  give  effect  to  the  claim  of 
the  defendants.  It  was  not  made  until  long  after  the  transfer  to  them. 
It  purported  to  authorize  a  sale  of  the  stock,  and  not  a  pledge  of  it, 
much  less  a  pledge  of  it  for  the  benefit  of  others  than  the  plaintiffs. 
But,  above  all,  the  Probate  Court  acquired  no  jurisdiction  of  the  case 
as  against  the  plaintiffs.  No  case  nor  any  proper  partj^  was  ever  be- 
fore the  court  in  regard  to  the  sale  of  the  stock.  The  unauthorized 
signature  and  appearance  of  Francis  availed  nothing  as  against  the 
plaintiffs  or  their  guardian.  Jochumsen  v.  Suffolk  Savings  Bank, 
6  Allen,  87.     Scott  v.  McNeal,  154  U.  S.  34,  46. 

Decree  in  ea^h  case  affirmed.^ 
I  A  stockholder  agreed  to  sell  his  shares,  and  deposited  with  the  corporation  his  ce^ 


■f 


1^ 


i7^ 


■X^ 


640 


^IN'^E   BAHIA 


AND   SAN 


FRANCISCO 


^^ 


A^ 


A 


^ 


-^  /  f^i^.K//;^!'''  ;ii' aV\  ' 


i^ 


(^> 


/. 


y~^      /I  -^  ^'^  ^^^^  ^^'^  o^  M^3'5  1867,  it  was  ordered  by  rule  of  court,  under 
f^iV-*^'^^    t^25  &  26  Vict.  c.  89,  s.  35,^  tliat  the  name  of  Amelia  Trittin  be  re- 


^i-^.^'C^.^ 


SAN  FRANCISCO  R.  CO. 

haw  Reports,  3  Queen's  Bench,  584. 


-\/^-        fxr^   n    jtificates  with  a  blank  indorsement  signed  by  him.    New  certificates  were  issued  in  their 
•K.  J,         /.y^'M  stead  to  the  purchaser.     It  Avas  the  duty  of  the  manager  of  the  corporation  to  cancel  the 

'^  '-^  'old  certificates.     Instead  of  doing  so,  he  delivered  them  to  Knox  as  security  for  a  loan. 

Held,  that  the  corporation  was  not  estopped  to  deny  the  validity  of  the  old  certificates,  and 
that  Knox  could  not  recover  of  the  corporation  the  damages  sustained  bj'  him  by  reason  of 
his  loaning  mone}'  on  the  faith  of  the  certificates.  Knox  v.  Eden  Musee  cfc.  Co.,  A.  D. 
1896,  148N.  Y.  441.  — Ed. 

1  The  25  &  26  Vict.  c.  89  applies  (s.  176)  with  certain  exceptions  to  companies  formed 
and  registered  under  the  Joint  Stock  Companies  Acts  of  1856  and  1857. 

Section  25  :  —  Every  company  under  this  act  shall  cause  to  be  kept  in  one  or  more 
books  a  register  of  its  members;  and  there  shall  be  entered  therein  the  following  par 
ticulars  :  (1)  The  names  and  addresses,  and  the  occupations,  if  any,  of  the  members 
of  uhe  company,  with  the  addition,  in  the  case  of  a  company  having  a  capital  divided' 
a  shares,  of  a  statement  of  the  shares  held  by  each  member,  distinguishing  each 
share  by  its  number ;  and  of  the  amount  paid  or  agreed  to  be  considered  as  paid  on 
the  shares  of  each  member.  (2)  The  date  at  which  the  name  of  any  person  wa? 
as  a  member.    (3)  The  date  at  which  any  person  ceased  to  be  a 

any  company  acting  in  contravention  of  this  section,  shall  incur  a  pen- 

V''*^^ J^  ^^^"^^  ^^^y  ^'^^  exceeding  5/.  for  every  day  during  which  its  default  in  not  complying  with  the 

''^       -  ~^  jiT^  '    like  penalty." 

^ '    L<^       Section  31 :  —  "A  certificate,  under  the  common  seal  of  the  company,  specifying  any 


I   %^  .^         ^y'>  snares  ui  ciiuii    luc 

-J.    ■'^   ^^  La  entered  in  the  register  ; 
(•^^    "\'t^  {1,^  member.     And  any  cor 


provisions  of  this  section  continues,  and  every  director  or  manager  of  the  company  who. 


jl  '',^^v-    share  or  shares,  or  stock  held  by  any  member  of  a  company,  shall  be  prima  facie  evi 
(Vi/^y    dence  of  the  title  of  the  member  to  the  share  or  shares  or  stock  therein  specified. 
\'t  ^A^.  -^    By  s.  32,  the  register  is  to  be  open  to  the  inspection  of  a  member  gratis,  and  of  si 
yr     stranger  on  payment  of  1  s. 
^  \  \         Section  35  :  —  "If  the  name  of  any  person  is  without  sufficient  cause  entered  in  or 


1  A^^  V^   iS^     or  any  member  of  the  company,  or  the  company  itself,  may  as  respects  companies  re, 


i^ 


and  any  damages  the  pattrf 


X  /?ktered  in  England  or  Ireland,  by  motion  in  any  of  her  Majesty's  superior  courts  of 

ij  I)         /^^isivf  or  equity,  or  by  application  to  a  judge  sitting  in  chambers,  or  to  the  vice-warden 

]  A,(         of  the  stannaries  in  the  case  of  companies  subject  to  his  jurisdiction,  and  as  respects 

companies  registered  in  Scotland  l)y  summary  petition  to  the  court  of  session,  or  in 

V'^BUch  other  manner  as  the  said  courts  may  direct,  apply  for  an  order  of  the  court  that 

^        jlic  register  may  be  rectified  ;  and  the  court  may  either  refuse  such  application,  with  or 

M^      /-^r  t/^  vjjthbut  costs,  to  be  paid  by  the  applicant,  or  it  may,  if  satisfied  of  tlic  justice  of  the 

jVj     „n^^    ^Jl/case,  make  an  order  for  the  rectification  of  the  ^register,  and  may  direct  the  company 

■       L^        J  AA^        ^  P*y  ^  *'^®  costs  of  such  motion,  application,  (^  petition,  an 


■1    '^  \MJr'  A'' 


^  ,  vS 


V  iV^' 


A 


.50 


r, 


IN   RE   BAHIA   AND   SAN  FRANCISCO   R.   CO.  641 

stored  to  the  register  of  the  Bahia  and  San  Francisco  Railway  Company 
in  respect  of  the  five  shares  in  the  company  numbered  84,511  to  84,615 
both  inclusive,  and  that  the  company  do  pay  to  Amelia  Trittin  an}' 
dividends  that  have  fallen  due  since  the  shares  were  transferred  from 
her  name.  And  it  was  further  ordered  that  a  special  case  be  stated 
for  the  opinion  of  this  Court  between  the  Reverend  Richard  Burton  and 
Mary  Anne  Goodburn  and  the  company,  for  the  purpose  of  determining 
the  amount  of  damages  (if  any)  which  the  company  are  liable  to  pay 
them  respectivel}'. 

1.  On  the  8th  of  March,  1866,  Miss  Amelia  Trittin  was  the  registered 
holder  of  five  shares  in  the  Bahia  and  San  Francisco  Railway  Company, 
Limited,  hereafter  called  "  the  compan}-,"  and  deposited  the  certifi- 
cates of  the  shares  with  one  Thomas  Charles  Oldham,  a  stock-broker, 
and  requested  him  to  keep  the  same  and  to  receive  the  dividends  pay- 
able thereon. 

2.  On  or  about  the  17th  of  April,  1866,  a  transfer  of  the  five  shares 
to  John  Alfred  Stocken  and  Samuel  Goldner,  purporting  to  be  executed 
by  Amelia  Trittin,  but  which  for  the  purpose  of  this  case  is  admitted  to 
have  been  a  forgery,  was  left  with  the  secretary  of  the  company  for  reg- 
istration, together  with  the  certificates  of  the  shares. 

3.  The  secretary  of  the  company,  in  the  ordinar}^  course  of  business, 
then  sent  by  post  to  the  last  place  of  residence  of  Miss  Trittin  a  writ- 
ten notice  that  the  deed  of  transfer  had  been  so  received  by  him,  and 
after  ten  days  having  received  no  answer  from  her,  registered  the  deed 
of  transfer  and  removed  the  name  of  Miss  Trittin  from  and  placed  the 
names  of  John  Alfred  Stocken  and  Samuel  Goldner  upon  the  register 
of  shareholders  as  holders  of  the  aforesaid  five  shares,  and  share  certifi- 
cates in  respect  of  the  said  shares  were  handed  to  them. 

4.  In  May,  1866,  the  Reverend  Richard  Burton  through  his  broker 
bought  on  the  Stock  Exchange  four  shares  in  the  company,  and  Mrs. 
Mary  Anne  Goodburn  by  her  broker  bought  one  share. 

5.  About  the  same  time,  John  Alfred  Stocken  and  Samuel  Goldner 
sold  five  shares  in  the  company  to  Arthur  Bristowe,  a  stockbroker,  and 
in  pursuance  of  the  above  contracts  transferred  four  of  the  "shares  com- 
prised in  the  forged  transfer  to  Mr.  Burton,  and  the  remaining  one  to 
Mrs.  Goodburn. 

aggrieved  may  have  sustained.  The  court  may  in  any  proceeding  under  thi.s  section 
decide  on  any  qnestion  relating  to  the  title  of  any  person  who  is  a  party  to  such  pro- 
ceeding to  have  his  name  entered  in  or  omitted  from  the  register,  whether  such  ques- 
tion arises  between  two  or  more  members  or  alleged  members  or  between  anv  members 
or  alleged  members  and  the  company,  and  generally  the  court  may  in  any  such  pro- 
ceeding decide  any  question  that  it  may  be  necessary  or  expedient  to  decide  for  the  rec- 
tification of  the  register  ;  provided  that  the  court,  if  a  court  of  common  law,  mav  direct 
an  issue  to  be  tried,  in  which  any  question  of  law  may  be  raised,  and  a  writ  of  error  oj 
appeal  in  the  manner  directed  by  'the  Common  Law  Trocedure  Act,  1S54,'  shall  lie." 
Section  37  :  —  "  The  register  of  members  shall  be  primA  facie  evidence  of  any  matteif 
ty  this  act  directed  or  authorized  to  be  inserted  therein." 


642  IN   EE   BAHIA  AND   SAN   FRANCISCO   R.   CO, 

6.  It  is  admitted  that  Mr.  Burton  and  Mrs.  Goodburn  entered  into  the 
contracts  above-mentioned  boni  fide  and  for  value  of  the  shares,  with- 
out notice  of  any  fraud,  and  according  to  the  usual  course  of  business 
with  reference  to  the  purchase  of  shares,  and  on  or  shortly  after  the  28th 
of  May,  1866,  the}-  were  duly  registered  by  the  company'  as  the  holders 
of  the  shares,  and  share  certificates  in  respect  thereof  were  handed  to 
them. 

6a.  In  the  above  transactions  everything  was  done  by  the  company 
in  accordance  with  the  usual  custom  of  business,  and  there  was  nothing 
in  the  circumstances  so  far  as  they  were  known  to  the  compan}'  to 
excite  their  suspicion  or  to  induce  them  to  depart  from  such  usual 
course  of  business. 

7.  The  form  of  certificate  used  by  the  company  was : — 

Certificate  of  Shares. 
Bahia  and  San  Francisco  Railway  Company,  Limited. 
Registered  under  the  Joint  Stock  Companies  Act  of  1856. 

28th  January,  1858. 

Nos.  to  .  Five  shares  of  20^.  each. 

This  is  to  certify  that  is  the  registered  holder 

of  the  shares  Nos.  to  in  the  above  company,  subject  to  the 

articles  of  association,  on  each  of  which  there  has  been  paid  to  this  day 

three  pounds. 

Given  under  the  common  seal  of  the  compan}', 
Signed  by  two  directors.  the  day  of  18 

8.  The  articles  of  association  were  made  part  of  the  case.  By  art.  1, 
the  regulations  of  table  B,  of  the  Joint  Stock  Companies  Act,  1856, 
were  excluded,  except  as  expressly  set  forth  in  the  articles  themselves, 
By  art.  25,  the  board  shall  determine  the  mode  and  conditions  of,  and 
the  charges  for  the  transfer  of  shares,  but  no  such  charge  shall  exceed 
25.  Q)iL  for  every  transferor  named  in  the  instrument  of  transfer.     By 

.  art.  26,  every  original  shareholder  shall,  on  payment  of  such  sum,  not 
exceeding  2s.  6f?.,  as  the  directors  prescribe,  be  entitled  to  a  certificate 
under  the  common  seal  of  the  company,  and  under  the  hands  of  two 
of  the  directors,  specifying  the  shares  held  by  him,  and  the  amount  paid 
up  in  respect  thereof. 

The  questions  for  the  opinion  of  the  Court  were :  1.  Whether,  as 
against  the  company,  Mr.  Burton  and  Mrs.  Goodburn  are  entitled  to 
the  said  shares  in  the  company,  or  an  equivalent  number.  2.  Whether 
they  are  entitled  to  any  and  what  damages  to  be  paid  to  them  by  the 
company  under  the  above  circumstances. 

The  Court  were  to  make  such  order  and  give  such  judgment  as  they 
might  think  fit,  and  have  power  to  make  and  give. 

J.  Brown^  Q.  C.  ( TF.  G.Harrison  with  him),  for  the  claimants, 
Burton  and  Goodburn. 

[Argument  omitted.] 


IN   RE   BAHIA   AND   SAN   FRANCISCO   R.   CO.  643 

WatJcin  Williams  (Cohen  with  him),  for  the  company.  The  con- 
tract which  a  buyer  makes  in  the  market  is  only  for  a  certain  number 
of  shares,  not  any  specific  shares,  and  it  is  not  till  the  purchase  is  com- 
plete that  the  company  is  called  upon  to  act  and  register  the  transfer. 
There  is,  therefore,  no  contract  on  which  the  companj'  can  be  held  liable 
to  the  claimants.  Nor  is  there  anj'  breach  of  duty  shown  on  the  part 
of  the  company  ;  the  secretary  acted  with  due  caution  by  notifying  the 
proposed  transfer  to  Miss  Trittin,  the  person  purporting  to  transfer,  and 
the  case  states  (par.  6a)  that  everything  was  done  by  the  company  in 
the  usual  course  of  business. 

[Blackburn,  J.  —  The  company  are  bound  by  the  statute  to  keep  a 
correct  register.] 

Only  to  use  due  diligence  in  keeping  it  correct,  not  to  have  a  register 
absolutely  correct :  see  East  Gloucestershire  Railway  Company  v.  Bar- 
tholomew, Law  Rep.  3  Ex.  15. 

[Blackburn,  J.  —  That  case  does  not  touch  the  present  case. 

CocKBURN,  C.  J.  —  As  far  as  the  register  is  concerned,  it  does  not 
appear  that  the  claimants  ever  referred  to  the  register.] 

Then  it  is  said  that  the  company-,  having  issued  share  certificates  to 
Stocken  and  Goldner,  as  their  credentials  of  membership,  are  estopped 
from  denying  their  title.  But  the  company  never  asserted  they  had 
title,  but  only  that  they  were  on  the  register  as  shareholders,  which  is 
true.  The  certificate  isjio  representationJLo^third  persons,  it  is  only  a 
clocument  between  J,he  holder  and  the  company. 

[Blackburn,  J.  —  The  statute  (s.  31)  makes  the  certificate  expressly 
prima  facie  evidence  of  the  title  of  the  holder.] 

As  between  him  and  the  company. 

[Blackburn,  J. — No,  prima  facie  evidence  generally.] 

In  all  the  cases  bearing  on  the  subject,  the  company  sought  to  be  made 
liable  had  been  guilty  of  negligence  ;  as  in  Ashby  v.  Blackwell,  2  Eden 
299,  where  the  power  of  attorney  was  grossly  irregular  on  the  face  of  it. 
Hidyard  v.  South  Sea  Compan}-  and  Keate,  2  P.  Wms.  76,  is  the  only 
case  really  in  point.  There,  on  a  transfer  of  stock  under  a  forged  letter 
of  attorney,  the  dividends  and  stock  were  ordered  to  be  refunded  and 
restored  by  the  assignee  to  the  right  owner,  and  the  company'  were  held 
not  responsible. 

[Blackburn,  J.  —  That  was  a  case  between  the  company,  the  pur- 
chaser under  a  forged  letter  of  attorne}',  and  the  true  owner ;  the  rights 
of  sub-purchasers  had  not  to  be  considered.] 

But  surel}'  the  remedy  is  against  the  vendor,  if  the  purchaser  gets 
nothing,  instead  of  what  he  contracted  for.  The  corapan}'  were  not  in 
fault ;  the  claimants  were  not  misled  by  the  company,  they  made  no 
inquiries,  nor  ever  saw  the  register,  as  the  Lord  Chief  Justice  has 
pointed  out. 

[Cockburn,  C.  J.  —  No ;  but  by  giving  the  certificate  the  company 
practically  armed  the  vendors  with  the  means  of  holding  themselves 
ouj,  as  the  holders  of  these  shares. 


644  IN   KE   BAHIA   AND   SAN   FRANCISCO   R.    CO. 

Lush,  J.  —  The  question  comes  round  to  this,  what  does  the  certificate 
mean :  does  it  certify  only  that  A.  B.  is  on  the  register,  or  does  it  not 
rather  amount  to  certifying  that  he  is  in  reality  a  shareholder  ?] 

Only  that  he  is  on  the  register. 

[Blackburn,  J.  —  Can  that  be  said  in  the  face  of  s.  31  ? 

Lush,  J.  —  Suppose  after  the  contract,  but  before  he  pa3's  the  pur- 
chase-mone}',  the  purchaser  applies  to  the  company  to  know  if  his  vendor 
is  a  member  of  the  company,  and  the  answer  is  yes?  The  compan^^ 
would  then  have  made  a  representation  on  which  the}'  intended  the 
purchaser  to  act.  How  does  that  differ  from  issuing  a  certificate, 
which  says  the  same  thing?] 

It  differs  in  this :  the  company  do  not  make  a  voluntary'  statement, 
they  are  bound  to  keep  a  register,  and  issue  a  certificate. 

[Blackburn,  J.  —  They  are  not  bound  to  put  a  person  on  the  register 
who  is  not  rightfully  entitled.] 

But  in  order  to  make  them  liable  for  putting  a  person  not  entitled  on 
the  register  negligence  must  be  shown,  which  is,  in  effect,  negatived  in 
this  case.  In  Swan  v.  North  British  Australasian  Company,  2  H.  &  C. 
175, 181,  188,  32  L.  J.  Ex.  276,  279,  Cockburn,  C.  J.,  says,  "  To  bring 
a  case  within  the  principle  estabished  by  the  decisions  in  Pickard  v. 
Sears,  6  Ad.  &  E.  469  (E.  C.  L.  R.  vol.'33),  and  Freeman  v.  Cooke, 
2  Ex.  654,  18  L.  J.  Ex.  114,  it  is,  in  my  opinion,  essentially  necessary 
that  the  representation  or  conduct  complained  of,  whether  active  or 
passive  in  its  character,  should  have  been  intended  to  bring  about  the 
result  whereby  loss  has  arisen  to  the  other  part}',  or  his  position  has 
been  altered."  And  in  the  same  case,  Blackburn,  J.,  says,  "  I  agree 
that  a  party  may  be  precluded  from  denying  against  another  the  exist- 
ence of  a  particular  state  of  things,  but  then,  I  think,  it  must  be  by 
conduct  on  the  part  of  that  party  such  as  to  come  within  the  limit  so 
carefully  laid  down  by  Parke,  B.,  in  delivering  the  judgment  of  the 
Court  of  Exchequer  in  Freeman  v.  Cooke,  2  Ex.  663,  659, 18  L.  J.  Ex. 
119,  117.  It  is  pointed  out  by  Parke,  B.,  in  the  course  of  the  argu- 
ment in  that  case,  that  in  the  majority  of  cases  in  which  an  estoppel 
exists,  '  the  party  must  have  induced  the  other  so  to  alter  his  position 
that  the  former  would  be  responsible  to  him  in  an  action  for  it.'  And 
he  had  before  pointed  out  that  '  negligence,'  to  have  the  effect  of  estop- 
ping the  party,  must  be  '  neglect  of  some  duty  cast  upon  the  person 
who  is  guilty  of  it.'  And  this,  I  apprehend,  is  a  true  and  sound 
principle." 

Cockburn,  C.  J.  —  I  am  of  opinion  that  our  judgment  must  be  for  the 
claimants.  If  the  facts  are  rightly  understood,  the  case  falls  within 
the  principle  of  Pickard  v.  Sears  and  Freeman  v.  Cooke.  The  com- 
pany are  bound  to  keep  a  register  of  shareholders,  and  have  power  to 
issue  certificates  certifying  that  each  individual  shareholder  named 
therein  is  a  registered  shareholder  of  the  particular  shares  specified. 
This  power  of  granting  certificates  is  to  give  the  shareholders  the 
opportunity  of  more  easily  dealing  with  their  shares  in  the   market, 


IN   EE   BAHIA   AND   SAN   FRANCISCO   R.    CO.  645 

and  to  afford  facilities  to  them  of  selling  their  shares  by  at  once  show- 
ing a  marketable  title,  and  the  eflfect  of  this  facilit}'  is  to  make  the 
shares  of  greater  value.  The  power  of  giving  certificates  is,  therefore, 
for  the  benefit  of  the  company  in  general ;  and  it  is  a  declaration  by  the 
company  to  all  the  world  that  the  person  in  whose  name  the  certificate 
is  made  out,  and  to  whom  it  is  given,  is  a  shareholder  in  the  company, 
and  it  is  given  by  the  company  with  the  intention  that  it  shall  be  so 
used  by  the  person  to  whom  it  is  given,  and  acted  upon  in  the  sale  and 
transfer  of  shares.  It  is  stated  in  this  case  that  the  claimants  acted 
bona  fide,  and  did  all  that  is  required  of  purchasers  of  shares ;  they 
paid  the  value  of  the  shares  in  money  on  having  a  transfer  of  the 
shares  executed  to  them,  and  on  the  production  of  the  certificates  which 
were  handed  to  them.  It  turned  out  that  the  transferors  had  in  fact 
no  shares,  and  that  the  company'  ought  not  to  have  registered  them  as 
shareholders  or  given  them  certificates,  the  transfer  to  them  being  a 
forger}-.  That  brings  the  case  within  the  principle  of  the  decision  in 
Pickard  v.  Sears,  6  Ad.  &  E.  469  (E.  C.  L.  R.  vol.  33),  as  explained 
by  the  case  of  Freeman  v.  Cooke,  2  Ex.  654,  18  L.  J.  Ex.  114,  that, 
if  you  make  a  representation  with  the  intention  that  it  shall  be  acted 
upon  by  another,  and  he  does  so,  you  are  estopped  from  denying  the 
truth  of  what  you  represent  to  be  the  fact. 

The  only  remaining  question  is,  what  is  the  redress  to  which  the 
claimants  are  entitled.  In  whatever  form  of  action  they  might  shape 
their  claim,  and  there  can  be  no  doubt  that  an  action  is  maintainable, 
the  measure  of  damages  would  be  the  same.  They  are  entitled  to 
be  placed  in  the  same  position  as  if  the  shares,  which  the}'  purchased 
owing  to  the  company's  representation,  had  in  fact  been  good  shares, 
and  had  been  transferred  to  them,  and  the  company'  had  refused  to  put 
them  on  the  register,  and  the  measure  of  damages  would  be  the  market 
price  of  the  shares  at  that  time ;  if  no  market  price  at  that  time,  then 
a  jury  would  have  to  say  what  was  a  reasonable  compensation  for  the 
loss  of  the  shares. 

Blackburn,  J.  —  I  am  of  the  same  opinion.  When  joint  stock  com- 
panies were  established,  the  gi-eat  object  was  that  the  shares  should  be 
capable  of  being  easily  transferred  ;  and  the  legislature  has  made  pro- 
vision by  25  &  26  Vict.  c.  89,  s.  25,  that  the  company  shall  keep  a  reg- 
ister of  the  members,  and  when  the  capital  is  divided  into  shares,  each 
share  is  to  be  distinguished'  by  a  number,  and  the  shares  held  by  each 
member  is  to  be  specified,  and  the  dates  at  which  each  person's  name 
was  entered  on  the  register.  In  order  tojceep^up  such  a  register,  the 
company  must  alter  its  re^isterjwhenever  a  tra_ns^r  of^shares^  isjna^, 
on  the  application  and  pav'ment  of  a,  certain  sum  to  thern  b}-  the  person 
towhom  the  shares  are  alleged  to  be  transferred.  And  the  first  thing 
the_company  would  have  to  do  when  a  transfer  was  tendered  to  thjejn, 
vrould  be  to  inquire  into  itj  validity;^;  but  a  company  may  be  decei^:ed, 
and  jnducedj  as  the  company  were  in  the  present  case,  without  any  neg- 
ligence, tq^eceive^as  genuine  a  forged  transfer.     They  accordingly 


646 


IN  EE   BAHIA.   AND   SAN  FRANCISCO  E.   COo 


'^^yo>y 


4>^' 


inade  an  alteration  in  the  register,  and  made  it  in  factinaccurate  by  put- 
ting  the  names  of  Stocken  and  GoMjier  oiLthejr_egisteJL.asJtlieJ^Qld£rs_Qf 
particular  shares,  when  in  fact  they  were  not  so.  The  statute  (s.  31) 
further  provides  that  the  compan}'  may  give  certificates,  specifying  the 
shares  held  by  an}'  member  ;  and  the  object  of  this  provision  is  expressly 
stated  to  be  that  this  certificate  should  be  prima  facie  evidence  of  the 
,title  of  the  person  named  to  the  shares  specified ;  and  the  compan}', 
Itherefore,  by  granting  the  certificate,  do  make  a  statement  that  the}'  have 
transferred  the  shares  specified  to  the  person  to  whom  it  is  given,  and 
that  he  is  the  holder  of  the  shares.  If  they  have  been  deceived  and  the 
statement  is  not  perfectly  true,  they  maj"  not  be  guilty  of  negligence, 
but  the  company  and  no  one  else,  have  power  to  inquire  into  the  mat- 
ter ;  and  it  was  the  intention  of  the  legislature  that  these  certificates 
should  be  documents  on  which  bu3'ers  might  safel}'  act.  Now,  on  the 
facts  of  this  case,  although  according  to  the  practice  on  the  stock  ex- 
change, the  claimants  did  not  originall}^  contract  for  these  particular 
shares,  the  mone}'  was  paid  by  them  or  their  broker  on  the  execution 
by  Stocken  and  Goldner  of  a  transfer,  and  on  the  certificate  under  the 
seal  of  the  company  being  handed  over  to  them  that  Stocken  and  Gold- 
ner were  the  holders  of  these  particular  shares  ;  and  it  is  quite  clear  that 
a  statement  of  a  fact  was  made  by  the  compau}',  on  which  the  compan}', 
at  the  ver}'  least,  knew  that  persons  wanting  to  purchase  shares  might 
act.  And  the  claimants  having  bona  fide  acted  upon  that  statement, 
and  suffered  damage,  can  they  recover  from  the  company  ?  I  think  they 
can,  on  the  principle  enunciated  in  Freeman  v.  Cooke,  2  Ex.  654,  18 
L.  J.  Ex.  114.  Suppose  an  action  by  the  claimants  against  the  com- 
pany, asserting  that  the  shares  were  the  plaintiffs'  and  that  the  company 
refused  to  pay  them  the  dividends  and  deprived  them  of  the  use  of  the 
shares,  in  effect  an  action  of  trover.  The  only  plea  would  be  that  the 
plaintiffs  were  not  the  true  owners  of  the  shares,  and  there  would  be 
a  replication  by  way  of  estoppel,  that  the  company  were  estopped  from 
saying  that  the  plaintiffs  were  not  the  owners,  because  they  had  pur- 
chased on  a  statement  of  title  made  by  the  company,  and  intended  by 
them  to  be  acted  upon  ;  this  would  clearly  amount  to  an  estoppel  within 
the  rule  defined  in  Freeman  v.  Cooke,  2  Ex.  654,  18  L,  J.  Ex.  114. 
The  claimants,  therefore,  would  be  entitled  to  a  verdict,  and  it  follows 
that  they  are  entitled  as  damages  to  the  value  of  the  shares  at  the  time 
they  were  converted ;  that  is,  at  the  time  when  Miss  Trittin  interfered 
and  claimed  the  shares. 

Mellor,  J.  —  I  am  of  the  same  opmion.  I  think  the  right  of  action 
cannot  be  grounded  on  negligence  ;  bjit  that  the  facts  do  amount  to_an 
estoppel  on  the  company  from  denying  the  claimants'  title.  The  com- 
pany need  not  register  a  person  as  a  member,  under  a  transfer  of  shares 
of  which  they  have  any  doubt ;  but  can  leave  the  transferee  to  come  to 
the  Court  and  make  out  his  title.  In  the  present  case  the  company 
acted  apparently  without  negligence,  on  the  production  of  the  transfer 
by  the  broker,  and  having  sent  a  letter  to  Miss  Trittin  and  received  no 


IN   KE  BAHIA   AND   SAN   FKANCISCO   R.   CO. 


647 


answer,  the}'  caused  the  transferees  to  be  registered,  and  gave  them 
a  certificate  under  seal,  clearly  intending  them  to  use  it  injthe  market 
as  a  voucher  or  statement  that  they  were  the  holders  of  the  particular 
shares^  The  claimants  accordingly  purchase  the  shares,  but  it  turns 
out  that  they  acquired  no  title,  and  their  names  are  struck  off  the 
register.  I  cannot  but  think  that  a  person  must  have  a  remedy  against 
a  company  for  wrongfully  striking  his  name  off  the  register,  so  as  to 
prevent  his  having  tue  advantage  of  the  shares  he  had  purchased,  and 
in  such  an  action  by  the  claimants  the  estoppel  would  arise  against  the 
comjQanj-.  The  measure  of  damages  would  be  the  value  of  the  shares 
at  the  time  they  ceased  to  be  recognized  as  shareholders.  Whether  or 
not  the  compan}'  maj'  have  a  remedy  over  against  Stocken  and  Goldner 
it  is  unnecessar}-  to  consider. 

Lush,  J.  —  I  am  also  of  the  same  opinion.  It  is  not  stated  what  the 
usual  course  of  business  is,  but  only  that  the  shares  were  purchased  iu 
the  usual  course.  I  take  it,  the  claimants  having  bargained  in  the 
share  market  for  a  certain  number  of  shares  each,  the}'  were  offered  a 
transfer  of  the  shares  which  had  been  transferred  b}'  a  forged  transfer 
to  Stocken  and  Goldner,  the  certificate  at  the  same  time  being  handed 
to  them  before  the  completion  of  the  purchase,  and  by  this  certificate, 
in  the  usual  form  and  under  the  seal  of  the  company,  it  is  certified  that 
Stocken  and  Goldner  are  the  registered  holders  of  the  specific  shares, 
giving  the  numbers.  Now  there  is  no  doubt  that  the  certificate  was 
given  bj'JJie^ompany  to  Stocken  and  Goldner  in  order  that  they  might 
u_se  it  in  the  usual  wa3^in  which  ^ucLi  certificates  are  usedjjyiz.,  as_a 
voucher  to  a  purchaser  of  their  names  being  on  the  register.  And  the 
claimants  having  acted  on  this  statement  by  the  companj-,  there  arises 
an  estoppel  as  against  the  company,  prohibiting  them  from  jlenying 
thatwhat  it^tates  is  true._  And  the  question  then  is,  what  does  the 
certificate  mean  ?  Does  it  mean  merely,  that  Stocken  and  Goldner  are 
on  the  register,  and  the  company  have  done  their  best  to  ascertain  that 
they  are  entitled  to  the  shares,  but  cannot  say  whether  they  are  so  enti- 
tled? Or  does  it  ainount  to  a  statement  that  the  company  take  ujjoa 
themselves  the  responsibility  of  asserting  that  they  are  the  registered 
shareholders  entitled  to  the  specific  shares  ?^^  I  think  the  certificate 
musFaimount  to  the  latter  assertion.  It  is  the  company  who  are  to 
keep  and  look  after  the  register,  and  they  are  the  only  persons  who 
have  control  over  it,  and  they  can  refuse  to  register  a  person  until  he 
shows  that  he  is  legally  entitled.  Having,  therefore,  put  the  names  of 
Stocken  and  Goldner  upon  the  register,  and  granted  them  a  certificate, 
the  company  are  estopped  after  that  statement  has  been  acted  upon, 
and  cannot  deny  that  those  persons  were  the  legal  holders  of  the  par- 
ticular shares  which  have  been  transferred  to  the  claimants.  The 
claimants,  therefore,  are  entitled  to  recover  from  the  company  the  value 
of  the  shares  at  the  time  when  they  were  deprived  of  them. 

Brown,  Q.  C.,  asked  that  the  Court  would  award  interest  in  addition; 
de  stated  that  the  company  paid  7  per  cent,  dividend,  and  that  the  con> 


^ 


648  WHITECHURCH  V.    CAVANAGH. 

pany  refused  to  recognize  the  claimants  as  shareholders  on  the  10th  of 
October,  1866. 

Per  Curiam.  —  The  rule  will  be  that  the  company  do  pay  to  the 
claimants  the  value  of  their  respective  shares  on  the  10th  of  Octobei; 
1866,  at  interest  from  that  time  at  4  per  cent,  as  damages,  together 
with  costs.  Mule  absolute  accordingly. 


/ 


^  ^GEOEGE  WHITECHUECH,  Limited,  v.  CAVANAGH. 


^'f^ 


«/^  (  V    v*  ■A^'ig-  5,  1901.     House  of  Lords,  17  Times  Law  Reports,  746.1 

\j^  -TriX.  Y^  "^  ,  This  was  an  appeal  from  an  order  of  the  Court  of  Appeal  (Lords 
^    _^  V^  Justices  A.  L.  Smith,  Collist-s,  and  Eomer)  affirming  a  judgment  for 

'-r-'^  JCu.  \  *^®  plaintiff  [Cavanagh]  —  respondent  on  the  appeal  —  of  Mr.  Justice 
Bigham.     The  case  below  is  reported,  16  The  Times  L.  E.  303. 

Mr.  Lawson  Walton,  K.  C,  Mr.  Swinfen  Eady,  K.  C,  and  Mr.  Wills 
appeared  for  the  appellants ;  and  Mr.  Bufus  Isaacs,  K.  C,  and  Mr. 
Ryland,  for  the  respondent. 

The  facts  are  rather  complicated,  and  are  sufficiently  stated  in  Lord 
Macnaghten's  judgment.  The  question  was  whether  a  company  was 
estopped  for  refusing  to  give  effect  to  the  representations  of  its  sec- 
retary and  of  its  managing  director.  The  action  was  in  effect  for 
damages  from  the  appellant  company  for  refusing  to  place  the  re- 
spondent on  its  register  of  shareholders. 

The  House,  having  taken  time  for  consideration,  reversed  the  deci- 
sion of  the  Court  of  Appeal,  and  held  that  the  company  was  not  bound 
by  these  representations. 

Lord  Macnaghten's  judgment  was  read  by  the  Lord  Chancel- 
lor, who  expressed  his  concurrence  therein.  It  was  as  follows  : 
This  case  has  been  argued  very  fully  and  very  ably.  Many  interest- 
ing points  have  been  discussed,  most  of  which,  I  am  happy  to  think, 
are  not  at  all  necessary  for  the  determination  of  the  matter  in  hand. 
The  real  question  may  be  stated  very  shortly.  Has  the  appellant 
company,  George  Whitechurch  (Limited),  incurred  any,  and,  if  any, 
what,  liability  by  reason  of  representations  made  by  its  secretary, 
Eichard  G.  Wells,  in  London,  and  by  its  managing  director,  George 
Whitechurch,  in  Paris  ?  The  claim  as  originally  presented  was 
founded  on  an  alleged  misrepresentation  by  the  company.  The 
action,  however,  was  treated  by  the  Court  of  Appeal  and  by  the 
learned  counsel  for  the  respondent  at  your  Lordships'  Bar  as  an 
action  to  recover  damages  from  the  company  for  refusing  to  place  the 
respondent  Cavanagh  upon  its  register  of  shareholders.  It  was  held 
by  the  Court  of  Appeal,  and  it  was  strenuously  argued  at  the  Bar,  that 

1  It  is  supposed  that  this  case  will  be  officially  reported  in  Law  Reports  (1901),  Appeal 
Cases.  —  Ed. 


WHITECHURCH  V.    CAVANAGH.  649 

the  appellant  company  was  estopped  by  the  representations  of  Wells 
and  Whitechurch  from  denying  Cavanagh's  right  to  be  placed  on  the 
register.  I  quite  agree  with  the  Master  of  the  Rolls  in  thinking  that 
it  is  necessary  to  keep  the  two  alleged  estoppels  distinct  and  to  deal 
with  them  separately.  Whatever  difficulty  there  may  be  in  ascertain- 
ing the  precise  scope  and  effect  of  the  representations  made  by  White- 
church,  there  can  be  no  doubt  as  to  the  scope  and  effect  of  the  repre> 
sentations  made  by  Wells.  They  are  in  writing  and  in  a  common 
form.  There  can  be  no  question  as  to  the  meaning  of  the  written 
words,  except,  perhaps,  in  regard  to  one  point,  which  in  the  view 
I  take  of  the  case  is  not  material.  It  seems  that  one  Raymond 
had  undertaken  to  transfer  to  Cavanagh  by  way  of  security  a  large 
number  of  shares  in  George  Whitechurch  (Limited)  which  were  of 
considerable  value.  On  May  29,  1899,  at  Raymond's  bidding,  Wells, 
the  secretary  of  the  company,  certified  two  transfers,  one  of  1,100 
preference  shares  and  the  other  of  9,250  ordinary  shares  in  the  com- 
pany. The  shares  wera  each  £1  shares,  fully  paid,  and  worth  about 
15s.  apiece.  The  transfers  were  executed  by  Raymond  as  transferor. 
They  were  intended  to  be  executed  by  Cavanagh,  who  was  named  as 
transferee.  The  certification  on  the  transfer  of  the  preference  shares 
was  in  these  words  :  "Coupon  for  £1,100  preference  shares  in  the 
company's  office.  George  Whitechurch  (Limited).  —  Richard  G. 
Wells,  Secretary."  The  certification  on  the  transfer  of  the  ordinary 
shares  was  in  similar  terms.  It  was  common  ground  that  the  word 
"  coupon  "  stood  for  "  certificate  "  or  "  certificates,"  and  it  was  not 
disputed  that  the  certification  was  a  representation  that  there  had 
been  lodged  in  the  company's  office  certificates  for  the  shares  specified 
in  the  bodies  of  the  transfers,  such  certificates  being  either  in  the 
name  of  Raymond  himself,  as  registered  owner,  or  in  the  names  of 
the  registered  owners  who  had  executed  in  favor  of  Raymond  trans- 
fers which  had  been  lodged  with  the  certificates.  In  the  present  case 
the  jury  found  that  the  certification  given  by  Wells  imported  that  the 
shares  in  question  were  standing  in  Raymond's  own  name.  It  was 
contended  that  this  finding  was  not  supported  by  the  language  of  the 
certification,  or  by  anything  in  the  evidence.  In  my  opinion  the  point 
is  immaterial.  It  turned  out  that  no  certificates  had  been  lodged  in 
the  company's  office  by  Raymond,  nor  were  any  certificates  ever  forth, 
coming  to  answer  the  transfers  which  Raymond  had  executed.  As 
far  as  Raymond  was  concerned  the  whole  thing  was  a  fraud.  Wells 
was  Raymond's  secretary  and  servant,  as  well  as  secretary  to  the  com- 
pany. He  was  Raymond's  instrument  in  carrying  out  the  fraud.  He 
lied  purposely  for  Raymond's  benefit.  The  jury  have  found  that 
Wells  joined  in  the  fraud  for  the  benefit  of  the  company  as  well  as 
for  the  benefit  of  Raymond.  There  is  not,  however,  a  shadow  of 
evidence  to  support  this  conclusion.  The  finding,  so  far  as  the  com- 
pany is  concerned,  must  be  disregarded.  It  only  shows  how  little 
the  jury  appreciated  the  facts  of  the  case.     Then  comes  the  question, 


650  WHITECHURCH   V.    CAVANAGH. 

Is  the  company  bound  by  the  representations  of  their  secretary  ? 
That  must  depend  upon  what  authority  the  secretary  had  or  was  held 
out  as  having.  Now  the  duties  of  a  company's  secretary  are  well 
understood.  They  are  of  a  limited  and  of  a  somewhat  humble  char- 
acter. "  A  secretary,"  said  Lord  Usher,  "  is  a  mere  servant.  His 
position  is  that  he  is  to  do  what  he  is  told,  and  no  person  can  assume 
that  he  has  any  authority  to  represent  anything  at  all "  {Barrett  v. 
South  London  Traimioays  Company,  18  Q.  B.  D.  817).  In  the  present 
case  the  secretary  was  not  even  in  the  pay  of  the  company,  at  least  not 
directly.  The  company,  it  seems,  was  provided  with  an  office  and  a 
secretary  too  for  £50  a  year  by  another  company  which  appears  to 
have  been  under  Raymond's  control  and  management.  No  doubt 
the  practice  of  certifying  transfers  is  a  convenient  one.  It  facili- 
tates dealing  iu  shares  on  the  Stock  Exchange,  and  so  tends  indi- 
rectly  to  increase  the  value  of   shares  as  a  marketable  commodity. 

(But  in  permitting  its  secretary  to  certify  transfers,  it  cannot  be  sup- 
posed that  a  company  authorizes  the  secretary  to  do  more  than  to 
give  a  receipt  for  certificates  which  were  actually  lodged  in  the  office. 
I  cannot  think  that  a  company  is  estopped  by  the  certification  of  its 
secretary  if  he  gives  a  receipt  or  an  acknowledgment  for  certificates 
which  have  not  been  lodged  with  him.  If  authority  be  wanted 
for  this  proposition  it  seems  to  me  that  there  is  ample  authority  to 
be  found  in  the  case  of  Grant  v.  Norway  (10  C.  B.  QQ)5).  Grant  v. 
Norway  was  a  much  stronger  case  than  the  present.  There  it  was 
held  that  a  shipowner  is  not  bound  by  bills  of  lading  signed  by 
the  master  for  goods  not  received  on  board.  The  court  declared  that 
it  could  not  "  discover  any  ground  upon  which  a  party  taking  a  bill  of 
lading  by  endorsement  would  be  justified  in  assuming  that "  the  mas- 
ter ''  had  authority  to  sign  such  bills  whether  the  goods  were  on  board 
or  not."  Having  regard  to  the  authority  which  the  master  undoubt- 
edly possesses,  and  the  important  part  which  bills  of  lading  play  in 
the  commerce  of  the  country,  there  was  much  to  be  said  in  favor  of 
an  opposite  view.  It  was  argued  in  Grant  v.  Norway  that  the  doc- 
trine for  which  the  shipowner  was  contending  would  go  far  to  de- 
stroy the  negotiability  of  bills  of  lading,  and  that  as  the  master  had 
an  unlimited  authority  to  sign  bills  for  goods  received,  and  was  for 
some  purposes  regarded  as  the  general  agent  of  the  owner,  it  was  but 
just  that  the  owner  should  be  responsible  if  the  master  exceeded  his 
authority  or  deceived  third  persons.  But,  for  all  that,  the  principle 
of  the  decision  was  accepted  in  Coleman  v.  Riches  (16  C.  B.  104), 
and  the  decision  itself  has  been  recognized  in  this  House  as  sound  law ; 
and  the  commerce  of  the  country  has  not  suffered,  nor  has  the  credit 
of  bills  of  lading  been  impaired  in  consequence.  There  is  a  marked 
difference  between  a  certificate  and  a  certification.  A  certificate  is 
under  the  seal  of  the  company.  By  the  Companies  Act,  1862,  a  cer- 
tificate is  made  prima  facie  evidence  of  title.  If  faith  were  not  given 
to  the  solemn  assertions  of  a  company  under  its  common  seal,  "  it 


WHITECHURCH   V.   CAVANAGH.  651 

would,"  as  Lord  Caiexs  observed  in  BurkinsJiaw  v.  Nicolls  (3  App. 
Cas.  1004),  "  paralyse  the  whole  of  the  dealings  with  shares  in  public 
companies."  A  certification  stands  on  a  different  footing  altogether. 
Transfers  are  never  certified  under  the  company's  seal.  There  is  no 
obligation  on  a  company  to  certify  transfers  at  all.  The  certification 
is  not  passed  by  the  directors  or  brought  before  the  board.  A  certifi-l 
cation,  in  fact,  is  only  required  for  a  temporary  purpose,  to  meet  the 
exigencies  of  business  on  the  Stock  Exchange,  which  has  stated  days 
and  fixed  periods  for  the  different  stages  of  a  business  transaction  in- 
tended to  be  carried  out  under  its  rules.  In  dealings  in  shares  not 
under  the  rules  of  the  Stock  Exchange  certification  is  really  out  of 
place.  In  such  dealings,  in  the  case  of  a  purchase,  the  price  would 
only  be  paid  in  exchange  for  the  transfer  and  share  certificate  —  on 
the  completion  of  the  transaction  and  not  before.  Still  less  would  a 
certification  be  required  if  the  shares  were  merely  intended  to  form 
a  security.  A  good  equitable  charge  may  be  created  by  the  deposit  of 
certificates,  and  if  the  certificates  happened  to  include  shares  which 
were  not  intended  to  be  the  subject  of  the  security,  there  would  be  no 
very  great  difficulty  in  defining  the  extent  of  the  proposed  charge  in 
the  memorandum  of  deposit.  It  seems  to  me  that  it  would  be  most\ 
unreasonable  in  an}^  case,  whether  the  transaction  takes  place  on  the 
Stock  Exchange  or  not,  to  hold  a  company  estopped  by  the  certifica-j 
tion  of  its  secretary  if  the  secretary  certifies  a  transfer  without  hav- 
ing received  the  certificates.  The  supposed  estoppel,  therefore, 
founded  on  Wells's  certification,  in  my  opinion,  fails  altogether,  and 
for  the  same  reason  the  case  founded  on  alleged  misrepresentation  by 
the  company  fails  also. 

I  now  come  to  the  estoppel  founded  on  representations  made  by 
George  Whitechurch. 

[His  Lordship  here  stated  the  evidence,  and  continued.] 
The  jury  found  that  George  Whitechurch  "  allowed  the  plaintiff  to 
think  it  was  all  right  in  order  to  induce  the  plaintiff  to  withdraw  '  the 
opposition.'  "  It  is  not  very  clear  what  the  jury  really  meant.  The 
Master  of  the  Rolls  thinks  they  meant  to  say  that  Whitechurch 
represented  that  "  the  certified  transfers  were  as  good  as  transfers 
plus  certificates."  Lord  Justice  Collins  held  that  the  "  jury  meant 
that  Whitechurch  led  Cavanagh  to  believe  that  nothing  more  was 
required  by  the  company  to  entitle  the  plaintiff  to  receive  a  certificate 
giving  him  the  right  to  be  registered  as  the  transferee  of  the  shares." 
My  Lords,  I  must  confess  I  am  utterly  at  a  loss  to  see  any  ground 
upon  which  an  estoppel  can  be  raised  against  the  company.  To  begin 
with,  what  authority  had  George  Whitechurch  to  make  any  represen- 
tation in  regard  to  these  certified  transfers  which  could  bind  the 
company  ?  He  was  no  doubt  the  managing  director.  The  commer- 
cial business  of  the  company  was  entrusted  to  him.  But  nobody  can 
suppose  that  this  was  commercial  business.     I  put  that  aside.     Then 


652  WHITECHUECH   V.   CAVANAGH. 

I  have  always  understood  that  a  representation  to  bind  anybody  as 
an  estoppel  must  be  a  representation  of  an  existing  fact,  or  rather  a 
representation  as  to  some  fact  alleged  to  be  in  existence  and  not  to 
promises  defuturo.  What  was  it  that  Whitechurch  represented  as 
an  existing  fact  ?  That  Wells  was  the  secretary  of  the  company,  and 
that  the  certification  on  the  transfers  were  signed  by  him  ?  Well, 
that  was  perfectly  true.  That  Wells  had  actually  received  the  neces- 
sary certificates  ?  It  is  absurd  to  suppqse  that  Whitechurch  was 
asked  to  guarantee  that.  He  had  no  reason  to  doubt  Wells's  honesty, 
and  naturally  took  it  for  granted  that  Wells  would  not  have  given  a 
receipt  for  that  which  he  had  not  received.  The  Master  of  the  Eolls 
seems  to  think  that  the  representation  attributed  to  Whitechurch  was 
a  representation  to  the  effect  that  the  company  or  the  board  of  direc- 
tors would  act  on  the  certified  transfer  without  requiring  anything 
more.  That  seems  to  be  the  view  of  Lord  Justice  Collins  also. 
That  is  not  a  representation  of  an  existing  fact.  If  it  is  anything  it 
is  a  promise  defuturo,  which  cannot  be  an  estoppel.  The  doctrine  of 
estoppel  by  representation  is  a  very  old  head  of  equity.  It  has  been 
discussed  not  unfrequently  in  this  House,  notably  in  the  case  of  Jorden 
V.  Money  (5  H.  L.  C.  185),  to  which  Lord  Selborne  was  constantly 
in  the  habit  of  referring.  It  is  founded  upon  a  broad  principle  which 
enters  so  deeply  into  the  ordinary  dealings  and  conduct  of  mankind 
that  I  sometimes  rather  doubt  whether  any  great  advantage  is  to  be 
gained  by  endeavoring  to  reduce  it  to  rules  such  as  those  which  have 
been  formulated  in  the  case  of  Carr  v.  London  and  North  Western 
Railway  Company  (L.  R.,  10  C.  P.  307).  Perhaps  some  of  the  diffi- 
culties which  have  gathered  round  the  present  case  have  come  from 
clinging  to  rules  rather  than  attending  to  principles. 

[His  Lordship  added  inter  alia,  that  Cavanagh  and  his  solicitor, 
who  were  both  present  at  the  interviews  with  Whitechurch,  must  be 
taken  to  have  been  cognizant  of  the  articles  of  association  of  George 
Whitechurch,  Limited,  which  deal  with  the  transfer  of  shares  in  that 
company.  Whether  they  were  in  fact  acquainted  with  the  regulations 
of  the  company  or  not,  they  must  be  taken  to  have  had  notice  of 
them.] 

The  Lord  Chancellor  said  that  Lord  Sherrod  concurred  in  the 
judgment  proposed. 

Lord  James  of  Hereford,  Lord  Brampton,  and  Lord  Eobert- 
soN  read  judgments  to  the  same  effect. 

Appeal  allowed.    Action  dismissed. 


-(^A  <*'^ 
.//V 


YO^  AND   NEW  ^HAV^  V^Kl'^O.   V.   SCHUYLER. 


NEW  YORK  AND 


[) 


NEW 

1865. 


'^y. 


ij- 


■■\ 


^r 


HAVEN  R.   R.   CO.  v. 

34  iVew  yori-,  30.1  ^^A^'       (v,       ^^ 

This  is  an  action  in  the  nature  of  a  suit  in  equity,  against  Robert 
Schuyler  and  several  hundred  other  defendants.     The  complaint  was  \j^ 
sustained  by  this  court  on  demurrer,  as  will  appear  by  reference  to  the 
reported  case  in  17  N.  Y.  592.     The  object  of  the  complaint  was  to 
have  a  large  number  of  alleged  false  and  fraudulent  certificates  and  -V^    ^ 
transfers  of  pretended  stock  of  the  company,  made  by  Schuyler,  an( 
charged  to  be  held  by  the  defendants,  adjudged  spurious  and  void;''.^    ^  J^ 
and  to  compel  the  certificates  to  be  brought  into  court  and  ca.nce\\ed;-<^ a'^-^'- 
and  to  enjoin  the  several  defendants  from  further  prosecuting  actions />'^      ,o 
then  pending,  and  from  bringing  suits  against  the  company  to  enforce  J^'^'- 


.^    ..^ 


such  certificates  and  transfers,  or  to  recover  damages  for  any  reasons      v^ 


^'t4 
connected  therewith.  v^  4/  U.  ^    j^ 

A  large  number  of  the  defendants  answered,  setting  forth  various  iA     !<y" 

facts  and  grounds  upon  which  they  claimed  that  the  plaintiflTs  were  not  ?iiA    .  J 
entitled  to  the  relief  sought,  and  that  the  certificates  or  transfers  re-  '    .  t^-^^ 
spectively  held  by  them  were,  or  ought  to  be,  treated  as  valid  and  ^  ( 
binding  on  the  company;  or  damages  awarded  to  them  for  injuries  (*^    ^ ')  iP' 
sustained  by  the  alleged  frauds  of  Schuyler,  and  man}-  asking  for  relief '^-c^  ^ 
by  way  of  judgments  for  damages  against  the  company-.  (^^ 

The  case  was  tried  at  Special  Term  before  Ingraham,  J.     The  court    >*''-  "^  \   ' 
found  various  facts,  some  of  which  are  hereinafter  summarized.     A      i  b^ 
judgment  entered  at  the   Special  Term  was  affirmed  at  the  General 
Term.     From  such  affirmance  the  plaintiffs  and  some  of  the  defendants [v  ^ 
appealed.  l^^ 

It  appeared  that,  from  1847  to  1854,  the  issue  of  certificates,  both  ^v^ 
for  entirely  new  stock  and  for  stock  reissued  upon  transfers,  was  left 
wholly   in   charge   of    Robert   Schuyler,    the    transfer    agent  of    the 
company. 

The  charter  provided  that  the  shares  should  be  transferred  in  such^-  ^ 
manner  as  the  by-laws  should  direct.  By-laws  were  adopted,  accord! ng-^^^ 
to  which  shares  were  transferable  onl}'  on  the  books  of  the  compan}-  b}- 
the  shareholder  or  his  attorney  duh'  appointed,  and  on  the  surrender  of 
the  certificate  held  by  him  when  any  certificate  had  been  issued.  Each 
certificate  issued  recited  that  the  person  named  therein  was  entitled  to 
shares  transferable  on  the  books  of  the  company  b}-  such  person,  or 
his  attorney,  on  the  surrender  of  this  certificate.  Schuyler,  as  transfer 
agent,  was  authorized  to  sign  and  issue  certificates  on  a  transfer  from 
one  shareholder  to  another  upon  the  books  and  on  the  surrender  of  the 
previous  certificates.  He  also  had  authority  to  issue  certificates  in 
precisely-  the  same  form  to  the  original  subscribers  for  the  stock  (there 
was  a  large  increase  in  the  capital  stock  in  1851,  in  conformity'  with  a 

^  The  greater  part  of  the  case  is  omitted.  —  Ed. 


0 


H^ 


^ 


654 


NEW   YOEK   AND   NEW   HAVEN   R.   R.    CO.   V.   SCHUYLER. 


provision  of  the  charter).  He  also  had  authority  to  dispose  of  the 
stock  of  the  compati}'  not  taken  b}'  the  original  subscribers  (of  which 
there  was  a  large  amount),  and  issue  certificates  in  the  same  form 
to  the  purchasers.  He  also  had  authority  to  dispose  of  certain  for- 
feited shares,  and  in  such  case  issue  like  certificates.  He  also  had 
authority  to  receive  transfer  to  himself  of  shares  on  behalf  of  the 
company,  and  transfer  the  same  to  purchasers  and  issue  like  certificates 
to  them. 

From  1848  to  1854,  Schuyler  fraudulently'  issued  stock  in  excess  of 
the  amount  limited  b}'  tlie  charter.  There  were  over-issues  of  what 
purported  to  be  the  original  stock.  There  was  also  "over-issue  by 
transfer,"  Schuyler  issuing  new  certificates  for  shares  of  already'  exist- 
ing stock  in  cases  where  the  previously  issued  certificates  had  not  been 
surrendered  but  were  still  outstanding.  In  many  cases  where  valid 
certificates  of  stock  had  been  issued  to  R.  &  G.  L.  Schuyler  for  stock 
actually  belonging  to  them,  and  outstanding  to  their  credit  on  the  books 
at  the  time,  and  while  such  certificates  with  the  usual  assignments  and 
powers  of  attorney  executed  in  blank  were  outstanding  in  the  hands 
of  bona  fide  holders,  the  stock  was  permitted  to  be  transferred  by 
R.  Schuyler  in  the  firm  name  to  other  persons,  who  took  the  same 
for  value  in  good  faith,  without  the  surrender  of  the  outstanding 
certificates. 

The  stock  books  kept  by  the  transfer  agent  were  not  open  to  the 
inspection  of  the  public.  An  examination  of  those  books  by  the  direc- 
tors would  have  disclosed  Schuyler's  frauds  at  an  early  stage  of  the  over- 
issue ;  and  the  directors  were  culpably  negligent  in  not  thus  discovering 
the  frauds. 

Geo.  F.  Comstock  and  Wm.  Tracy.,  for  plaintiffs. 

Twenty-four  counsel  appeared  for  various  defendants. 

Davis,  J. 


This  somewhat  summary  disposition  of  the  preliminary  points  of  the 
case  leaves  an  open  path  to  its  meritorious  questions,  some  of  which, 
however,  may  be  disposed  of  even  more  summarily.  One  of  these  is 
the  question  whether  the  stock  purporting  to  be  created  by  the  false 
y.  certificates  and  fraudulent  transfers  of  Schuyler  can  be  valid  stock  of 
the  corporation  and  become  part  of  its  capital.  In  the  nature  of  things 
this  is  impossible.  A  corporation  with  a  fixed  capital  divided  into  a 
fixed  number  of  shares  can  have  no  power  of  its  own  vohtion,  or  by 
an}'  act  of  its  officers  and  agents,  to  enlarge  its  capital  or  increase  the 
number  of  shares  into  which  it  is  divided.  The  supreme  legislative 
power  of  the  State  can  alone  confer  that  authorit}'  and  remove  or  con- 
sent to  the  removal  of  restrictions  which  are  part  of  tlie  fundamental 
law  of  the  corporate  being ;  and  hence  every  attempt  of  the  corpora- 
tion to  exert  such  a  power  before  it  is  conferred,  by  any  direct  and 
express  action  of  its  officers  is  void ;  and  hence  every  indirect  and 
fraudulent  attempt  to  do  so  is  void  ;  for  if  such  ajesult  cannot  be  ao 


NEW  YORK   AND   NEW   HAVEN   E.    K.   CO.    V.   SCHUYLER.  C55 

com^Iisbecl  directly  b}'  the  wbole^macbinery^fjbhe  corpor^  powers,  it 
iTabsur^^  suppose  that  it  canbejproduced  by  tbe~covert  or  fraudulent 
egorts_of^oneor^iore  of  the  agents  of  the  corporation.  The  Special 
Terra  was,  therefore,  right  in  holding  that  the  spurious  stock,  attempted 
to  be  created  by  Schuyler  in  excess  of  the  capital,  formed  no  part  of 
the  capital  stock  of  the  compan}-,  but  was  utterly  invalid ;  and  it  neces- 
sarily followed  from  the  decision  of  this  court  when  the  case  was  before 
it  on  demurrer,  that  the  plaintiffs  were  entitled  to  have  all  certificates 
and  transfers  which  represented  such  spurious  stock  declared  void  and 
ordered  to  be  cancelled. 

Another  important  legal  proposition  in  the  case  is  so  clear  upon 
principle,  and  so  distinctly  settled  by  authority,  that  nothing  but  con-    .7         //  _   /^ 
fusion  can  flow  from  its  discussion.     It  will  bear  no  more  than  plain  '^^^    ^~   ^' 
enunciation.     A  corporation  is  liable  to  the  same  extent  and  under  the  V-t^   A^iCofiX' 
same  circumstances  as  a  natural  jDersGrT  foFThe  consequences  of  its  oC  4  (>-^~^  'M  <-^ 
wrongful  acts,  and  wijTbe  held  to  respond  in  a  civil  action  at  the  suit  L^-  oU^    -s^-^i--^ 
'^Li°i?J'^-^'?f^  P^'^^^3^-f'Qt^^6j'y  grade  and  xlesci:iption  of  forcibleT  niall^-^^/^  O-^d-^i^- 
cious  or  negligent  tort  or  wrong  whichjt  commits,  however  forelgnjo  y^^^^j^^t^  Lfwc-^-i- 
its  nature  or  beyond  its  granted  ^qi^rsjthejwron^ful  transaction  or  act  /T'^^/^T^^j^^ 
maybe^   {Life  and  Fire  Ins.  Co.  v.  I^chwtM  Fire  Ins.  Co.,  T'WencT  ^^^^  _  ^- 

31  ;  Angell  on  Corp.,  §§  382,  388,  391  ;  Albert  v.  Savings  Bank,  2/^    .^a-^-^^-^-^ 
Mar}-.  Dec.  169;    Goodspeed  v.  East  Haddam  Bank,  22  Conn.  541 ;  X/^!;?^-*'-''-^^-^^ '"'^'T'^ 
Bissell  v.  Michigan  Southern  and  Northern  Indiana  Railroad  Co..,  J  /•*  ^t^^^^-^^A*-^^*^ 
22  N.  Y.  305-309,  per  Selden,  J. ;  1  Wend.  Black,  [note],  476  ;  Green  7  ^  ] 

v.  London  Omnibus  Co.,  7  C.  B.  290  [N.  S.]  ;  Frankfort  Bank  v.        >*-^— 
Johnson,  24  Maine,  490 ;  Philadelphia  and  Baltimore  Railroad  Co. 
V.  Quiglg,  21  How.  U.  S.  209  ;  and  cases  cited  hy  Campbell,  J.) 

It  follows,  from  this  proposition,  that  if  it  were  established  in  this' 
case  that  the  corporation  itself  issued  the  false  certificates  of  stock  and 
permitted  the  fraudulent  transfers  of  spurious  stock,  it  would  be  liable 
to  the  part}-  directl}^  deceived  and  injured  by  that  transaction.  The_ 
incapacity  to  create  the  spurious  stock  would  be  no  defense  to  an  action 
for  damages  foiM-he  injur}-^  On  the  contrary,  that  ver}'  incapacity,  since 
it  would  render  the  certificate  or  transfer  a  fraud  and  deceit,  would 
itself  be  the  cause  of  the  injur}-  and  the  basis  of  recovery.  No  court 
would  hear  the  corporation  assert  that  its  wrongful  act  was  be3-ondJts 
chai'tered  powers,  and  therefore  ineffective  to  charge  it  with  the  inju; 
rious  consequences  of  the  fraud.  But  in  this  case  the  false  certificates 
were  issued  and  the  spurious  stock  transferred  by  an  officer  of  the  cor- 
poration. A  corporation  aggregate  being  an  artificial  bod}'  —  an  im- 
aginary person  of  the  law,  so  to  speak  —  is,  from  its  nature,  incapable 
of  doing  any  act  except  through  agents  to  whom  is  given  by  its  funda- 
jnental  law,  or  in  pursuance  of  it,  every  power  of  action  it  is  capable  of 
possessing  or  exercising.  Hence  the  rule  has  been  established,  and 
may  now  also  be  stated  as  an  indisputable  princlpTe,  that  a  cor^Mration 
is  responsTble  for  the  acts  or  negligence  of  its  agents  while  engaged  in 
the  business  of  the  agency,  to  the  same  extent  and  under  the  sarne 


656 


NEW   YORK   AND   NEW   HAVEN   E.   K.   CO.  V.   SCHUYLER. 


circiimstancesj_  that  a  natural  person  is  chargeable^  with  the  acts  ot 
iiegligence_pf  his  agent ;  and  "  there  can  be  no  doubt,"  saj's  liOrd  Ch. 
Cranworth  in  Ranger  y.  The  Great  Western  M.  R.  Co.,  "  that  if  the 
agents  employed  conduct  themselves  fraudulent!}^  so  that  if  they  had 
been  acting  for  private  employers  the  persons  for  whom  they  were  act- 
ing would  have  been  affected  by  their  fraud,  the  same  principles  must 
prevail  where  the  principal  under  whom  the  agent  acts  is  a  corpora- 
tion." (5  House  of  Lords  Cases,  86,  87;  Thayer  \.  Barloio,  19  Pick. 
511  ;  4  Serg.  &.  Rawl.  16  ;  7  Wend.  31 ;  Frankfort  Bank  v.  Johnson, 
24  Maine,  490  ;  Stor}'  on  Agency,  sec.  308  ;  Angell  &  Ames  on  Corp., 
sec.  382,  388.) 


d 


<V^- 


[After  expressing  the  opinion,  "  that  the  plaintiffs  are  estopped  by 
the  facts  and  circumstances  of  this  case,  to  deny  the  authoritj'  of 
Schuyler  to  do  the  acts  from  which  the  injur}'  to  the  defendants  has 
arisen."] 

But  conceding  that  the  whole  question  of  this  case  is  governed  by 
the  law  of  principal  and  agent,  it  becomes  of  grave  significance  to  as- 
certain the  scope  and  extent  of  the  powers  conferred  on  the  agent. 
Herein,  I  think,  the  case  essentiall}^  differs  from  that  of  the  Mechanics^ 
Bank,  3  Kernan,  599.  {^Mechanics'  Bank  v.  Nev:)  York  &  New  Haven 
R.  R.  Co.,  13  New  York,  3  Kernan,  599.]  The  question  of  that  case 
is  stated  by  Comstock,  J.,  in  16  N.  Y. ,  at  pages  154,  155,  with  suc- 
cinctness and  accuracy.  He  says:  '■^  la  that  case,  the  transfer  agent 
of  the  defendants^  corporation  was  authorized  to  sign  and  issue  certifi- 
cates of  stock  on  a  transfer  from  one  shareholder  to  another  upon  the 
%ooks  and  on  the  surrender  of  the  previous  certificates.  The  agent, 
for  his  own  purposes,  signed  and  issued  certificates  to  a  large  amount 
|where  there  had  been  no  such  transfer  or  surrender.  These  unauthor- 
lized  and  spurious  instruments  were  in  form  precisely  like  those  that 
were  genuine  and  authorized.  Trusting  to  their  false  appearance,  the 
plaintiffs  took  one  of  them  by  transfer  and  advanced  money  upon  it, 
I  which  they  recovered  in  the  New  York  Superior  Court.  We  held  they 
could  not  recover,  and  reversed  the  judgment,  placing  our  decision 
promhientl}'  upon  the  ground  that  the  acts  of  the  agent  icere  not  within 
the  real  or  aprparent  scope  of  the  power  delegated  to  hin%y 

It  now  apjpears  that  the  agent,  in  addition  to  the  power  thus  stated, 
had  authority  also  to  issue  certificates  in  jyeciselg  the  same  form,  to  the 
original  subscribers  for  the  stock,  and  to  some  extent  did  do  so ;  that 
he  had  authority  to  dispose  of  the  stock  of  the  company  not  taken  by 
tlie  original  subscribers  (of  which  there  was  a  large  amount),  and  issue 
certificates  in  the  same  form  to  the  purchasers ;  that  he  had  authority 
to  dispose  of  certain  forfeited  shares,  and  in  such  case  issue  like  cer- 
tincat(!S  ;  that  he  had  authority  to  receive  transfers  to  himself  of  stocks 
on  V)eiuilf  of  the  company,  and  transfer  the  same  to  purchasers  and 
issue  like  certificates  to  them  ;  that  before  the  increase  of  the  capital  to 
80,000  shares,  he  did  issue  to   his  own  firm  a  large  number  of  false 


NEW   YORK   AND   NEW   HAVEN   R.   R.   CO.   V.    SCHUYLER.  657 

certificates  which  became  the  basis  of  transfers  on  the  books  to  third 
parties,  and  by  some  arrangement  were  absorbed  into  the  enlarged 
capital  as  genuine  stock ;  that  he  acted  to  some  extent  as  financial 
agent  of  the  compan}',  and  through  his  firm  raised  large  amounts, 
"  indiscriminate!}-,  on  genuine  and  spurious  certificates  of  stock,"  which 
were  paid  out  on  the  check  of  the  firm  on  behalf  of  the  company  and 
on  its  construction  account ;  that  to  him  was  intrusted  the  keeping  of 
all  the  stock  accounts  of  the  company  and  its  dealers  at  the  New  York 
office,  and  in  those  accounts  he  entered  all  his  transactions,  both  false 
and  genuine  ;  that  the  books  were  kept  closed  to  dealers  ;  that  his 
management  of  the  affairs  of  the  office,  and  of  all  these  various  matters, 
was  never  investigated  or  questioned. 

It  is  in  all  these  facts  that  we  are  now  to  seek  for  "  the  real  or  ap- 
parent scope  of  the  power  delegated  to  him."  As  we  descend  from  the 
sharp  promontory  of  the  Mechanics''  Banh  case  to  this  broad  plane  of 
powers  and  their  mode  of  use,  we  stand  amongst  new  and  far  different 
lights  and  shadows.  We  find  ourselves  quite  unable  to  sa}-,  with  the 
able  jurist  in  that  case,  "  He  (Schuyler)  had  no  poxcer  to  sell  stock  at 
all^  and  none  to  issue  certificates  except  as  incidental  to  a  scde  between 
existing  stockholders,  and  then  it  depended  on  the  coridition  precedent 
of  a  transfer  on  the  books  and  a  surrender  of  a  previous  certificate 
for  the  same  stock.'"'  Nor  to  sa}',  "  Sis  appointment  in  its  very  terms, 
v)hich  all  dealers  are  supposed  to  have  been  acquainted  vyith,  did  not 
include  his  acts,  and  there  is  no  pretense  that  it  was  ever  enlarged  by 
any  holding  out,  or  recognition  of  his  acts." 

When  his  certificate,  regular  in  form  in  all  respects,  is  offered  in  the 
market,  the  buyer  is  not  able  to  refer  it  to  the  narrow  restrictions  of 
the  by-law,  for  how  does  it  appear  that  it  is  not  one  issued  to  an  origi- 
nal subscriber,  where  there  was  no  transfer  to  be  made,  and  no  prior 
certificate  to  be  surrendered  ;  or  that  it  is  not  one  issued  to  a  purchaser 
of  the  original  stock  which  Schuyler  was  empowered  to  sell  and  certify 
in  this  manner ;  or  that  it  is  not  of  stock  that  has  been  transferred 
to  the  agent  on  account  of  the  company  and  which  he  was  likewise 
authorized  to  sell ;  or  that  it  was  not  some  of  the  forfeited  shares 
which  he  was  directed  to  sell  and  certify ;  or  that  it  was  not  of  the 
kind  which,  by  "some  arrangement,"  is  absorbable  into  the  capital  as 
genuine,  even  if  it  be  in  fact  spurious ;  or  that  it  is  not  issued  to  raise 
money  for  the  benefit  of  the  construction  fund  of  the  company  ;  or  that 
it  is  not  of  the  spurious  kind  which  the  company  have  heretofore  al- 
lowed to  be  cured  by  a  subsequent  acquisition  of  stock  by  the  Schuylers, 
and  a  transfer  thereafter  under  the  power. 

Whether  it  does  not  belong  to  some  one  of  these  classes  there  are  no 
earthly  means  of  ascertaining  save  b}'  the  representation  of  the  agent. 
The  books  are  sealed ;  but  if  open  and  most  thoroughly  investigated 
they  would  not  necessarily  negative  the  power  to  issue  for  some  of  the 
purposes  for  which  authority  had  been  given,  directly  or  bj'  recogni- 
tion ;  for  even  if  run  down  to  absolute  spuriousness  it  is  still  open  to 


658 


NEW   YORK   AND   NEW   HAVEN   R.    R.    CO.  V.  SCHUYLER. 


sa}-,  this  is  of  the  kind  of  spurious  certificates  upon  which  the  company 
raise  money  for  their  construction  accounts,  or  the  kind  which  they 
legitimatize  b}-  subsequent  arrangements  of  the  capital ;  or  the  kind 
which,  by  the  custom  of  dealing  becomes  good,  if  a  transfer  be  made 
under  it  at  a  moment  when  the  SchuN-ler  firm  happens  to  have  so  much 
stock  to  its  credit  on  the  books.  And  the  accounts  for  seven  years 
show  that  all  these  kiuds  are  treated  on  the  same  footing  as  genuine 
shares. 

In  this  view  of  the  extent  of  the  authority  with  which  Schuyler  was 
clothed  b}'  the  company,  either  by  direct  appointment  or  by  recognition 
and  ratification,  or  by  actual  enjoyments  of  the  fruits  of  his  acts,  or  by 
long  acquiescence  therein  from  which  a  presumption  or  implied  agency 
arises,  I  have  come  to  the  conclusion  that  the  issuing  of  the  certificates 
by  him  must  be  held  to  be  within  the  scope  of  the  real  and  apparent 
authority  which  he  possessed  ;  and  the  remedy  of  the  defendants  is  not 
prejudiced  b}^  the  fact  that  he  used  and  intended  to  use  the  avails  for 
his  own  purpose.  In  short,  they  stand  precisely  in  respect  to  the  rem- 
edy where  they  would  if  the  board  of  directors  bad  issued  the  same 
icertificates  in  fraud  of  their  powers  under  the  law,  and  obtained  the 
defendants'  moneys  thereon. 

But  these  views  do  not  dispose  of  a  question  that  has  been  argued  in 
this  case  with  an  elaboration  and  power  seldom  equaled  in  a  court  of 
justice.  From  the  manner  in  which  the  decision  of  the  judges  is  stated 
in  the  3Iechanics'  Jiank  case,  it  is  difficult  to  tell  what  precise  points 
were  designed  to  be  passed  upon  by  the  court.  It  is  open  to  conjecture 
that  the  case  may  have  passed  off  on  the  ground  of  want  of  privity 
between  the  plaintiflTs  and  defendants,  as  was  intimated  by  Selden,  J., 
in  The  Farmers'  c0  llechanics^  Jjank  v.  The  Batchers''  &  Drovers' 
Bank  (16  N.  Y.  142),  or  on  the  ground,  as  suggested  by  H.  R.  Sel- 
den, J.,  in  Gris'tcold  v.  Haven,  (25  N.  Y.  598),  "  that  Kyle,  to  whom 
the  certificate  issued,  being  privy  to  the  fraud,  had  of  course  no  claim 
against  the  company,  and  that  his  assignees  could  have  no  greater 
rights  than  himself ; "  or  upon  the  mistaken  idea  that  the  court  of 
errors,  in  reversing  Tlie  North  River  Bank  v.  At/mar,  has  settled  the 
law  adversely  to  the  opinion  of  the  Supreme  Court  in  that  case. 

But  whatever  may  have  been  the  views  of  other  members  of  the 
court,  there  is  no  mistaking  the  ground  on  which  the  judge  who  pro- 
nounced the  opinion  intended  to  put  the  liability  of  a  principal  for  the 
acts  of  an  agent.  It  is,  in  brief,  that  a  2)rincipal  is  bound  ohli/  by  the 
authorized  acts  of  his  agent.  The  proposition  involved  was  fairly  put 
by  the  learned  judge  in  this  form :  "Suppose  an  agent  is  authorized 
by  the  terms  of  his  appointment  to  enter  into  an  engagement,  or  series 
of  engagements,  on  behalf  of  his  principal,  and  while  the  appointment 
is  in  force  he  fraudulently  makes  one  in  his  own  or  a  stranger's  busi- 
ness, but  in  the  form  contemplated  by  the  power,  and  which  he  asserts 
to  be  in  the  business  of  his  employer  by  using  his  name  in  the  contract. 


NEW   YORK   AND   NEW  HAVEN  R.   R,  CO.   V.   SCHUYLER.  059 

can  the  dealer  rely  upon  that  assertion,  or  is  he  bound  to  inquire  and 
to  ascertain  at  his  peril  whether  the  transaction  is  not  only  in  appear- 
ance but  in  fact  within  the  authority?    According  to  the  decision  of  the 
Supreme  Court  of  this  State,  in  the  case  of  The  North  Eicer  Bank  v. 
Ay^nar  (3  Hill,  262),  he  can."     The  judge  then  proceeds  to  show  that 
the  case  cited  had  been  reversed  by  the  court  of  errors ;  and  then  to 
discuss  the  question  with  his  own  clearness  and  vigor,  reaching  a  con- 
clusion which  he  expresses  in  these  words:  "The  appearance  of  the 
power  is  one  thing,  and  for  that  the  principal  is  responsible.     The 
appearance  of  the  act  is  another,  and  for  that,  if  false,  I  think  the  rem- 
edy is  against  the  agent  onl}'.     The  fundamental  proposition,  I  repeat,  I 
is,  that  one  man  can  be  bound  only  by  the  authorized  act  of  another.) 
He  cannot  be  charged  because  another  holds  a  commission  from  himl 
and  falsely  asserts  that  his  acts  are  within  it." 

The  counter  proposition  was  again  stated  by  Selden,  J.,  in  The 
Farmers'  <jb  Mechanics'  Bank  v.  Tlie  Butchers'  S  Drovers'  Bank^  in 
this  form  :  "  It  is,  I  think,  a  sound  rule  that  when  a  party  dealing  with 
an  agent  has  ascertained  that  the  act  of  the  agent  corresponds  in  ever}- 
particular  in  regard  to  which  such  party  has  or  is  presumed  to  have 
any  knowledge  with  the  terms  of  the  power,  he  ma}^  take  the  represen- 
tation of  the  agent  as  to  any  extrinsic  fact  which  rests  peculiarly  within 
the  knowledge  of  the  agent  and  which  cannot  be  ascertained  by  a  com- 
parison of  the  power  with  the  acts  done  under  it." 

Manifestly,  here  is  an  '•'•irrepressible  conflict"  between  these  propo- 
sitions, and  we  are  called  upon  to  determine  which  expresses  the  settled 
law  of  this  State. 

.  .  .  it  is  impossible  to  escape  the  conclusion  that  the  law  of  this 
State,  as  settled  hy  adjudication  at  this  day,  is,  as  put  b}'  H.  R.  Sel- 
den, J.,  in  Grisicolcl  v.  Uaven^  "  That  where  the  authority  of  an  agent 
depends  tipon  some  fact  outside  the  terms  of  his  poioer^  and  which, 
from  its  nature,  rests  2?articidarly  loithin  his  knoidedge,  the  principal 
is  bound  by  the  representation  of  the  agent,  although  false,  as  to  the 
existence  of  such  fact.'^  The  contrar}'  rule,  though  asserted  with  con- 
fidence and  vindicated  with  great  force  in  the  case  of  The  3Iechanics' 
Bank,  was  not  necessarily  adopted  hy  the  court,  and  that  case  does 
not  so  determine.  It  may  with  confidence  be  asserted  that  all  the 
cases  in  this  State,  both  before  and  since,  la}'  down  a  different  rule 
from  that  supposed  in  the  Mechanics'  Bank  case,  to  have  been  estab- 
lished by  the  court  of  errors  ;  and  so  do  the  elementary  writers  upon 
whom  we  are  accustomed  to  rel}'.  (Story  on  Agency,  452  ;  Paley  on 
Agency,  by  Lloyd,  294,  301,  307  ;  Bacon  Abr.,  Tit.  Master  and  S.!^  K  ; 
2  Kent  Com.,  620,  notes,  1  Blk.  Com.,  432.)  It  were  long,  b}-  quota- 
tion, to  show  that  the  cases  just  noticed  necessarily  rest  on  this  doc- 
trine. A  short  allusion  to  their  facts  must  suflBce.  The  condition  oi 
tlie  authority  in  The  North  River  Bank  v.  Aymar,  was  that  the  paper 
should  be  made  in  the  business  of  the  principal.    In  The  Butchers'  and 


660 


NEW  YOKK  AND  NEW  HAVEN  E.  R.  CO.  V.   SCHUYLER. 


% 


^<y^ 


V. 

9- 


J)rovers'  Bank  case,  that  the  drawee  should  have  funds  in  deposit 
enough  to  pa}'  the  check.  In  Grisicold  v.  Haven,  that  the  grain  for 
which  the  receipt  was  given  should  actually  have  been  received.  In 
Exchange  Bank  v.  3Iont€ath  (so  far  as  it  rested  on  a  question  of 
agency),  that  the  drafts  should  be  for  the  use  and  benefit  of  the  de- 
fendant's line  of  boats.  In  each  of  these  cases,  the  extrinsic  fact 
which  constituted  the  condition  of  the  authority  was  peculiarly  within 
the  agent's  knowledge,  and  was  necessarily^  represented  to  exist  b}-  the 
execution  of  the  agent's  powers.  It  might  or  it  might  not  be  discovered 
by  inquiry.  So  in  this  case,  in  the  narrow  view  in  which  we  are  now 
considering  it,  the  condition  upon  which  the  agent  could  issue  the  cer- 
tificate was,  a  transfer  in  the  books  and  the  surrender  of  a  previous 
certificate,  if  any  had  before  been  issued.  These  facts  are  wholly  ex- 
trinsic and  peculiarly  within  the  knowledge  of  the  agent,  as  part  of  the 
special  duties  to  be  attended  to  b}'  him,  and  were  represented  bj-  him 
to  exist  by  the  certificate  itself.  I  can  see  no  shade  of  difference  be- 
tween the  question  in  this  case  and  in  those  cited,  and  which  seem  to 
me  to  settle  the  law.  The  rule  which  governs  this  class  of  cases,  in  my 
judgment,  rests  upon  a  sound  principle.  As  was  said  b}'  Selden,  J., 
in  Griswold  V.  Haven,  "The  mode  in  which  the  liabilit}' is  enforced 
in  all  these  cases,  is  by  estoppel  in  pais.  The  agent  or  partner  has  in 
each  case  made  a  representation  as  to  a  fact  essential  to  his  power, 
upon  the  faith  of  which  the  other  party  has  acted,  and  the  principal  or 
firm  is  precluded  from  controverting  the  fact  so  represented."  It  foes 
back  to  the  celebrated  aphorism  of  Lord  Holt,  in  Hern  v.  J^ichols 
(1  Salk.  289),  "  For  seeing  somebody  must  be  a  loser  by  this  deceit,  it 
is  more  reason  that  he  that  employ's  and  puts  a  trust  and  confidence  in 
the  deceiver,  should  be  a  loser  than  a  stranger,"  or  as  more  tersely 
/  expressed  by  Ashurst,  J,,  in  Lickbarroio  v.  Mason  (2  T.  R.  70), 
"  "Whenever  one  of  two  innocent  parties  must  suffer  by  the  acts  of  a 
thirHThe  who  has  enabled  such  third  jDerson  to  occasion  the  loss^must 
sustam  it7'^  (Story  on  Part.,  §  108,  and  authorities  there  cited.)  In 
truth,  the  power  conferred  in  these  cases,  is  of  such  a  nature  that  the 
agent  cannot  do  an  act  appearing  to  be  within  its  scope  and  authority, 
without,  as  a  part  of  the  act  itself,  representing  expressly  or  by  neces- 
sary implication,  that  the  condition  exists  upon  which  he  has  the  rigbt 
to  act.  Of  necessity  the  principal  knows  this  fact  when  he  confers  the 
power.  He  knows  that  the  person  he  authorizes  to  act  for  him,  on 
^  condition  of  an  extrinsic  fact,  which  in  its  nature  must  be  peculiarly 
<^^  within  the  knowledge  of  that  person,  cannot  execute  the  power  without 


as  res  gestae  making  the  representation  that  the  fact  exists.  With  this 
nowledge  he  trusts  him  to  do  the  act,  and  consequently  to  rnake  the 
representation  wbich,JOrue,  is  of  course  binding  on  the  principal.  But 
'^e  doctrine  claimed  js  that  he  reserves  the  right  to  repudiate  the  act  if 
\the  representation  be  false^  So  he  docs  as  between  himself  and  the 
(agent,  but^lTot  as  to  an  innocent   Lhird   paiLy  who   is   deceived  l)y  it. 


llie  latter  may  answer,  you  intrusted  your  agent  with  means  effectually 


NEW   YORK   AND   NEW  HAVEN   K.  E.   CO.    V.   SCHUYLER.  6G1 

to  deceive  me  by  doing  an  act  which  in  all  respects  compared  with  the 
authority  you  gave,  and  which  act  represented  that  an  extrinsic  fact 
known  to  your  agent  or  yourself,  but  unknown  to  rae,  existed,  and  3-ou 
have  thus  enabled  your  agent,  by  falsehood,  to  deceive  me,  and  must 
bear  the  consequences.  The  very  power  you  gave,  since  it  could  not  be 
executed  without  a  representation,  has  led  me  into  this  position,  and 
therefore  you  are  estopped  in  justice  to  deny  his  authority  in  this  case. 
By  this  I  do  not  mean  to  argue  that  the  principal  authorizes  the  false 
representation.  He  only  in  fact  authorizes  the  act  which  involves  a 
representation,  which,  from  his  confidence  in  the  agent,  he  assumes 
will  be  true  ;  but  it  may  be  false,  and  the  risk  that  it  may  he  takes 
because  he  gives  the  confidence  and  credit  which  enables  its  falsity  to 
prove  injurious  to  an  innocent  party.  I  have  already  shown  how  this 
principle  in  many  cases  sustains  liability  after  all  actual  authority  has 
been  withdrawn,  as  between  the  principal  and  parties  who  have  a  right 
to  infer  that  the  authority  continues. 

The  contrary  doctrine  would  be  singularly  inconvenient,  if  not  absurd, 
in  practice.  For  instance,  under  a  general  power  to  draw  bills,  which 
means,  of  course,  only  in  the  business  of  the  principal,  no  party  could 
safely  take  a  bill  drawn  by  the  agent  without  pursuing  the  inquiry 
whether  it  was  drawn  in  such  business,  to  extremes.  If  the  peril  is  on 
the  party  to  whom  the  bill  is  given,  nothing  short  of  personal  applica- 
tion to  the  principal  himself  can  relieve  it,  for  nowhere  short  of  that 
is  absolute  certainty.  Every  intermediate  appearance  or  representa- 
tion may  be  false  or  deceptive,  and  the  rigid  rule  of  actual  authority  will 
be  satisfied  with  nothing  less  than  absolute  verit}'.  So,  then,  the  gen- 
eral power  carries  no  safety  whatever,  since  each  bill  made  under  it 
must  be  verified  as  to  extrinsic  facts  by  resort  for  perfect  security  to 
the  principal  himself. 

Or  to  bring  the  illustration  nearer  to  this  case :  It  is  claimed  that 
ever}'  receiver  of  a  stock  certificate,  executed  by  an  agent,  must  verify, 
at  his  peril,  the  extrinsic  facts  that  a  transfer  of  the  stock  has  been 
made  and  the  former  certificate  surrendered.  But  how?  If  he  go  to 
the  board  of  directors  they  can  only  refer  him  to  the  transfer  agent  or 
the  books  kept  by  him,  for  these  are  alone  their  sources  of  information. 
If  he  resort  to  the  books  they  are  at  best  but  other  representations 
of  the  agent  which,  if  they  in  form  show  a  transfer,  may  still  be 
deceptive,  and  nothing  but  a  transfer  of  actual  stock  will  answer  the 
condition.  He  must  therefore  trace  the  lineage  of  the  stock  repre- 
sented by  the  certificate  to  some  point  behind  which  no  "  strain  upon 
the  pedigree  "  will  enable  the  corporation  to  bastardize  the  issue.  Such 
a  rule  would  be  vastly  detrimental  to  the  business  interests,  both  of 
corporations  and  of  the  public. 

It  would  be  far  better  to  establish  a  rule  that  no  man  shall  take  an 
instrumentjpade  by  an  agent  without  first  having  the  principal's  ceri 
tlficate  that  it  is^enuine  and  authorized  j^  and  even  this  would  be  im- 
practicable in  corporations,  for  every  new  certificate,  being  another  act 


662 


NEW   YORK   AND   NEW   HAVEN   E.   R.    CO.   V.    SCHUYLER. 


^ 
^ 


/^ 


i^ 


y 


of  an  agent,  would  only  open  a  new  circuit  of  inquiry.     But  such  ig 
neither  ttTejlQligF^      good  sense  of  the  laj?. 

It  is  a  mistake  to  suppose  that  the  conventional  rule  of  commercial 
negotiability  has  anything  to  do  with  this  question,  except  in  cases 
where  the  paper  carries  no  notice  on  its  face  that  it  is  made  by  some- 
body assuming  to  be  an  agent.  That  rule  stands  upon  an  arbitrary 
doctrine  of  the  law  merchant,  and  not  at  all  upon  any  principle  of 
estoppel.  It  extends  only  to  instruments  which  usage  or  legislation 
has  brought  within  it ;  and  its  substance  is,  that  by  force  of  the  arbi- 
trary rule  the  possessor  of  such  negotiable  instrument  has  power  to 
give  by  delivery  to  a  hoyia  fide  purchaser  for  value,  a  good  title  not- 
withstanding any  defectiveness  in  his  own.  Hence,  under  it  a  finder 
or  a  thief  may  confer  such  title  with  none  in  himself,  not  because  the 
loser  is  estopped  by  his  misfortune  from  asserting  his  rights,  but  be- 
cause from  real  or  supposed  commercial  necessities,  "  ita  lex  est 
scripta."  But  it  is  a  fixed  requisite  of  the  rule  that  the  bu3'er  shall  be 
for  value  loithout  notice^  and  therefore  nothing  that  gives  notice  on  its 
face  is,  in  that  particular,  within  the  rule.  So  an  instrument  that 
shows  on  its  face  that  it  is  made  by  one  man  for  another,  at  once 
warns  the  taker  to  inquire  if  the  assumed  agent  be  authorized,  and  that 
question  becomes  one  independent  of  the  arbitrary  rule  of  the  law  mer- 
chant, and  dependent  on  the  doctrines  that  govern  the  law  of  principal 
and  agent.  (Atwood  v.  Mumiings,  7  B.  &  C.  278  ;  Fearn  v.  Felica^ 
8  Scott  N.  C.  241.) 

I  concur,  therefore,  with  Judge  Selden,  when  he  asserts  that  in  no 
respect,  except  as  it  touched  the  question  of  privity  of  contract,  was 
the  negotiability  of  the  paper  of  an}'  importance  in  the  case  of  The 
North  River  Bank  v.  Ay  mar  (25  N.  Y.  602).  In  that  case  it  appeared 
on  the  face  of  the  paper  that  it  purported  to  be  made  by  an  agent.  A 
different  rule  as  to  the  effect  of  negotiability  may  well  obtain  where  the 
paper  is  negotiable  within  the  law  merchant,  and  bears  on  its  face  no 
notice  whatever  that  it  is  made  by  some  party  other  than  the  one  it 
purports  to  charge,  as  where  it  is  made  in  a  firm  name,  or  in  the  form 
and  by  the  officers,  through  and  hy  which  a  corporation  can  by  law  issue 
its  authorized  evidences  of  debt. 

We  have  already  seen  how  far  privity  is  essential  in  actions  of  tort. 
(Redfield  on  Railways,  61  and  note;  Gerhard  v.  Bates,  20  Eng.  L.  & 
Eq.  129,  &c.) 

I  shall  not  inquire  how  far  the  English  cases,  and  especially  the  lead- 
ing case  of  Nortcay  v.  Grant  (10  C.  B.  665),  so  much  relied  upon,  may 
be  in  conflict  with  the  law  of  this  State.  Both  the  Judges  Seldex  have 
sought  to  show  that  Norway  v.  Gi'ant  is  distinguishable  from  the  cases 
under  their  consideration,  and  I  will  only  add  that  if  they  did  not  suc- 
ceed in  pointing  out  the  distinction,  and  the  case  reall}'  stands  in  con- 
flict, so  inuch  the  toorse  for  that  case. 

We  may  come  back,  therefore,  to  the  solid  ground  of  The  North 
River  Bank  v.  Ayrnar,  regarding  it  only  as  shaken  down  to  greater 


BOSTON   MUSIC   HALL   ASSOCIATION   V.   CORY.  663 

firmness  b}*  the  severe  ordeal  of  The  Farmers*  and  Mechanics'  Bank 
case,  and  with  confidence  declare  the  true  doctrine  of  this  branch  of  the 
law  of  agenc}'  to  be,  that  where  the  principal  has  clothed  his  agent 
with  power  to  do  an  act  upon  the  existence  of  some  extrinsic  fact 
necessarily  and  peculiarly  within  the  knowledge  of  the  agent,  and  of 
the  existence  of  which  the  act  of  executing  the  power  is  itself  a  repre- 
sentation, a  third  person  dealing  with  such  agent  in  entire  good  faith 
pursuant  to  the  apparent  power,  may  rely  upon  the  representation,  and 
the  principal  is  estopped  from  denying  its  truth  to  his  prejudice.  In 
Grisicold  v.  Haven.,  this  rule  was  distincth'  settled.  The  dissenting 
opinion  touched  only  the  right  to  maintain  the  form  of  action  brought 
in  that  case,  but  a  majority  of  the  court  held  that  the  representation 
of  the  agent  not  only  charged  the  principals,  but  estopped  them  from 
denying  the  actual  possession  of  the  wheat  asserted  to  be  in  store,  so 
as  to  defeat  an  action  of  trover  or  replevin  to  recover  the  property'. 
In  this  view  I  see  no  ground  upon  which  the  plaintiffs  can,  in  this  case, 
be  permitted  to  deny  that  Schuyler  was  acting  within  the  scope  of  his 
authority  in  issuing  the  false  certificates  ;  and  the}'  are  therefore  to  be 
treated  as  though  issued  by  the  board  of  directors.  ^ 

[The  judgments  against  the  plaintiffs  for  damages  were  affirmed.]  ^   . 


i'7iy. 


BOSTON  MUSIC  HALL  ASSOCIATION  v.  CORY.^a<^       f ^  (^  j,^  / 

1880.     Wi  Massachusetts,  ^3b.  '*^    '''^    •.*^'VlK1    ^. 


Colt,  J.     In  1874,  Howard  L. 


fassackusetts,  435.  i^S^-    ^        J^      r'\'-^\>^ 

Hay  ford  sold  five  shares  in  the  stock yv^  i/^  'V^^''    / 
of  the  Boston  Music  Hall  Association  to  his  brother  Nathan  H.  Hay-(i^      J    ^       '\ir^^ 
ford,  to  whom   he   delivered  a  stock  certificate,  and  upon  which  he  ;^    xf'y    L*^>^  (^ 
indorsed  and  signed  a  written  transfer  in  the  usual  form.     No  transfer   a-^    tr^  k'      / 
was  made  on  the  books  of  the  corporation,  and  there  was  no  provision'       *"  j*^*^     J^ 
in  the  charter  or  by-laws  of  the  association  requiring  it.     It  was  not  ,    ij-^^^  i4'^^a'^ 
until  after  the  shares  were  levied  on  as  the  property  of  Howard  L.,  ia^    ,        L     i     ,/^  '  ^ 
May,  1878,  that  the  corporation  was  notified  of  the  alleged  sale  and-fl^^/^  ^  u/     \r  ^ 
transfer  to  Nathan  H.     In  the  mean  time  Howard  L.,  with  the  knowl- i^*^'  v<^  i)rj-^  ^^ 
edge  of  his  brother,  collected  the  annual  dividends  declared  on  \}aQt,yAr^  /^     ^  \^ 


stock,  attended  meetings  of  the  stockholders,  and  served  upon  com-'^^^^ 


mittees  appointed  at  such  meetings.     Under  the  levy  made  in  18 
Barney  Cory  bought  the  stock  as  the  property  of  Howard  L.  ;  and  the'^^  ^ a)j^      ■ 
question  presented  by  this  bill  of  jnterpleadej  is,  which  of  the  two'^/t-^     J^  f**-'         ^ 
acquired  the  title.  "^    ^  A   w^''  ,(vM''^i 

The  case  comes  up  on  an  appeal  from  the  decree  of  a  single  judge  1^,  ^    ,.p^    Ih-'' 
In  favor  of  Nathan  H.  Hayfoid,  accompanied  by  a  report  of  the  evi-  O-'^ ^r..      ^  'vij^^ 
deuce  taken  at  the  hearing.     In  tlie  first  place,  it  is  contended  that  the         ^    T^     ^    i^''^ 
ividence  fails  to  show  that  the  stock  was  sold  and  assigned  to  Nathaoflj"  ;<^*'  (>'^\    ^^  m'^ 


Iv 


664  BOSTON   MUSIC   HALL   ASSOCIATION   V.    CORY. 

H.  in  good  faith  at  an}'  time  before  the  lev}-.  Upon  this  question  of 
fact,  the  decision  of  the  single  judge  will  not  be  reversed,  unless  it 
clearly  appears  to  be  erroneous.  Eeed  v.  Heed,  114  Mass.  372.  Mont- 
ff ornery  v.  Pickeri7ig,  116  Mass.  227. 

The  only  evidence  of  the  transaction  in  1874  comes  from  the  two 
Hayfords,  who  were  the  parties  to  it.  But  we  cannot  say  that  the  fact 
that  the  apparent  ownership  remained  unchanged  for  such  an  unusual 
length  of  time  upon  the  books  of  the  corporation,  and  that  Howard 
L.  received  the  dividends  and  continued  to  act  as  the  real  owner,  is 
sufficient  to  lead  us  to  believe  that  the  judge  erred  in  not  treating 
it  as  sufficient  to  overcome  the  positive  evidence  of  a  valid  sale  of  the 
property,  coming  from  the  two  witnesses  who  were  before  him,  and  of 
whose  truthfulness  he  had  the  best  opportunity  to  judge. 

In  the  next  place,  it  is  strenuously  urged  that,  by  force  of  the  various 
statutes  of  this  Commonwealth  relating  to  the  ownership  and  transfer 
of  stock  in  corporations,  authorizing  the  attachment  of  shares,  requiring 
returns  to  the  Secretary  of  the  Commonwealth,  and  imposing  a  personal 
liability  on  stockholders  for  the  debts  of  tlie  corporation,  there  can  be 
DO  transfer  of  stock,  valid  against  the  claims  of  an  attaching  creditor, 
unless  such  transfer  be  recorded  in  the  books  of  the  corporation.  Gen. 
Sts.  c.  68,  §§  10,  12  ;  c.  123,  §§  59-61  ;  c.  133,  §  46.  St.  1864,  c.  201. 
The  intention  of  the  Legislature,  it  is  said,  must  have  been  to  provide 
for  the  owners  of  stock  a  convenient  and  uniform  method  of  trans- 
ferring title  on  the  books  of  the  corporation,  which  should  be  the  only 
valid  transfer  as  to  creditors,  and  others  interested ;  and,  although  the 
statutes  have  not  provided  in  express  terms  that,  as  to  creditors,  trans- 
fers shall  not  be  valid  till  they  are  so  recorded,  yet  such,  it  is  contended, 
is  the  necessary  implication,  for  otherwise  the  design  of  the  statutes, 
requiring  registration  and  making  the  shares  liable  to  be  taken  for 
debts,  would  be  defeated.  But  this  consideration  is  not  sufficient  to 
control  the  law  as  long  since  settled  by  the  decisions  of  this  court.  It 
requires  a  clear  provision  of  the  charter  itself,  or  of  some  statute,  to 
take  from  the  owner  of  such  property  the  right  to  transfer  it  in  accord- 
I  ance  with  known  rules  of  the  common  law.  And  by  those  rules  the 
delivering  of  a  stock  certificate,  with  a  written  transfer  of  the  same  to 
a  bona  Jide  purchaser,  is  a  sufficient  delivery  to  transfer  the  title  as 
against  a  subsequent  attaching  creditor.  Sargent  v.  Essex  Marine 
Railway,  9  Pick.  201.  Sargent  v.  Franklin  Ins.  Co.  8  Pick.  90. 
Fisher  v.  Essex  Bank,  5  Gray,  373.  Dickinson  v.  Central  National 
Bank,  ante,  279. 

It  would  not  be  in  accordance  with  sound  rules  of  construction  to 
infer,  from  the  provisions  of  several  different  statutes  passed  for  the 
purpose  of  obtaining  information  needed  to  secure  the  taxation  of  such 
property,  or  for  the  purpose  of  subjecting  stockholders  to  a  liability  for 
tlie  debts  of  a  corporation,  or  for  protecting  the  corporation  itself  in  its 
ilealings  with  its  own  stockhoklers,  that  the  Legislature  intended  thereby 
lo  take  from  the  stockholder'  his  power  to  transfer  his  stock  in  any 


SCRIPTUEE  V.   FRANCESTOWN   SOAPSTONE   CO. 


C65 


^ 


recognized  and  lawful  mode.  If  a  change  in  the  noode  of  transfer  be 
desirable,  for  the  protection  of  creditors,  or  for  an}-  other  reason,  it  is  for 
the  Legislature  to  make  it  by  clear  provisions,  enacted  for  that  purpose. 

We  see  nothing  in  the  facts  which  can  be  held  to  deprive  Xathan 
H.  Ha3-ford  of  the  stock  in  question,  on  the  ground  that  he  is  charge- 
able with  laches  in  not  causing  the  transfer  to  be  sooner  recorded,  or 
that  he  is  now  estopped  from  setting  up  his  title  to  the  shares  in  his 
possession.  It  must  be  taken,  upon  the  findings  of  the  judge,  that 
Nathan  H.  bought  these  shares  in  good  faith  in  1874  ;  and  that  all 
whifili_the  law  4:equired  wiis  clone  to  vest  a  perfect  title  in  him,  as  against 
an  attaching  creditor  of  Hov»ard  L.  He  was  under  no  legal  dut}' to_ 
have  the  transfer  recorded  in  order  to  perfect  his  title  as  gainst 
stran^rSj  and  he  can  be  charged  with  no  neglect  or  laches  which 
would  involve  the  forfeiture  of  his  title. 

The  evidence  in  the  case  does  not  require  us,  against  the  findings  of 
the  single  judge,  to  find  that  Nathan  H.  is  estopped  to  set  up  his  title 
against  a  creditor  of  Howard  L.  The  acts  and  declarations  of  the 
latter,  after  the  sale,  would  not  affect  the  title,  except  so  far  as  the}' 
were  authorized  by  Nathan  H.,  and  there  is  nothing  to  show  any  act  or 
declaration  authorized  by  the  latter,  with  intent  to  give  a  false  credit  to 
Howard  L.,  or  that  any  creditor  of  his  was  in  fact  defrauded.  ^  ^  y^"  J^    'b. 

Decree  affirmed.  "^    V^  jA  V^  ^  /, .  • 

)NE  CO.' 


^k 


y 


F.  C.  Welch,  fpr  the  attaching  creditor. 
e/".  P.  .Tr^jadweU,  for  the  transferee. 


yjJ'^y'y^ 


■h 


/y 


^ 


^^i&<^^lPp}^V.  ^^RtA.NCESTOT\b!r^SOAPSTONE  cB.'^"^     .        V^ 

rCoy  y   X   /   -  ^^^    50  New  Hampshire,  571.1  ^    .  i    i       - 


Assumpsit  for  not  delivering  to  the  plaintiff  certificates  for  forty-five f/'  ^    ^    A'^^K* v> 
shares  of  stock  in  the  defendant  company,  which  plaintiff  had  puf-^*-^    ^%»    \Ai'^\/' 
chased  of  one  Barton.      Plaintiff  purchased  the  stock  of  Barton  on  l  (^    C^   j^    ui.     V  .u'l 
May  24,  1867.     Barton  transferred  the  same  to  him  by  his  indorse-^  '^f'i  ,  \yi  \i(SV^' 
ment  upon  the  back  of  the  certificate.     On  Feb.  3,   1868,  the  said^'LcA^V^  ^     \  ■  L^^ 
certificate  so  transferred  was  presented  to  the  treasurer  of  the  com-i^^    ^  ^'q.'I       v^* 
pany,  and  a  new  certificate  for  those  shares  demanded  by  the  plaintiff^ft  lj^  f    L'^*^"  i  *'  t 
The  treasurer  declined  to  issue  a  new  certificate,  for  the  reason  thatp  .^^  >         '''^■/''^ 
the  shares  had  been  attached  as  Barton's  property,  on  January  28,  ^^  '   f^^^'  - '*         • 
1868,  in  a  suit  brought  by  the  Francestown  Soapstone  Company  against^^/^    ^j>         ^^  i«^    r^ 
Barton.     At  the  trial  the  plaintiff  proposed  to  introduce  certain  evi^^t,^'    ->'^^'*')f*'0  i"^ 


.V, 


\  \^.  '''" 


,y 


ti^'..^'t^ 


dence  to  prove  that  the  company  had  notice  of  the  aforesaid  sale  and^ 
transfer  before  the  attachment.     Thereupon  the  cause  was  taken  from,{^*>  '^^J^t  '■^      ^    u 
the  jury  for  the  purpose  of  determining,  as  matter  of  law,  whether  the  ../v"'^    ijy^ir^^lx^ 
evidence  offered  was  competent  to  prove  notice  or  knowledge  in  the  y^.'  f^*- 

1  Statement  abridged.    Arguments  omitted— Ed.  ^""^      a^ 


666  SCRIPTUEE   V.   FEANCESTOWN   SOAPSTONE   CO, 

compaii}- ;  and  whether,  with  such  notice  or  knowledge,  the  attachment 
would  be  valid  to  hold  these  shares  against  the  plaintiff. 

A.  W.  Scnoyer,  for  plaintiff. 

Geo.  Y.  Smcyer  &  Sawyer.,  Jr..,  for  defendant. 

Ladd,  J.  The  sale  and  transfer  of  these  shares  were  made  bj'  Bar- 
ton to  the  plaintiff  May  24,  1867  ;  and  the  case  shows  that  the  plaintiff 
paid  $95  per  share  for  them,  the  par  value  being  SIOO. 

It  is  alleged  in  the  declaration,  that  on  February  3,  1868,  the  plain- 
tiff caused  the  certificate  and  assignment  to  be  delivered  to  the  treasurer 
of  the  company ;  and  it  appears  that  the  reason  assigned  for  not  issu- 
ing to  him  a  new  certificate  was,  that  prior  to  that  time,  namely,  on  the 
28th  day  of  January,  1868,  said  shares  had  been  attached  as  Barton's 
property  on  a  writ  in  favor  of  the  company  against  him. 

If  hy  the  attachment  a  valid  lien  was  created  in  favor  of  the  com- 
pan}',  it  was  under  no  obligation  to  enter  the  transfer  on  its  books  at 
the  time  the  certificate  was  presented  ;  and  the  plaintiff  cannot  maintain 
this  suit. 

The  question  then  is,  What  effect  shall  be  given  to  the  attachment 
made  January  28,  1868? 

The  plaintiff  offered  to  prove  that  at  the  time  of  the  sale  said  Barton 
was  president  of  the  corporation,  and  acted  as  its  general  agent  in 
superintending  the  affairs  thereof,  and  continued  so  to  act  until  January 
27,  1868,  the  day  before  the  attachment  was  made  ;  that  the  agent  who 
succeeded  Barton,  and  who  procured  the  attachment  and  caused  a  levy 
'.o  be  made  on  the  shares,  was  a  director  in  1867,  and  knew  of  the  sale 
«ind  transfer  of  the  shares  from  Barton  to  the  plaintiff  prior  to  the  time 
of  the  attachment ;  and  that  the  treasurer  of  the  company  had  actual 
notice  of  the  sale  and  transfer  as  early  as  June,  1867  ;  and  other  facts 
tending  to  show  knowledge  of  the  sale  by  the  corporation  at  or  about 
the  time  of  the  transaction. 

We  think  this  evidence  was  clearly  admissible  for  the  purpose  pro- 
posed. The  president  and  treasurer,  by  the  by-laws,  were  directors 
ex-officio  ;  and  it  is  fair  to  suppose  that  they  were  active  members  of 
the  board,  participating  largely  in  the  control  and  management  of  the 
affairs  of  the  corporation.  But  even  if  those  officers  had  not  been 
members  of  the  board  of  directors,  there  would  probably  be  no  difficult}' 
in  holding  that  notice  to  a  general  agent,  who  has  the  superintendence 
of  the  affairs  of  a  corporation,  is  notice  to  the  corporation,  and  there- 
fore that  the  defendant  is  chargeable  with  knowledge  possessed  by  its 
president  and  general  agent,  Barton. 

Augcll  and  Ames  on  Corp. ,  §  305,  and  cases  in  note ;  Hovey  v. 
Blanchard,  13  N.  H.  145  ;  Marshall  v.  Ins.  Co.,  27  N.  H.  157  ;  Camp, 
bell  V.  Ins.  Co.,  37  N.  H.  35  ;  Patten  v.  Ins.  Co.,  40  N.  H.  375  ;  Fitz- 
lierhert  v.  Mather,  1  T.  R.  12  ;  N.Y.  <jb  JST.  H.  Railroad  Co.  v.  Schuyler^ 
34  N.  Y.  84. 

We  are  thus  brought  to  the  question  whether  the  attachment  made 
by  the  defendant,  with  knowledge  that  the  shares  had  been  previously 


SCRIPTUEE  V.   FRANCESTOWN   SOAPSTONE   CO,  667 

Bold  and  transferred  by  Barton  to  the  plaintiff,  will  hold  them,  for  the 
reason  that  the  transfer  had  not  been  raade  on  the  books  of  the  com- 
pany according  to  the  provision  contained  in  the  certificate. 

It  does  not  appear  that  any  mode  of  transfer  is  provided  in  the  char- 
ter, and  the  only  provision  in  the  b\--laws  on  that  subject  is  contained 
in  Art.  10,  as  follows  :  "  Shares  may  be  transferred  by  assignment  on 
the  back  of  the  certificate,  and  surrender  of  the  certificate  to  the  treas- 
urer." This  corresponds  with  the  provision  in  the  certificate,  except 
that  the  words  "  only  on  the  books  of  the  company"  appear  in  that 
instrument. 

It  is  not  necessary  to  inquire  whether  the  provision  contained  in  the 
b^'-laws  was  authorized  by  the  charter ;  nor  whether  there  is  any  differ- 
ence in  legal  effect  between  a  provision  in  the  charter  and  one  in  the 
by-laws  which  have  been  adopted  in  pursuance  of  an  authorit}'  conferred 
by  the  charter ;  nor  whether  the  provision  in  the  certificate  should  have 
an}-  effect  by  way  of  contract  between  the  share  owner  and  the  corpo- 
ration ;  for  we  think  that,  b}'  a  fair  construction  of  the  general  law  of 
the  State  in  force  at  the  time  of  this  transaction,  a  transfer  of  shares  in 
a  corporation  of  this  sort,  to  be  complete  and  perfect  for  all  purposes, 
^lust  be  entered  upon  the  books  of  the  company  —  Rev.  Stats.,  chap. 
141  ;  Pinkerton  v.  The  M.  tb  L.  Railroad^  42  N.  H.  424  —  the  object 
being,  as  is  well  said  hs  defendant's  counsel  in  their  brief,  "  not  only  to 
give  notice  of  the  title,  but  to  furnish  an  authentic  record  that  would 
determine  membership  in  the  corporation,  the  right  to  vote,  private 
liability  for  debt,  liability  to  taxation,  and  all  other  incidents  of  owner- 
ship," &c. 

^  It  being  admitted,  then,  that,  for  the  protection  of  these  various  rights 
and  interests  of  the  corporation,  the  public,  and  creditors  of  the  stock- 
holders, the  law  provides  that  the  title  of  a  purchaser  of  shares  shall 
not  be  complete,  as  against  those  having  these  various  interests,  until 
the  transfer  is  entered  on  the  books  of  the  company,  it  becomes  a  very 
important  inquiry  to  ascertain  what  is,  in  point  of  fact,  the  origin  and 
basis  of  a  purchaser's  title  to  such  shares  when  they  pass  from  seller  to 
buyer.  Does  it  originate  in  and  rest  upon  the  contract  of  sale  between 
the  parties,  or  is  it  a  creation  of  law,  dating  its  birth  from  the  record 
of  the  transfer  on  the  company  books? 

A  share  in  a  corporation,  which  has  for  its  object  a  division  of  profits 
among  its  stockholders,  has  been  defined  to  be  ''  a  right  to  partake, 
according  to  the  amount  of  the  party's  subscription,  of  the  surplus 
profits  from  the  use  and  disposal  of  the  capital  stock  of  the  company 
to  the  purposes  for  which  the  company  is  constituted."  Angell  and 
Ames  on  Corp.,  §  557. 

It  cannot  be  disputed  that  tliis  right  is  property  of  a  definite  and  i 
important  character,  with  many  of  the  qualities  of  visible,  tangible,  per- 
gonal property,  and  having  a  value,  and  as  capable  of  appreciation  as 
.vessels  or  merchandise,  or  other  personal  chattels.  Shaw,  C.  J.,  in 
Fisher  v.  Essex  Bank;  5  Gray  377.  From  this  it  follows,  by  inevi- 
table inference,  that  it  may  be  ihe  subject  of  sale  as  much  as  any  other 


'l\ 


g68 


SCRIPTURE   V.    FRAXCESTOWX   SOAPSTONE   CO. 


t 


^  ^ 


-V 


A' 


^/n 


^' 


-i^' 


<M' 


(species  of  proper!}',  real  or  personal,  so  that,  as  between  vendor  and 
vendee,  the  title  may  pass  by  their  own  act,  and  be  thereby  vested 
absohiteh'  in  the  vendee. 

It  seems  too  clear  for  argument,  that  the  ownership  of  the  shares 
passes  from  the  seller  to  the  bu3-er  b}'  force  of  the  contract  of  sale,  and 
not  b}'  operation  of  law ;  and  if  that  be  so,  the  buyer's  title,  so  far  as 
the  seller  is  concerned,  attaches  the  moment  this  contract  is  full}'  con- 
,  summated  between  them. 
^j!^Th\s  kind  of  property,  being  an  intangible  right,  somewhat  akinjo 
the  right  to  receive  money  due  upon  a  bond  or  other  chose  in  action, 
is  incapable  of  actual  manual  delivery.  All  the  seller  can  do,  Ihat  cor- 
responds  at  all  to  the  delivery  of  personal  chattels  in  other  cases  of 
sale,  is,  to  hand  over  to  the  buyer  his  certificate,  with  a  sufficient  asslgh- 
ment  by  deed  or  otherwise  to  entitle  him  to  a  transfer  of  the  shares  on 
tlie  books  of  the  compan}'.  When  the  seller  has  done  Jlns_5^his^power 
and  duty  in  the  matter  are  ended,  and  it  is  at  the  option  of  the  pur- 
chaser  whether  the  transfer  shall  be  recorded  or  not._ 

If  the_purchaser  omits  to  have  the  record  made,  he  can  claim  no 
rights  as  a  member  of  the  corporation  ;  and  he  also  incurs  the  further 
risl^of  having  his  title  defeated  bj'  a  subsequent  attachment  or  sale  to 
a  bona  fide  purchaser^ 

itjs  difficult  to  see  an}'  substantial  difference  between  the  position  of 
this  plaintiff  after  the  sale  and  assignment  of  the  shares  to  him  by 
Barton  and  before  a  transfer  was  made  on  the  books,  and  that  of  the 
grantee  in  a  deed  of  land  before  his  deed  is  recorded.  Li  both,  cases 
t^e_seller  has  parted  with  his  title,  and,  as  to  him,  thejbuyer  has  ac^ 
quired  it.  It  is  only  third  persons  in  either  case  whose  rights  or  inter- 
ests  are  affected  by  the  omission. 

In  the  case  of  an  unrecorded  deed,  the  grantor  continues  to  be 
clothed  with  evidence  of  ownership  after  the  conveyance,  very  similar 
to  that  which  remains  with  the  seller  of  shares  before  the  transfer  has 
been  entered  on  the  books.  The  record  shows  that  he  is  still  the  owner 
of  the  land,  when  in  fact  he  is  not;  and,  so  far  as  any  interest  a  cred- 
itor can  have  in  the  matter  is  concerned,  the  same  is  precisely  true  in 
the  case  of  shares  in  a  corporation  sold  but  not  transferred  on  the 
books. 

The  statutes  which  we  hold  require  the  transfer  of  shares  to  be  en- 
tered on  the  books  of  the  corporation  kept  for  that  purpose,  are  certainly 
no  more  explicit  and  absohite  than  that  which  requires  the  recording 
of  deeds.  The  object  of  the  law,  s^_far  a,s  creditors  are  concerned,  is 
the  same  in  both  cases. 

As  between  the  parties  the  title  passes  by  contract  and  not  by  the^ 
record  in  both  cases  alike. ^ 

I  ItJs^cbfficult  to  suggest  any  reason  for  holding  that  actual  notice  of 
an  unrecorded  deed  to  a  subsequent  purchaser  or  attacliing  creditor 
BhalFbe  equivalent  to  a  record,  so  far  as  that  purchaser  oi-^redi^rjs 

i  A  note  by  tlie  reporter  is  omitted.  —  Ed. 


SCRIPTURE  V.   FRANCESTOWN   SOAPSTONE  CO.  669 

concernecT^hich  does  not  with  equal  force  require  us  to  hold,  in  the 
present  case,  that^ctuaF  notice  to  the  defendant  of  a  sale  of  these 
shares  was  equivalent,  so  far  as  its  rights  as  a  creditor  are  concerned, 
to  a  transfer  entered  in  due  form  upon  its  books.  This  view  is  sns- 
tained  by  hooding  v.  Riley ^  50  N.  H.  400,  where  the  chief  justice, 
upon  an  exhaustive  review  of  the  authorities  bearing  upon  the  question, 
arrives  at  the  conclusion  that  purchasers  or  mortgagees  of  personal 
propert}',  having  notice  of  a  prior  outstanding  equitable  title,  are 
affected  by  such  knowledge  in  the  same  wav  and  to  the  same  extent 
as  the  grantee  of  land  is  affected  by  knowledge  of  a  prior  unrecorded 
deed  ;  that  both  stand  upon  the  same  equitable  principle. 

The  same  result,  substantially,  is  reached,  if  we  consider  that  the 
omission  of  the  plaintiff  to  have  the  transfer  recorded  places  him  in  the 
same  position  as  a  purchaser  of  chattels,  who  permits  them  to  remain 
in  the  hands  of  the  seller  after  the  sale. 

Taking  that  view,  the  consequence  contended  for  hy  defendant's 
counsel  does  not  follow.  The  circumstance  of  such  retention  of  pos- 
session may  be  explained.  It  is  true  that,  in  the  absence  of  explana- 
tion, a  secret  trust  will  be  presumed;  but  when  an  explanation  is 
offered,  it  is  for  the  jury  to  say,  under  proper  instructions,  whether 
the  explanation  is  sufficient ;  and  the  fact  that  possession  was  so  re- 
tained, is  for  them  to  weigh  in  connection  with  all  other  evidence  bear- 
ing upon  the  actual  character  and  complexion  of  the  transaction  between 
the  parties. 

Here  the  defendant  had  notice  of  the  sale  and  assignment,  and,  as 
we  hold,  of  all  the  facts  attending  the  transaction,  for  the  reason  that 
Barton,  its  general  agent,  b}-  whose  knowledge  it  is  bound,  was  a 
party  to  the  transaction  and  knew  all  about  it.  Under  these  circum- 
stances it  can  hardl}'  be  heard  to  sa}'  that  it  inferred  fraud  from  the 
plaintiff's  conduct,  as  a  conclusion  of  law,  when  it  knew,  as  matter 
of  fact,  that  no  fraud  did  really  exist. 

Suppose^after  the  sale  b}'  Barton  to  the  plaintiff,  Barton  had  sold  the  c^'         V 

same  shares  again^ind  applied  the  proceeds  of  such  sale  to  his  own         ^.^g^^^^"^         \^ 
uses.      ILthe  second  purchaser  were  ignorant  of  the  prior  sale,  he  %>^\yT^  ^^^ 
would  get_a  good  title,  although  Barton  would  have  been  guilty*  of  a      '^-^"^|^^<^^ 
fraud  against  the^^Iaintitf  j)f  the^ost  gross  and  flagrant  charactj^r.     ^■'^^W 
But  if  this  second  purchaser  had  notice  of  the  former  sale  —  was  aware      -^y* 
of  the  situation  of  the  title  as  between  Barton  and  Scripture  —  by  con- 
certiiig_with  the  former  to  deprive  the  latter  of  his  property  he  becomes 
aparty  to  the  fraud,  and  no  j)roces_s_of  reason  ijig,  in  logic  or  morals^ 
will  lead  to  any  other  result  but  that  he  would  be  equally  guilty  with- 
the   seller.     To   hold   that   such   a  purchaser   acquired   a  good   title 
would  be  to  countenance  the  most  scandalous  bad  faiths  and  encourage 
dishonesty. 

The  difference  between  an  attempt  to  gain  a  title  under  such  cir- 
cumstances by  purchase  and  b}'  an  attachment  is  not  very  apparent, 
and  certainlv*  not  very  broad.     At  all  events,  we  think  it  entirely  clear 


G70        HOTCHKISS   AND   UPSON   CO.   V.   UNION   NATIONAL   BANK. 

that  what  cannot  be  accomplished  in  one  way  cannot  be  l)rought  about 
in  the  other. 

In  any  view  we  are  able  to  take  of  the  case,  we  think  the  question 
for  the  jury  is,  whether  the  sale  by  Barton  to  Scripture  was  a  bona  fide 
sale,  or  whether  it  was  so  tainted  with  a  secret  trust,  or  other  element 
of  fraud  in  fact,  that  it  cannot  be  sustained  ;  and  upon  that  question 
the  price  paid  for  the  shares  as  compared  with  their  actual  value,  the 
omission  of  plaintiff  to  have  the  transfer  recorded,  and  all  other  facts 
and  circumstances  tending  to  throw  light  upon  the  actual  character  of 
the  transaction,  will  be  proper  evidence  for  the  jury  to  consider.  In 
short,  that  the  sale  may  be  attacked  in  the  same  manner  and  upon  the 
same  grounds  as  though  the  transfe^  had  been  entered  upon  the  books 
of  the  corporation  at  the  time  t^H  fact  of  the  sale  was  brought  to  its 
knowledge.  rj^i^ /\.  Case  discharged. 


-5\.>   V^  UPSON  CO.  V.  UNION  NATIONAL  BANK. 

J;^.        'C^;        i>^ '/ir^  1895.     37  U.  S.  Appeals,  86.1 

tr^        4-  '^/^  Circuit  Court  of  Appeals.     Sixth  Circuit. 

l/s^^  }^yiA'^ JL  0^     Appeal  from  U.  S.  Circuit  Court  for  the  Northern  District  of  Ohio. 
^ ^y*^  '\aA'  A    C*^  I^ill  in  equity  by  Union  National  Bank  of  Cleveland,  Ohio,  against 
^iJ/*^  ttie  Hotchkiss  &  Upson  Company,  a  Connecticut  corporation,  to  enforce 

''^ .    M'''*^  a  liejv-upon  stock  of  the  latter  company  alleged  to  have  been  acquired 

u^i  TO^  ^*^    P     lA^bya  pledge  from  Charles  A.  Hotchkiss.     It  appeared  that  Hotchkiss, 
(i^        '  /W/'        _,x^as  a  collateral  security  for  a  loan,  assigned  in  pledge  to  the  bank  cer- , 
^^    jlM*/^         tificates  for  140  shares  of  the  Hotchkiss  &  Upson  Compan}-.      The 
ur^^         .^t/M^-^^*^^'assignment  consisted  in  delivering  the  certificates  to  the  bank;  with  a 
S     ^jL>^-  -Uj^  blank  power  of  attorney  for  the  transfer  of  the  stock  upon  the  books  of 

'  s  0*=''*^^'^^^  i>w/>-*^tie  company,  executed  bj'  Hotchkiss.     The  stock  has  never  been  trans- 
^'"'"^^     -^  "^Z  vT^       ferred  upon  the  books  of  the  company  to  the  bank,  and  no  copy  of  the 
f^-^""*^ ^^^C    y       J^power  of  attorney  was  ever  filed  in  the  office  of  the  company. 
l*^"        ..yC^T^'^Jy  '    Subsequently  to   the    above  pledge,   Hotchkiss  embezzled  a  large 
K*^  -l/ftj'  '^    amount  of  the  funds  of  the  Hotchkiss  &  Upson  Company,  of  which  he 

f^^'^^*^       L^*'^  ^1^^  charge  as  president. 

djt.x*'*^^     ^   '^"'^      It  is  contended  that  by  force  of  the  general  laws  of  Connecticut  re- 

//CJi^*'*^'''^       A^tAV  lating  to  corporations  a  lien  was  given  to  the  company  upon  the  stock 

J^  ^^-^^  stancling  upon  its  books  in  the  name  of  Hotchkiss  for  the  amount  of  the 

ig,^   v«^>*T!l*'^^,(XA-^debtedness  created  by  his  embezzlements,  and  that  this  lien  is  para- 

r^iy-JU'-^Q  .        mount  to  that  of  the  bank,  for  the  reason  that  there  was  no  transfer  of 

^  .4.XAJ-  ^  ^       ^  ^^^e   stock  by  Hotchkiss  to  the  bank  upon  tlie  books  of  the  company, 

/^e/  ^^^-^^^*^         ,and  no  copy  of  the  power  of  attornc}-,  was  filed  in  the  oilice  of  the  com- 

a    (o^  C<*-<r  '^^"^^^^^  pany  as  required  b}^  the  law  of  Connecticut  in  order  to  make  the  assign* 

^^-i^iy  '4^^'^7  ^^^^  good  as  against  the  company. 

^r^K^    i>-Hf^       .      ,^^^^    ^'^"'^^ -jr:^^  1^  I'Unly  part  of  the  case  is  given.  — Ed. 


J> 


HOTCHKISS   AND   UPSON   CO.   V.   UNION  NATIONAL  BANK.        671 

The  provision  of  the  statutes  of  Connecticut  giving  the  company  such 
lien  is  found  in  section  1923  of  the  General  Statutes  of  that  state  (Re- 
vision of  1887),  which  reads  as  follows  :  ''When  not  otherwise  provided 
in  its  charter,  the  stock  of  ever}-  corporation  shall  be  personal  propert}-, 
and  be  transferred  onl}-  on  its  books  in  such  form  as  the  directors  shall 
prescribe  ;  and  such  corporation  shall  at  all  times  have  a  lien  upon  all 
the  stock  owned  by  any  person  therein  for  all  debts  due  to  it  from  him." 
And  section  1924  declares  how  such  stock  may  be  pledged,  and  the 
manner  in  which  such  pledge  may  be  made  effectual,  as  follows: 
"Shares  of  stock  in  any  corporation,  organized  in  this  state  under  the 
laws  of  this  state  or  of  the  United  States,  may  be  pledged,  by  execut- 
ing and  delivering  a  power  of  attorney  for  its  transfer,  with  the  certifi- 
cate of  stock  therein  mentioned,  to  any  party  to  whom  the  pledge  is 
made ;  but  no  such  pledge,  unless  consummated  by  an  actual  transfer 
of  the  stock  to  the  name  of  such  party,  shall  be  effectual  to  hold  such 
etock  against  any  person  but  the  pledger  and  his  executors  and  admin- 
istrators, until  a  copy  of  said  power  of  attorney  shall  be  filed  with  the 
cashier,  treasurer  or  secretary  of  said  corporation." 

The  provisions  of  section  1924  were  not  complied  with  in  the  making 
of  the  above  pledge.  But  the  bank  introduced  evidence  tending  to 
show  that  the  Hotchkiss  &  Upson  Company  had  notice  of  the  pledging 
of  these  shares  before  the  embezzlement  commenced.  The  court  below 
found  that  the  company  had  such  notice  ;  and  held^  that  the  bank's  lien 
was  superior  to  that  of  the  company. 

A  decree  was  made,  sustaining  the  bank's  lien  upon  the  140  shares 
pledged  as  above  stated. 

J.  E.  Ingersoll,  for  appellant. 

W.  B.  Sanders  {Squire,  Sanders  <&  Dempsey  were  on  the  brief), 
for  appellee. 

Severens,  J. 

For,  assuming  that  the  bank  was  bound  to  take^otice,  not  only  of 
the  charter»J)ut  the  general  laws  of  Connecticut  affecting  the  Hotch- 
kiss &  Upson  Company,  we  think  it  was  competent  for  the  bank  to  P 
show  that  the  Connecticut  corporation  had  the  notice  of  the  pledge  of 
its  stock  to  the  bank  for  the  j)ayment_of  the^^lSJiO^^^ote^  which  it 
Avas^hej)urpose  of  section_1924  of  the  laws  of  that  state,  jjjove  quoted, 
to  secure.  ~~~' 

It  is  a  widely  prevalent  doctrine,  applj'ing  to  a  variety-  of  statutes 
enacted  for  the  purpose  of  protecting  parties  dealing  bona  fide  with 
property'  upon  the  assumption  of  its  ownership  by  the  persons  dealing 
with  them,  against  prior  liens  and  conveyances,  that,  notwithstanding 
the  generalit}'  of  the  language  of  such  statutes  declaring  that  such  for- 
mer liens  and  conveyances  should  be  held  void,  if  not  registered  in 
conformity'  with  the  provisions  of  the  statute,  as  against  subsequent 
purchasers,  j'et,  seeing  that  the  whole  object  of  such  provisions  was  to 
guard  the  subsequent  purchaser  against  transfers  of  which  he  had  nd 


672  II0TCHKI3S   AND   UPSON   CO.   V.   UNION   NATIONAL   BANK. 


2) 


notice,  if  the  object  of  the  statute  had  been  subserved  by  actual  knowl- 
edge of  the  fact,  the  prior  transferee  would  be  protected.  And  there  is 
no  reason  why  this  should  not  be  so.  Such  laws  are  not  designed  to 
accomplish  so  unjust  a  result  as  that  a  person  having  knowledge  of  an- 
other man's  equities  may  defeat  them  by  an  act  of  his  own,  taken  with 
such  knowledge.  Converting  those  statutes  to  such  purpose  would  be 
quite  contrary  to  the  spirit  of  their  enactment.  That  such  is  the  gen- 
eral doctrine  upon  this  subject  cannot,  we  think,  be  disputed.  The 
cases  are  too  numerous  to  justify  a  review  of  them  here.  Many  of  the 
principal  decisions  are  collected  in  1  Jones,  Mortg.  (5th  Ed.)  §  538, 
and  the  result  of  them  stated ;  and  it  is  there  said :  "  The  doctrine  is 
the  same  under  statutes  which  declare  without  qualification  that  an  un- 
acknowledged or  unrecorded  deed  shall  be  void  as  against  purchasers, 
or  as  against  all  persons  who  are  not  parties  to  the  conveyance." 

The  rule  is  the  same  in  respect  to  personal  property.  No  distinction 
in  tlie  application  of  the  doctrine  can  be  based  upon  a  distinction  be- 
tween the  two  classes  of  property.  Jones,  Chat.  Mortg.  (4th  Ed.)  §  308. 
It  rests  upon  a  broad  and  fundamental  equity.  It  must  be  conceded 
that  there  are  occasionally  to  be  found  cases  which  seem  to  lead  to  a 
different  conclusion,  but  the  general  current  and  weight  of  authority  is 
as  above  indicated.  No  doubt  there  are  exceptions  to  this  rule  where 
the  statute  goes  further  than  to  provide  for  the  mere  giving  of  notice, 
and  expressly  declares  that  the  instrument  shall  only  become  valid  upon 
its  registration.  In  such  case  the  condition  is  made  essential  to  its 
validit}'. 

The  decisions  of  the  supreme  court  of  the  state  of  Connecticut  show 
be3ond  doubt  that  the  rule  which  prevails  in  that  state  upon  this  sub- 
ject is  the  same  as  the  rule  whicbLPievails  generally  injbhe^courts  of  the 
several  states  and  of  the  United  States,  and  it  may  be  regarded  as  the 
settled  rule  of  Connecticut  that  statutes  of  a  kindred  character,  and 
having  the  same  purpoje_j^hat  here  under_ consideration ,_are  to  be 
construed,  not  as  rendering  prior  transactions  void  as  between  the  par- 
ties  themselves  or  others  who  had  equivalent  notice  of  such  transactions, 
and_who,  therefore,  were  in  no  predicament  requiring  protection,  but 
as  provisions  whose  whole  scope  and  intended  effect  was  the  protection 
of  parties  who  had  an  equity  arising  upon  the  fact  of  their  having  altered 
their  situation,  in  reliance^  'ipon  the  apparent  condition  of  things. 
WEeaton  v.  Dyer,  15  Conn.  307  ;  Blatchley  v.  Osborn,  33  Conn.  226  ; 
Hamilton  v.  Nutt,  34  Conn.  501. 


[Remainder  of  opinion  omitted.] 


Decree  affirmed. 


h      ;A\> 


FORT  MADISOI^) 


»V/' 


/, 


// 
k. 


.^ 


FORT  MADISON  LjftlBER 

^      1887.     71  Iowa,  270. 


CO.  V.  BATAVIAN  BANK. 


G73 


i>- 


D- 


AP- 


/ 


..^^ 


Action  in_e^mit}'  to  compel  the  defendants  to  interplead,  in  order  that 
their  respective  claims  against  each  other,  and  against  the  plaintiff  com- 
panj',  ma}'  be  determined.  The  facts  appear  to  be  that  one  Weston 
was  at  one  time  the  owner  of  certain  shares  of  stock  in  the  plaintiff 
company,  and  the  same  stood  in  his  name  on  the  books  of  the  com- 
pan}'.  In  1883  he  borrowed  money  of  the  defendant,  the  Batavian 
Bank  of  La  Crosse,  Wisconsin,  and  assigned  to  it  certificates  of  his 
stock  as  collateral  security  ;  but  no  transfer  of  the  stock  was  made  upon  » 
the  books  of  the  company.  Afterwards  he  became  insolvent.  Among' 
his  creditors  were  the  defendants  D.  Hammell  &  Co.,  the  Clark  Counts- 
Bank  and  the  Neillsville  Bank.  These  creditors  brought  actions  upon 
their  respective  claims  in  the  circuit  court  of  Lee  county,  Iowa,  and 
caused  writs  of  attachment  to  be  issued,  and  levied  upon  the  stock  in 
question.  At  the  time  of  the  levy  they  Jiadno^knqwledge  of  any  ti-an§- 
fer  of  the_certificates  by  Weston.  Shortly  after  the  levy  the  Batavian 
Bank  procured  the  secretary  of  the  plaintiff  to  indorse  upon  the  stubs 
of  the  book  from  which  the  certificates  had  been  detached  an  entrj-  or 
memorandum  of  a  transfer.  This  action  is  brought  for  the  purpose  of 
procuring  a  determination  of  the  question  as  to  whether  the  rights  of 
the  Batavian  Bank,  as  pledgee,  are  subject  to  the  attachments,  or  the 
attachments  subject  to  the  rights  of  the  Batavian  Bank.  The  court 
held  that  the  attachments  were  subject  to  the  rights  of  the  Batavian 
Bank.  The  defendants  D.  Hammell  &  Co.,  the  Clark  County  Bank  and 
the  Neillsville  Bank  appeal. 

Casey  &  Caseij,  for  D.  Hammell  &  Co.,  appellants. 

M.  C.  Ring,  M.  F.  Kounts  and  Casey  &  Casey,  for  the  other  ap- 
pellants. 

C.  W.  Bunn  and  W.  J.  Knight,  for  the  Batavian  Bank. 

Van  Valkenburg  &  Hamilton,  for  the  other  defendants. 

Frank  Hagerman,  for  plaintiff. 

Adams,  C.  J.     Tlj[e_question  whether  a  transfer  of  stock  in  an  incor- 
porated company  iji  this  state,  when  not  entered  upon  the  books  of  the  .^kn  (^4AP^Crk\ 

company,  jsj'alid,  as  against  attaching  creditors  of  the  assignor  with-     " — ^ — ■ 

out  notice,  is  now  presented  for  the  first  time  in  this  court.  Its  deter- 
mination must  depend  upon  the  view  which  should  he  taken  of  the 
meaning  of  the  provision  found  in  section  1078  of  the  Code,  and  which 
is  as  fullows  :  "  The  transfer  of  shares  is  not  valid,  except  as  between 
ihe  parties  thereto,  until  it  is  regularly  entered  on  the  books  of  the 
company,  so  as  to  show  the  name  of  the  person  by  and  to  whom  trans- 
ferred, the  numbers  or  other  designation  of  shares,  and  the  date  of  the 
iransfer." 


^L 


FORT   MADISON  LUMBER   CO.   V.   BATAVIAN   BANK. 


J^  iy    y^v'  The  question  now  presented  does  not  arise  between  the  parties  to 
iy„     .  A^|'^/*Tthe  transfer.     Without  any  question,  the  transferee  will  hold  the  stock, 


^ 


as  against  the  transferer,  for  all  the  purposes  for  which  the  transfer  was 
madeT"  The  question  arises  between  one  of  the  parties  to  the  transfer 
I  and  otherswho  were  not  parties,  and  who  dispute  the  validity  of  the 
I  transfer!  IT  we  give  the  statute  a  literal  construction,  we  must  hold 
that  the  transfer  is  not  valid.  To  hold  otherwise,  we  should  be  obliged 
to  enlarge  the  exception.  The  rule  would  be  that  the  transfer  is  not 
valid,  except  as  between  the  parties,  and  except  as  between  the  trans- 
feree and  the  attaching  creditors  of  the  transferer.  But  ordinaril}',  in 
the  construction  of  a  statute,  an  exception  is  not  to  be  enlarged. 

The  question,  however,  is  not  free  from  difficult}'.  It  is  urged  b}^ 
the  appellee,  the  transferee,  that  an  attachment  can  in  no  case  bind 
more  than  the  interest  of  the  debtor ;  and,  if  the  transfer  is  valid  be- 
tween  the  parties,  it  is  said  that  it  follows,  from  the  necessity  of  the 
case,  that  the  attaching  creditor  of  the  transferer  acquires  a  lien  only 
upon  such  interest  as  the  transferer  has  left,  if  imy. 

That  there  is  plausibility  in  this  argument  cannot  be  denied.  But  in 
our  opinion  it  is  not  sound.  It  would  carr}'  us  too  far.  It  would  make 
a  transfer  that  is  valid  between  the  parties  to  it  valid  as  against  all 
persons  claiming  under  the  transferer.  But  no  one  pretends  that  this 
is  so.  If  the  transferer  sells  again,  and  to  an  innocentjDurchaserJiu: 
value,  who  obtainsa  transfer  upon  the  books,  no^e  doubts  that  he 
would  become  both  the^ legal  and  equitable  owner;  and  ^lis  is  true 
though  the  transferer  had,  in  one  sense^  lio^interes^in  the  stock  which 
hFcould^ sell.  It  is  entirely  competent,  then,  for  the  legislature  to  pro- 
"vide  arbitrarily  that  a  given  transfer  shall  be  deemed  by  a  court  valid 
or  invalid,  according  to  the  parties  which  shall  be  before  the  court. 
The  transfer  is  valid  if  the  parties  before  the  court  were  the  parties  to 
the  transfer,  and  otherwise  not.  This,  at  least,  is  the  rule  of  the  stat- 
ute, and  must  be  followed,  unless  some  equitable  consideration  controls. 
If  the  attaching  creditors  of  the  transferer  had  knowledge  of  the 
Itransfer,  it  ma^^be  that  a  court  of  equTt;^  would  protect_jLhe  trans- 
feree's rights.  It  has  frequentlyl)een_so_hel^^ 
I  nqt_before  us. 

Our  conclusion  thus  far  has  been  based  upon  what  seems  to  be  the 
fair  meaning  of  the  language  of  the  provision.  But  we  are  entitled  to 
take  a  broader  view,  and  look  at  other  provisions.  It  is  provided  in 
the  same  section  that  the  "  books  of  the  company  must  be  so  kept  as 
to  show  intelligibly  the  original  stockholders,  their  respective  interests, 
the  amount  paid  on  their  shares,  and  all  transfers  thereof;  and  sucb 
books,  or  a  correct  copy  thereof,  so  far  as  the  items  mentioned  in  this 
section  are  concerned,  shall  be  subject  to  the  inspection  of  any  person 
desiring  the  same."  The  above,  it  will  be  seen,  is  a  provision  that 
the  books  shall  show,  at  any  given  time,  precisely  who  the  stock- 
holders are  at  that  time.  The  books,  too.  Shall  be  kept  open  for 
inspection  by  any  one.     Wherea  provision  j^s  jnade  for  a  record  of  spe- 


FORT   MADISON  LUMBER 


,->^y  P/V^ 

inspecting  the  record  expends^  money  upon  the  faith  of  it,  any  otlieft^',^  ^  v^ 
person  through/whose  negligence  the  Record  fails  to  show  the  triith/,^  ,^ 
shouhlbe  estopped  from  settingjupjts  mitruthfulness^  -^ 

It  is  contended  by  the  appellee  that  the  provision  for  a  record,  de- 
signed to  show  who  the  stockholders  are  at  anj'  given  time,  is  for  the 
sole  benefit  of  the  corporation  itself.  But  there  is  nothing  in  the  pro- 
vision that  calls  for  such  construction.  Besides,  nothing  can  be  clearer 
than  that  the  record  is  for  the  benefit  of  any  one  who  may  desire  to 
inspect  it,  because  it  is  expressly  provided  for  such. 

It  is  contended  by  the  appellee  that  a  mere  attachment  of  stock 
should  not  have  precedence  over  a  prior  assignment,  not  made  of 
record,  because  the  attaching  creditor  has  expended  nothing  but  his 
labor  and  the  costs.     By  way  of  argument,  it  is  said  that  an  attach-  i 

ment_does  not  take  precedence  of  an  unrecorded  deed.     But  such  a^^_»__»^^*^ 
case  differs  in  this.    The  statute  expressly  requires  transfers  of  stock 
to  be  recorded  ;  it  does  not  require  that  deeds  shall  be. 

Stock  in  an  incorporated  company  is  personal  property.  Transfers 
of  personal  property,  to  be  valid  as  against  attaching  creditors,  should 
be  attended  by^a  yisibl^cbange  of  possession,  or  else  evidence  of  the 
t£ansfer^should_be  spread  uponji  public  record.  We  have  an^e^^ress 
provision  of  statute  for__propert£  where  j,  visible  chjuig^  of  possession 
can  be  made.  In  the  case  of  stock  m  an  incorporated  company,  no 
visible  change  of  possession  can  be  made.  Stock  is  a  share  in  the 
interests  and  rights  of  the  corporation.    Certificates  are  mere  ejvidence. 

They  may  never  be  issued. It  is  not  essentiajjthat  they  should  be^. 

"NVhen  issuejl,  they  are  merel}-  for  convenience.  Thej^bject  of  the  im- 
perative  jirovision  that^  transfers  of  stocks  shalL  be  recorded  un£ues- 
tionably  is  that  tbe^ownership  maybe  made  apparent. 

Chief  Justice  Shaw,  in  Fisher  v.  Essex  Bank,  5  Gray,  373,  (380), 
in  speaking  of  stock  in  an  incorporated  company,  said  :  "  It  is  of  im- 
portance that  the  title  be  certainly  and  easily  ascertained,  that  the 
mode  of  acquiring  and  alienating  it  ma}'  at  an}'  time  be  made  available 
by  process  of  law  for  the  debts  of  the  owner."  Again,  speaking  of 
the  necessity  of  a  record  of  the  transfers  as  passing  title,  and  of  a 
levy  according  to  the  record,  he  says :  "  The  shares  [otherwise]  could 
never  be  attached,  for  the  officer  could  have  no  means  of  obtaining 
possession  of  the  certificate  from  a  reluctant  debtor  adversely  inter- 
ested, and  without  it  the  shares  might  pass  the  next  day  to  a  purchaser 
without  notice."  Again  he  says :  "  It  is  necessary  to  fix  some  act, 
and  some  point  of  time,  at  which  the  property  changes,  and  rests  in 
the  vendee  ;  and  it  will  tend  to  the  security  of  all  parties  concerned  to 
make  that  turning  point  consist  in  an  act  which,  while  it  may  easily  be 
proved,  does  at  the  same  time  give  notoriety  to  the  transfer." 
In  support  of  the  conclusion  which  we  have  reached,  that  the  statute 


6'<3 


rOET   MADISON   LUMBEE   CO.   V.   BATAVIAN   BANK. 


\x 


O^^CX-yC-lA 


i/^i^-cy*^ 


in  question  was  designed  in  part  for  tlie  benefit  of  attacliing  creditors, 
we  will  refer  to  another  provision  of  tlie  statute.  The  sheriff  must,  as 
nearly'  as  the  circumstances  will  permit,  levy  upon  property  fifty  per 
cent  greater  in  value  than  the  amount  of  the  debt  as  sworn  to.  Code, 
§  2954.  Now,  if  the  construction  contended  for  by  the  appellee  is  cor- 
rect, the  attaching  creditor  and  sheriff,  proceeding  strictly  according  to 
law  in  attaching  stock,  and  exhausting  their  ability  to  secure  the  debt 
by  such  attachment,  cannot  know  whether  any  security  at  all  has  been 
obtained.  The  certificate  holder  may  keep  himself  concealed  until  the 
very  moment  when  the  stock  is  offered  for  sale  on  execution,  and  it  is 
sufficient  if  he  then  appear,  and  give  notice  of  bis  claim.  We  cannot 
think  that  the  statute  was  designed  to  admit  such  a  result.  We  may 
say,  indeed,  that  the  very  mode  of  attaching  stock  provided  by  statute 
seems  to  be  a  legislative  construction  of  the  statute  in  question. 

We  come,  now,  to  inquire  how  the  question  stands  upon  the  authority 
of  adjudicated  cases. 

In  ^laine  the  statute  provides  that  "a  transfer  of  shares  is  not 
valid,  except  between  the  parties  thereto,  until  it  is  so  entered  in  the 
books  of  the  corporation."  The  provision  is  identical  with  the  provi- 
sion of  our  own  statute.  In  Skqwhegan  BaiiJc  v.  Cutler^  49  Me.  31,5, 
a  question_arose  as  to  whether  an  attachment  would  take  precedence  of 
an  unrecorded  assignment,  and  it  was  held  that  it  would. 

In  Illinois  it  is  provided  that  shares  of  stock  in  a  corporation  can  be 
transferred  only  upon  the  books  of  the  corporation.  In  People^ s  Bank 
V.  GridJey.  91  111.  457,  a^question  arose  as  to  whether_the^  levy  of  an 
execution  would  take  precedence  of  a  transfer  of  shares  not  entered 
upon  the  books.  It  was  held  that  it  wouM.  The  action  was  brought 
to  enjoin  the  sale  on  execution.  The  point  was  made  that  the  execu- 
tion creditor,  who  had  merely  levied,  was  not  an  innocent  purchaser  for 
value,  and  that,  not  being  such,  the  transfer,  though  not  entered  upon 
the  records,  might  be  set  up  against  him  ;  but  the  court  held  other- 
wise. It  is  true,  the  Illinois  statute  differs  a  little  from  ours.  It  pro- 
vides that  transfers  can  be  made  only  on  the  books  of  the  company. 
It  does  not,  like  our  statute,  expressly  provide  that  a  transfer  not  en- 
tered upon  the  books  will  be  good  as  between  the  parties  to  the  trans- 
fer. But  the  difference,  in  our  opinion,  is  not  material.  The  statute 
is  the  same  in  effect.  It  is  well  settled  that,  under  a  statute  like  the 
Illinois  statute,  a  transfer  not  entered  upon  the  books  is  good  between 
the  parties.     The  case,  then,  appears  to  be  strictly  in  point. 

The  same  view  was  taken  in  Sabin  v.  Bank  of  Woodstock,  21  Vt., 
553,  and  Cheever  v.  Meyer^  52  Id.,  66.  In  the  former  case.  Chief  Jus- 
lice  Redfield  said  :  "  We  entertain  no  reasonable  doubt  that  .  .  ^_all 
persons  unaffected  with  notice  to  the  contrary  are  at  liberty  to  act  upon 
the  faith  of  the  title  being  where  it  appears  upon  the  books  of  the  com* 
pany  to  be."  In  State  Ins.  Co.  v.  Sax,  2  Tenn.  Ch.  507,  Chancellor 
Cooper  cites  the  case,  and  refers  to  it  approvingl}-. 

In  Wisconsin  the  statute  pertaining  to  the  transfer  of  stocks  is  like 


FOKT   MADISON   LUMBER  CO.   V.   BATAVIAN   BANK. 


677 


ours,  and  in  ApiMcation  of  Murphy,  51  Wis.,  419,  8  N.  W.  Rep.,  419, 
a  construction  was  put  upon  it  which  sustains  the  appellants  in  the  case 
at  bar.  The  court  said:  "We  think  that  the  meaning  of  the  law  i3_ 
that  all  transfers  of  shares  should  be  entered,  as  here  required,  upon 
the  books  of  the  corporation ;  and  Jt_is^  equall}'  clear  to  us  that  all^ 
transfers  of  shares  not  so  entered  are  invalid  as  to  attaching  or  execu- 
7ion  creditors  of  the  assignors,  as  well  as  to  the  corporation  and  sub- 
sequent purchasers  in  good  faith." 

In  Pinkerton  v.  Manchester  tJt  L.  R.  Co.,  42  N.  H.,  424,  (462), 
an  attachment,  made  without  notice  of  a  prior  transfer  not  entered 
upon  the  books,  was  held  to  take  precedence  of  it.     The  court  said : 
"  As  to  goods  and  chattels  in  possession,  a  substantial  change  of  pos-| 
session   is  by  our  law  essential  when  it  can  be  had.     In  the  case  of  I 
stock,  the  natural  and  appropriate  indication  of  ownership  is  the  entry; 
upon  the  stock  record." 

In  Connecticut  an  attachment  was  upheld  as  against  a  prior  assign- 
ment not  entered  upon  the  books.  Northrop  v.  Neicton  <&  bridge- 
port  Turnpike  Co.,  3  Conn.  544. 

It  is  claimed  by  the  appellee  that  in  New  York,  New  Jerse}'  and 
California  it  has  been  held  otherwise ;  and  it  may  be  conceded  that  this 
is  so,  though  we  are  not  prepared  to  sa^'  that  all  the  statutory  provi- 
sions in  those  states  bearing  upon  the  question  are  quite  the  same  as 
in  this. 

The  case  of  Black  v.  Zacharie,  3  How.,  483,  is  cited  by  the  appellee. 
In  that  case  language  was  used  which  might  seem  to  support  the  appel- 
lee's position,  but  the  case  was  essentially  different  from  the  one  at  bar. 
The  attaching  creditors  had  notice  of  the  assignee's  rights  at  the  time 
the  attachment  was  levied. 

The  appellee  also  cites  Moore  v.  Walker,  46  Iowa,  164.  But  the 
pretended  attachment  in  that  case  was  made  before  the  assignment,  and 
would  unquestionabl}'  have  taken  precedence  of  it  if  it  had  been  proi> 
erly  made ;  but  it  was  not,  and  had  no  validity,  regardless  of  an}' 
question  of  transfer.  It  was  expressly  held  that  the  provision  of 
statute  now  in  question  (section  1078,  Code,)  had  no  application  to  the 
case.  The  remark,  then,  in  the  opinion,  in  regard  to  the  scope  of  that 
section,  does  not  have  the  force  of  an  adjudication. 

There  is  jio  question  in  regard  to  the  preponderance  of  authority. 
It  ii^learly  on  the  side  of  the^appellants.  But  we  are  not  influenced 
more  by  this  fact  than  what  seems  to  be  the  plain  language  and  intent  of 
the  statute,  and  the  difficulty  and  uncertainty  which  would  often  attend 
securing  debts  by  attachment  of  stock,  if  stock,  as  against  attaching 
creditors,  can  be  transferred  b}*  mere  delivery  of  the  certificates,  and 
if  the  books  provided  expressly  for  inspection  by  such  creditors  are  to 
serve  especially  the  purpose  of  a  false  scent. 

We  think  the  judgment  must  be  Reversed- 


6o-^ 


P'^M" 


.^ 


)<i'^ 


OTTUMWA 


SCREEN  CO.   V.   STODGHILL, 


r 


u. 


1897.     103  Iowa,  437.1 

/  iy    ^Action  in  Equity,  to  restrain  the  defendant  sheriff  from  selling 
'0\7^    certain  shares  of  stock.     As  to  certain  of  the  shares  in  controversy, 
the  District  Court  found  for  the  defendants  ;  and,  as  to  these  shares, 
the   temporary   injunction  was   dissolved,   and  a   special  execution 
ordered  to  issue  for  their  sale.     Plaintiffs  appealed. 
W.  S.  Coen,  for  appellants. 
Morris  &  Loivenberg,  for  appellees. 

KiNKE,  C.  J.     I.     It  appears  from  the  record  that  one  Antrobus 
owned  certificates  of  stock  in  the  plaintiff  company  embracing  eleven 
shares,  and  that  the  same  were  assigned  in  writing  to  one  Thayer,  and 
were  by  him  deposited  with  the  secretary  of  the  company ;  that  the 
Ottumwa  Screen  &  Construction  Company  held  a  certificate  for  five 
shares  of  stock  in  plaintiff  company,  which,  when  issued,  was  by  the 
,  Q,..     holder  deposited  with  plaintiff  company,  under  an  oral  assignment, 
yXf*''^  ,. 'as   collateral  security  for  two  notes  which  had  been  signed  by  the 
-    I      Ottumwa  Screen  &  Construction  Company,  E.  B.  Jones  and  J.  H.  An- 
trobus.    Other  certificates  are  referred  to  in  the  record.     As,  however, 
the  court  found  in  plaintiffs'  favor  as  to  them,  they  need  no  fvirther 
^jiaasidexationj    Fair,  Williams   &  Co.,  having  a  judgment   in  their 
favor  as  plaintiffs,  and  against  the  Ottumwa  Screen  &  Construction 
Company  as  defendants,  caused  an  execution  to  issue  thereon,  and  a 
levy  thereunder  to  be  made  by  the  sheriff  upon  the  shares  of  stock 
.before  mentioned.     Plaintiffs  claim  that  before  the  sheriff  made  the 
I  levy  he  had  actual  notice  that  the  stock  had  been  transferred  as  before 
{stated.     As  to  this  the  evidence  is  conflicting,  though  we  think  it  pre- 
ponderates in  favor  of  plaintiffs'  contention.    No  entry  had  been  made 
Ay  of  the  transfer  of  said  shares  on  the  books  of  the  company  prior  to 

^  the  completion  of  said  levy.     It  appears  that  when  the  shares  were 

transferred  they  were  deposited  with  the  secretary  of  plaintiff  com- 
pany, where  they  had  remained  until  levied  upon ;  that  where  the 
assignment  was  in  writing,  it  was  attached  to  the  certificate,  and  in 
case  of  oral  transfer  the  company  was  also  notified  of  it.  Each  of  the 
certificates  of  stock  contained  this  provision :  ''  Transferable  only  on 
the  books  of  said  company,  in  person  or  by  attorney,  on  surrender 
of  this  certificate."  Plaintiffs  claim  that  the  transfers  were  made  in 
substantial  conformity  to  the  statute,  and  that  they  were  as  effectual 
as  if  entered  upon  the  books  of  the  company.  It  is  also  said  that,  as 
the  officer  making  the  levy  had  actual  notice  of  the  transfer  before 
said  levy,  the  object  of  the  statute  was  accomplished,  and  the  creditor 
acquired  no  lien  thereon  superior  to  plaintiffs'  lien.  On  the  other 
hand,  it  is  insisted  that  the  statute  provides  that,  except  as  between 
1  Statement  abridged.  —  Ed. 


iv' 


OTTUMWA   SCREEN  CO.   V.    STODGHILL. 


679 


the  parties,  a  transfer  of  shares  not  entered  on  the  books  of  the  com- 
pany is  invalid.  The  statute  reads  :  "  The  transfer  of  shares  is  not  | 
valid,  except  as  between  the  parties  thereto,  until  it  is  regularly  en-  jP' 
tered  on  the  books  of  the  company,  so  as  to  show  the  name  of  the '  ^ 
person  by  and  to  whom  transferred,  the  numbers  or  other  designation 
of  the  shares  and  the  date  of  the  transfer.  .  .  .  The  books  of  the 
company  must  be  so  kept  as  to  show  intelligibly  the  original  stock- 
holders, their  respective  interests,  the  amount  paid  on  their  shares, 
and  all  transfers  thereof.  .  .  ."  Code  1873,  section  1078.  The  ques- 
tion before  us  is  :  Will  a  transfer  made  in  any  other  way  than  that  pro- 
vided in  the  statute  be  effectual  to  transfer  the  shares  as  against  a 
creditor  of  the  transferor  who  has  actual  notice  of  such  transfer  ? 
While  this  court  has  held  that  a  transfer  of  shares  not  entered  on  the 
books  of  the  company  will  not  be  valid  as  against  an  attaching  cred- 
itor who  has  no  actual  notice  of  such  transfer,  the  effect  of  actual  no- 
tice in  case  it  exists,  has  not  been  determined.  Lumber  Co.  v.  Bata- 
vian  Bank,  71  Iowa,  270.  In  that  case,  in  discussing  the  meaning  of 
the  statute,  it  was  incidentally  said  :  "  If  attaching  creditors  of  the 
transferor  had  knowledge  of  the  transfer,  it  may  be  that  a  court  of 
equity  would  protect  the  transferee's  rights.  It  has  frequently  been 
so  held,  but  that  question  is  not  before  us."  We  think  the  statute 
sho.uld  be  construed  to  mean  just  what  it  says.  We  are  not  author- 
ized to  insert  another  exception  in  the  statute,  which,  in  effect,  we 
must  do  if  we  hold  that  the  attachment  lien  is  not  superior  to  the 
claims  of  plaintiffs.  Plaintiffs  construe  the  statute  as  if  it  read : 
"  The  transfer  of  shares  is  not  valid  except  as  between  the  parties 
thereto,  and  except  as  between  the  transferee  and  an  attaching  cred- 
itor of  the  transferor  who  has  actual  notice  of  the  transfer."  That 
would  be  ingrafting  upon  the  statute  an  exception  it  does  not  contain. 
The  holding  in  the  case  just  cited  is  followed  in  Moore  v.  Opera  House 
Co.,  81  Iowa,  45.  The  case  of  Bank  v.  Haney,  87  Iowa,  106,  relied 
upon  by  appellants,  does  not  involve  a  transfer  of  stock,  and  has  no 
application  to  the  question  here  presented.  The  precise  question  before 
us  was  determined  in  the  case  of  Bank  v.  Hastinr/s,  7  Colo.  App.  129 
(42  Pac.  Eep.  691).  The  statute  of  that  state  provides  that  "  no 
transfer  of  stock  shall  be  valid  for  any  purpose,  except  to  render  the 
person  to  whom  it  shall  be  transferred  liable  for  the  debts  of  the  com- 
pany, unless  it  shall  have  been  entered  in  the  proper  book  of  the 
company  within  sixty  days  from  the  date  of  the  transfer,  by  an  entry 
showing  to  and  from  whom  it  was  transferred."  General  Statute,  sec- 
tion 269.  It  was  held  that  the  requirement  of  the  statute  was  abso- 
lute, and  that  the  actual  notice  or  knowledge  of  a  creditor  that  a 
transfer  had  been  made  before  his  levy  amounted  only  to  knowledge 
that  the  transferees  had,  by  their  neglect  to  have  the  transfer  entered 
upon  the  proper  books,  lost  their  right  to  the  stock,  and  that  it  belonged 
to  their  transferor,  and  was  subject  to  attachment  at  the  suit  of  his 
creditors.     Now,  the  right  of  an  attachment  or  execution  creditor  to 


P^ 


680 


CONTINENTAL   NAT.   BANK   V.    ELIOT   NAT.   BANK. 


take  shares  jLEpearipg  injiis  debtor's  name  upon  jhe^company's  books 
is  deriyedTfrom  the  act  of  the  legislature,  and  we  dq^not  discover  upoii, 
what  principle  courts  can  deprive  a  creditor  of  such^ight  simply 
becausehe  or  the  sheriff  had  actua]_n^tice^f  a  transfer  of  the  stock 
before  the  levy"was  made^jghen no  such  exception  isltobe^ound  in  thg 
'  statute."  i  Morawetz,  Corporations,  section  i99.  Under  statutes  in 
,  effect  rike^ours  it  has  of  ten  beenjield  that  all  transfers  not  entered  on 
tKeHbooks  of  the  corporation  are  absoliitely  void,jiot  because  they^ 
were  without  noticeTJuFBecause  made  sojby  statute.  In  re  Murphy, 
51  WisTsiOTSirwrRep.  419) ;  Bank  v.  Cutler,  49  Me.  315 ;  Weston 
V.  Minhuj  Co.,  5  Cal.  186 ;  Bayik  v.  Folsom,  7  N.  M.  611  (38  Pac.  Rep. 
[  253).  The  statute  provides  that  a  transfer  of  stock  shall  not  be  y_alid, 
as  to  third  parties,  until  it  is  regularly  entered  on  jthe  books  of  the 
companyT  Its  language  is  explicit.  It  points  out  just  what  must  be 
done  to^rotect  the  purchaser  of  stock  in  his  holding  as  against  the 
claim  of  creditors  of  the  seller.  Its  meaning  is  obvious,  and  no  argu- 
ment is  needed  to  show  the  wisdom  of  its  provisions.  What  might 
be  the  rule  in  case  a  transferee  had  exhausted  all  reasonable  means  in 
attempting  to  procure  the  officers  of  a  corporation  to  make  the  proper 
entries  of  a  transfer  on  their  books,  and  they  had  failed  and  refused  so 
to  do,  we  need  not  determine,  as  no  such  case  is  before  us.  The  pro- 
visions  of  the  statute  requiring  an  entry  in  the  books  of  the  company 
isTrgperatiye,  and  in  no  wise  affected  by  the  fact  that  "the  creditor 
seeking  to  obtain  a  lien  upon  the  stock,  or  the  officer  holding_the_pro- 


cess^jmayjb^^  actual  notice  of  the  transfer  beforejthe  levy  is  made. 

L^    '     .  •  •  .  «  • 

y  Decree  affirmed. 


■^. 


'\ 


M 


jMiO^TlW^XjtL  NAT.   BANK  v.  ELIOT 

'^1*^  /t'^  ,^  1^81.     7  Federal  Reporter,  3&9. 


NAT.   BANK. 


/^  "" /^■k^ 


U.  S.  Circuit  Court.     District  of  Massachusetts. 

y>>^  y^  ,y*^-^^ Lowell,  J.    R.  B.  Conant  was  the  cashier  of  the  Eliot  National  Bank, 

<^     .u,,      (ij       of  Boston,  and  owned  158  shares  of  its  capital  stock.     Each  of  his  cer- 

,--^     tificates  contained  these  words :  "Transferable  only  on  the  books  of 

'   /)      ff     J  "^       <y^      ^^®  bank  by  the  said  Conant,  or  his  attorne}',  on  the  surrender  of  this 

r^     ''  t/^    v^    certificate."     The  Continental  National  Bank,  of  New  York,  was  the 

i^  ^ip^j     V^     i^  tegular  correspondent  of  the  Eliot  Bank.     In  April  and  Ma}',  1877, 

i^'Conant  borrowed  $9,500  of  the  Continental  Bank,  in  two  sums  of  $5,000 

and  $4,500,  and   sent   them  as   collateral  securit}-  certificates  for  95 

,      shares  of  stock  of  the  Eliot  National  Bank,  with  a  power  of  attorney 

■'^^L^    to  transfer  them  upon  the  books,  but  the}'  were  not  so  transferred.     The 

^^^twi-^  by-laws  of  the  bank  provide  that  the  stock  shall  be  assignable  only  on 

?  "  L^y^   .^  ''^  ,„<'-'' the  books  ;  that  when  stock  is  transferred  the  certificate  shall  be  returned 


r 


.v^:>T 


L^^ 


^uJ^ 


U 


^'^iolhe  bank  and  cancelled,  and  a  new  certificate  issued.     In  July,  1878, 


.4^ 


\t^^ 


^y^ 


t"54:^-^'4..^:.:'^^ 


^ 


CONTINENTAL  NAT.   BANK  V.    ELIOT  NAT.    BANK  681 

Conant  confessed  to  the  directors  of  the  Eliot  Bank  that  he  had  embez- 
zled the  funds  of  the  bank  to  the  amount  of  about  $70,000.  The}' 
required  him  to  resign  his  position  as  cashier,  which  he  did,  and  he  has 
since  been  convicted,  and  is  now  serving  a  sentence  of  imprisonment 
for  his  fraud.  The  Eliot  Bank  attached  his  shares  in  an  action  which 
is  still  pending  in  the  superior  court  for  Suffolk  count}'.  Afterwards  the 
Continental  Bank  sent  to  the  Eliot  Bank  the  certificates  and  powers  of 
attorney,  and  demanded  a  transfer  and  new  certificate,  which  was 
refused.  This  bill  is  filed  to  require  the  transfer  to  be  made,  or  for 
damages,  or  other  relief.  Conant  is  made  a  defendant,  and  the  bill  as 
against  him  has  been  taken  pro  confesso.  The  officer  is  likewise  a 
defendant,  but  it  is  admitted  that  no  decree  can  be  made  against  him. 

The  onl}'  question  of  fact  in  dispute  is  whether  the  Eliot  Bank,  before 
attaching  the  shares,  had  notice  that  they  had  been  pledged,  or  mort- 
gaged, to  the  complainants.  Conant  testifies  that  at  the  meeting  of  the 
directors  at  which  he  confessed  his  misdoings,  he  was  asked  what  assets 
he  had,  and  mentioned  certain  shares  of  mining  stock,  and  other  things ; 
and  that  the  president  asked  about  these  bank  shares,  and  was  informed 
of  the  fact  that  they  were  pledged  to  the  New  York  banks  for  their  face 
value.  Conant,  soon  after  leaving  the  directors'  room,  consulted  Mr. 
Morse,  an  attornej'  of  this  court,  who  went  at  once  and  saw  the  directors 
before  they  had  left  the  bank ;  and  he  testifies  that  he  was  told  there 
by  some  one  or  more  of  them  that  this  stock  was  pledged.  On  the  other 
hand,  none  of  the  directors  remember  such  a  conversation ;  and  some 
of  them  are  confident  that  none  such  can  have  occurred.  If  it  occurred, 
it  is  admitted  that  the  attachment  could  not  hold  because  the  attaching 
creditor  had  notice  of  the  transfer.     DkicJc  v.  Zacharie,  3  How.  483. 

I  am  inchned  to  think  that  the  affirmative  evidence  must  prevail  in 
this  case ;  but  there  is  so  much  doubt  in  my  own  mind,  that  I  have 
thought  best  'to  examine  the  disputed  question  of  law,  whether  the 
attachment  would  take  precedence  if  made  without  notice  to  the  attach- 
ing creditor  of  the  unrecorded  transfer.  ^  ^^ 

The  aiguments  have  been  ver}'  thorough  on  both  sides,  and  a  great 
man}'  cases  have  been  cited.  It  has  been  very  ably  urged  that  by  the 
law  of  Massachusetts  the  attachment  would  have  the  preference.  This 
I  consider  doubtful ;  but  the  decision  does  not  depend  upon  the  law  of 
Massachusetts. 

1.  It  is  not  important  to  consider  whether  the  contract  was  consum- 
mated in  Massachusetts  or  in  ?^ew  York.  The  n£gotiabilit}M3r  trans- 
ferable  quality  of  the^  stock^of  a  nati^naL_bank_de|jends  upon  the  laws 
of^the  United^  States.  Dickinson  v.  Central  National  Bank,  129  Mass. 
279.  In  IhrchaMs'  Bank  v.  State  Bank,  10  Wall.  604,  the  admitted 
law  and  usage  of  Massachusetts,  where  both  the  national  banks  were 
situated,  and  where  the  transactions  took  place,  were  wholly  disregarded 
by  the  majority  of  the  supreme  court.  The  negotiability  of  foreign 
scrip  in  England  is  not  governed  by  the  law  of  England,  but  by  the 
law  of  the  foreign  country,  which  may  be  proved  by  the  general  usage 


682  CONTINENTAL   NAT.   BANK  V.    ELIOT   NAT.   BANK. 

of  brokers  and  others  dealing  with  such  scrip.  Goodwin  v.  Eoharts^ 
1  App.  Cases,  476.  The  time  and  mode  of  attaching  property,  and  its 
effect  in  general,  are  part  of  the  law  of  the  formn  ;  but  its  operation 
upon  unrecorded  transfers  of  shares  in  national  banks  is  regulated  by 
the  law  which  creates  the  shares  and  provides  for  their  conveyance  and 
registration.  That  law  is  section  5139,  Rev.  St.,  which  provides  that 
shares  may  be  transferred  on  the  books  of  the  association  in  such  man- 
ner as  may  be  prescribed  by  the  by-laws  or  articles  of  association. 
Such  a  law,  in  Massachusetts,  might  possibly  mean  that  creditors  could 
attach  the  shares  as  the  property  of  the  recorded  owner.  Blanchard 
V.  Deedham  Gas-light  Co.  12  Gra}^  213.  I  have  already'  said  that  I 
^oubt  if  this  is  now  the  law  of  Massachusetts,  and  I  shall  return  to  the 
subject  presently ;  but  that  law  favors  attachments  in  certain  classes  of 
cases  to  an  unusual  extent. 

2.  It  is  a  general  rule  that  creditors,  whether  they  proceed  by  an 
attachment  on  mesne  process.,  seizure  on  execution,  creditor's  bill,  or 
through  an  assignee  in  bankruptcy,  must  take  their  debtor's  property 
subject  to  all  equitable  as  well  as  legal  charges,  liens,  or  opposing  titles. 
Willes,  J.,  in  giving  judgment  in  the  Queen's  Bench  in  1868,  in  a  case 
quite  analogous  to  this,  against  the  right  of  seizing  shares  of  the  appar- 
ent owner,  said  that  it  was  a  rule  applied  by  that  court  more  than  a 
hundred  years  before,  in  the  analogous  case  of  the  statutory  execution 
under  the  bankrupt  law,  that  the  creditors  can  have  no  more  than  a 
debtor  was  entitled  to  in  equity  or  at  law.  Pickering  v.  IJfracomhe 
By.  Co.  L.  R.  3  C.  P.  235,  251. 

It  has  been  the  law  of  the  lord  mayor's  court  in  London,  from  the 
time  of  Richard  I.,  that  an  equitable  assignment  of  a  chose  in  actio)! 
should  prevail  against  an  attachment.  Westoby  v.  Bay,  2  E.  &  B.  605. 
This  application  of  the  rule  obtains  in  Massachusetts,  and  in  the  Unitea 
States  generally,  though  a  few  courts  hold  otherwise.  Drake  on  At- 
tachments, c.  24  ;   Thayer  \.  Baniels,  113  Mass.  129,  and  cases  cited. 

The  doctrine  is  so  familiar  that  I  will  merely  cite  authorities  to  show 
that  it  is  the  general  rule  in  Massachusetts  as  well  as  elsewhere.  The 
exceptions  to  it  in  this  state  I  will  consider  afterwards.  See  Wakefield 
V.  Martin,  3  Mass.  558  ;  Bix  v.  Cobb,  4  Mass.  508  ;  Kendall  v.  Laic- 
rence,  22  Pick.  540  ;  Kingman  v.  Ferkins,  105  Mass.  Ill  ;  Thayer  v. 
Daniels,  113  Mass.  129  ;  Boston  Music  Hall  Ass'n  v.  Cory,  129  Mass. 
i3o. 

3.  The  incorporeal  property  of  the  shareholder  in  a  company  of  this 
sort  is  represented  by  his  certificates  ;  and,  if  these  are  conveyed,  the 
failure  to  record  the  conveyance  is  not  evidence  of  such  a  constructive 
fraud  as  sometimes  arises  from  the  possession  of  chattels  after  the  prop- 
erty has  been  parted  with.  On  the  contrar}',  it  was  proved  in_eaily 
cases   to  be   the  usage,  and   is  now^idopted   by  the   courts   aS- iaw_ 

r         r)ased~on~such  usage,  that  the   possession  of  the  certificates,  jvyitli_a 

W       l^yvverjto  transfer  them  is  jn'ima  J'acie  evidence  of  tjtle  ;  aiid  if,  in  Jactj. 

the  possessor  has  given  value,  his  title  cannot  be  impeached  even  by 


CONTINENTAL   NAT.   BANK   V,    ELIOT   NAT.    BANK.  G83 

subsequent  j)urchasers  who  did  not  receive  the  certificates^  mucu  less 
t)j  cj-editors  of  the  transferrei^  In  laXa  cases  tliese  certificates  are  likened 
to  hills  of  lading^  and  other  quasi  negotiab1e_securities._  See  Black  v. 
Zacharie,  3  How.  483;  Bank  \.  Lanier^  11  Wall.  3G9  ;  Johnson  \. 
Laflin,  (S.  C.  U.  S.)  12  Cent.  L.  J.  440 ;  U.  S.  v.  Vaughan,  3  Binne.y, 
394,  approved  in  U.  S.  v.  Cutts,  1  Sumn.  133  ;  Finney's  App.  59  Pa. 
St.  398  ;  Wood's  App.  10  Weekly  Rep.  125  ;  Smith  v.  Crescent  City 
Co.  30  La.  Ann.  1378  ;  Bridgeport  Bank  v.  Schngler,  34  N.  Y.  30  ; 
McKeilv.  Tenth  NaLBank.  46  N.  Y.  ^25  ;  -Winter  v.  Belmont  Mining 
^^oTsFCal.  428  ;  Fraser  v.  Charleston,  1 1  S.  C.  486  ;  Strong  v.  Houston 
B.  Co.  10  Weekly  Rep.  28  ;  Broadway  Bank  v.  3IcElicrath,  13  N.  J. 
Eq.  24 ;  S.  C.  24  N.  J.  Eq.  496  ;  Prcdl  v.  Tilt,  28  N.  J.  Eq.  483  ;  31er- 
chants'  Bank  v.  Richards,  6  Mo.  App.  454 ;  Conant  v.  Seneca  Co. 
Bank,  1  Ohio  St.  298  ;  Duke  v.  Cahawha  Navigation  Co.  10  Ala.  82  ; 
Boss  V.  S.  W.  B.  Co.  53  Ga.  514. 

In  many  of  the  foregoing  cases  there  were  laws  providing  for  the 
transfer  of  shares  upon  the  books  of  the  company.  But  the  courts  held 
that  this  registration  was  intended  chicfl}'  for  tlie  convenience  of  the 
company,  to  enable  it  to  know  wlio  should  have  dividends  and  who 
should  vote.  No  doubt  it  is  sometimes  intended  as  a  record  of  per- 
sons liable  for  the  debts  of  the  compan}-,  and  is  so  in  the  case  of  na- 
tional banks  ;  but  the  great  weight  of  authority  is  that  it  is  not  intended 
for  the  benefit  of  creditors  of  the  individual  shareholders.  Some  of  the 
£ourts  lipid  that  the  unrecorded  transfej^passes  only  an  equjtable^ title j 
othei;s,  that  it  gives  a  legal  title.  I  assume  thatjjy  the  decisions  in 
tlie  courti^  of  the  United  States  only^.an  equitable_Jille  is_j!jcqu]rc(l 
That  point  is  unimportant. 

4.  The  statutes  of  many,  perhaps  of  most,  of  the  States,  provide 
that  certain  conve^'ances  of  land  and  of  chattels  shall  be  recorded,  and 
that  until  record  is  made  a  conveyance  shall  have  no  effect  excepting 
between  the  parties,  and,  in  most  cases,  those  having  actual  notice. 
An  attaching  or  seizing  creditor,  without  notice  of  a  prior  conveyance, 
is,  undoubtedly,  within  the  words  of  these  statutes  ;  and  so  such  cred- 
itors have  come  to  be  treated,  and  even  spoken  of,  as  in  some  sort  pur- 
(■hasers.  A  few  of  the  statutes  requiring  registration  of  the  shares  of 
companies  follow  the  exact  language  of  these  registry*  laws,  and  declare 
lliat  no  unrecorded  title  shall  be  good,  or  only  against  persons  having 
notice.  In  California,  even,  such  a  law  is  held  not  to  avail  creditors, 
(  Winter  v.  Belmont  Co.  53  Cal.  428  ;)  but  in  Maine  and  Massachusetts, 
the  decision,  and  perhaps  the  better  one,  is  that  such  a  law  must  be 
construed  like  other  similar  registry  laws.  Skowhegan  Bank  v.  Cutler, 
49  Me.  315  ;  Bock  v.  Nichols,  3  Allen,  342.  It  was  in  this  state  of  things 
that  the  case  which  is  the  support  of  the  defence  here  was  decided.  In 
Fisher  v.  Essex  Bank,  5  Gray,  373,  the  charter  of  a  bank  incorporated 
in  Massachusetts  provided  that  the  shares  should  be  transferred  only  at 
the  banking  house,  and  upon  the  books  of  the  company,  and  the  court 
held  that  an  attaching  creditor  could  hold  against  an  earlier  unrecorded 


684  CONTINENTAL   NAT.   BANK  V.    ELIOT   NAT.   BANK. 

transfer  for  value.  1  have  studied  this  decision  with  care.  It  seems  to 
proceed  upor  the  theorj'  that  by  the  charter,  which  is  a  public  statute, 
there  can  be  no  such  thing  as  an  equitable  transfer,  or,  at  an}'  rate,  none 
except  by  a  sort  of  equitable  estoppel  between  the  parties,  and  that  it 
was  a  part  of  the  intent  of  the  act  that  a  creditor  at  law  should  have 
the  legal  right  to  attach  the  legal  title.  This  decision  has  been  followed 
in  Illinois,  (People's  Bank  v.  Gridley,  91  111.  457,)  but  rejected  in  the 
other  states,  so  far  as  their  courts  have  passed  upon  it.  It  is  sometimes 
spoken  of  as  being  the  law  of  Connecticut  and  Vermont,  but  the  early 
cases  in  the  former  state  are  much  modified  b^-  Colt  v.  Ives,  31  Conn.  25. 
The  case  cited  from  Vermont  {Rice  v.  Curtis,  32  Vt.  464)  is  not  in  point. 
It  is  opposed  directl}'  to  man}-  of  the  cases  already  cited  under  the  third 
point,  and  to  the  general  principle  that  attaching  creditors  are  bound 
by  all  equities,  including  equitable  estoppels.  It  has,  moreover,  been 
seriousl}'  modified,  if  not  wholl}'  overruled  in  Massachusetts,  in  Dick- 
inson v.  Central  Nat.  Bank,  129  Mass.  279,  printed,  but  not  yet  pub- 
lished. The  Central  National  Bank  had  a  by-law  like  that  now  in 
question,  and  A.,  the  owner  of  ten  of  its  shares,  had  transferred  them 
bj'  wa}'  of  security,  precisel}'  as  Conant  transferred  his  shares,  and  af- 
terwards became  bankrupt.  The  transferee,  still  later,  sold  the  shares 
at  public  auction,  under  his  power,  after  due  notice  to  A.  and  to  his 
assignee.  The  bank,  notwithstanding  a  notice  and  demand  by  the  as- 
signee in  bankruptcy,  transferred  the  shares  to  the  purchaser.  The 
assignee  sued  the  bank  for  damages,  but  was  defeated.  Colt,  J.,  deliv- 
ering the  opinion  of  the  court,  says  that  Fisher  v.  Essex  BanJc,  uli 
stipra,  does  not  apply,  because  in  that  case  the  charter  had  the  force 
of  a  general  law,  but  that  a  by-law  has  no  such  effect,  (citing  Sdrfient 
V.  Essex  Marine  M.  Co.  9  Pick.  201,)  and  that  in  the  absence  of  such 
a  general  law  the  transferee  took  an  equitable  title  which  should  prevail 
against  the  assignee  in  bankruptcy  of  the  transferrer.  The  only  cir- 
cumstances in  Fisher  v.  Essex  Bank,  not  found  in  Dickinsoii  v.  Central 
Bayik,  are  these :  (1)  The  law  in  the  former  case  contained  the  word 
"only"  —  that  the  shares  should  be  transferred  only  so  and  so; 
(2)  that  an  attaching  creditor  and  not  an  assignee  in  bankruptc}'  was 
concerned ;  (3)  that  the  law  governing  the  company  was  a  Massachu- 
setts law,  which  might  be  differently  construed  from  a  national  banking 
act.  The  first  and  third  points,  of  course,  are  the  same  in  this  case  as 
in  the  later  one  in  Massachusetts.  The  second  is  not  sound  in  this 
court ;  an  assignee  and  attaching  creditor  stand  precisely  alike,  accord- 
ing to  the  law  which  governs  this  controversy. 

5.  The  doctrine  o^  Dearie  v.  Hall,  3  Russ.  1,  confirmed  in  Foster  v. 
Cockrell,  3  CI.  &  Fin.  466,  is  much  relied  on  by  the  defendants.  This 
doctrine  is  that  of  two  innocent  purchasers  of  merely  equitable  interests 
he  shall  be  preferred  who  first  gives  notice  to  the  trustee  or  holder  of 
the  legal  title.  To  this  there  are  several  answers  :  1.  Though  the  cor- 
poration is  for  some  purposes  a  trustee  for  the  shareholders,  the  latter 
have  an  independent  legal  property  in  their  shares  which  they  can  coa- 


CONTINENTAL   NAT.   BANK  V.    ELIOT   NAT.    BANK.  C8o 

vev,  find  whether  their  actual  coiive^-ance  is  legal  or  equitable  is  of  d*" 
consequence.  2.  The  doctrine  applies  in  England  only  to  purchaser 
and  not  to  creditors  seizing  or  attaching,  even  though  a  statute  gives  a 
right  to  seize  all  shares  standing  in  the  debtor's  name  in  his  own  right. 
This  statute  was  once  held  bj-  the  Queen's  Bench  to  mean  that  the  cred- 
itor might  seize  what  the  register  showed  to  be  apparently  the  property 
of  the  debtor,  {Watts  \.  Porter,  3  E.  «fe  B.  743;)  but  this  has  been 
overruled,  on  the  ground  that  the  legislature  cannot  be  supposed  to 
have  intended  to  take  one  man's  propert}'  for  another  man's  debt,  with- 
out the  most  explicit  statement  of  such  a  purpose  ;  and  therefore  the 
"right"  refers  to  the  equitable  as  well  as  legal  right.  Dimstery. 
Lord  GleyxgaU,  3  Ir.  Ch.  47  ;  Scott  v.  Lord  Hastings^  4  K.  &  J.  633  ; 
Beavan  v.  Earl  of  Oxford,  6  D.  M.  &  G.  524 ;  Eyre  v.  McDonald, 
9  H.  L.  619  ;  Robinson  v.  Nesbitt,  L.  R.  3  C.  P.  264  ;  Pichering  v.  II- 
fracombe  Railway  Co.  L.  R.  3  C.  P.  235  ;  Gill  v.  Continental  Gas  Co. 
L.  R.  7  Ex.  619. 

A  few  courts  in  this  country  have  carried  the  doctrine  of  Dearie  v. 
Hall  so  far  as  to  uphold  the  garnishment  of  a  non-negotiable  debt  which 
had  been  equitably  assigned  without  notice.  We  have  already  seen  tliat 
this  is  not  the  law  in  England  nor  in  Massachusetts.  Neither  is  it  the 
law  of  the  United  States  generall}'.  Drake,  Attachments,  c.  24  ;  Cor- 
nick  V.  Richards,  3  Lea.  1.  The  supreme  court  of  Tennessee  in  that 
case  refused  to  extend  the  rule  to  shares  of  stock,  though  it  applies  in 
that  state  to  chases  in  action.  As  shares  are  not  choses  in  action,  and  as 
attaching  creditors  are  not  purchasers,  Dearie  v.  HoJl  is  not  in  point. 

6.  It  remains  onh'  to  cite  two  decisions  of  the  supreme  court,  which, 
in  principle,  are  decisive  of  this  case.  In  Bank  v.  Lanier,  1 1  Wall.  ."69 
a  national  bank  was  required  to  make  good  to  the  holder  of  an  unre- 
corded certificate  the  value  of  his  shares,  although  they  had  been  trans- 
ferred on  the  books  to  a  subsequent  purchaser  for  value.  That  purchaser, 
to  be  sure,  was  not  before  the  court,  but  if  his  title  was  better  than  that 
of  the  plaintiff,  the  bank  was  justified  in  transferring  the  shares  and 
would  have  had  a  perfect  defence.  Dickinson  v.  Central  Nat.  Lank., 
129  Mass.  279  ;  Gill  v.  Continental  Gas  Co.  L.  R.  7  Ex.  232.  If  a 
purchaser  for  value  could  not  hold  against  the  holder  of  the  unrecorded 
certificate,  a  fortiori  of  an  attaching  creditor. 

Bullardv.  The  Bank,  18  Wall.  589,  is  in  the  same  line  of  thought. 
It  decides  that  cei^ficates  of  shares  in  national  banks  are  so  far  nego- 
tiable, or  quasi  negotiable,  that  a  by-law  of  the  bank,  which  undertakes 
to  make  them  subject  to  the  debt  of  the  transferrer  to  the  bank  itself, 
is  void.  On  the  same  ground  it  was  held  that  a  b3'-law  like  that  of  the 
Eliot  National  Bank,  if  intended  to  give  attaching  creditors  a  better 
title  than  transferees  who  had  not  recorded  their  certificates,  was  void. 
Sargent  v.  Marine  Ry.  Co.  9  Pick.  201.  Here,  again,  the  argument  is 
a  fortiori.  If  the  bank  cannot  create  a  lien  bj'  its  bj'-law,  much  less 
•an  it  obtain  one  indirectly,  by  attachment,  upon  the  construction  of  an 
gmbiguous  by-law. 


686  LOWELL   ON   TRANSFER   OF   STOCK. 

MyconclusioiLisJha^^ 
v^Tn^gj^^^rthTnom^^  whether  that  is  equitable  or 

/)  legal.  There  is  no  conflict  of  jurisdiction,  because  no  state  court  or 
H'  officer  has  taken  possession  of'anything.  Thejjuestion Jsjnerely  one 
of  titieT  Xbilfin  equity  will  lie,  because  the_ci>iTip1ainn,nt  companji 
has,  or  mighnuive7a_xigMAo  I'equire  Ihe  shares  to  be  transferred  tojL 
As  values  are  at  present,  it  would  be  more  just  to  enter  a  decree  for  xhe 
debt  due  the  complainants,  and  interest,  which  would  leave  a  consider- 
able value  for  the  defendant  bank  if  the  present  market  price  holds.  I 
understood  counsel  to  say  that  the  precise  form  of  the  decree  could 
probably  be  agreed  on. 

Decree /or  the  complainants. 


A  corporation  has  no  implied  lien  on  its  shares  for  calls  or  other 
debts  owing  frj)in jts  shareholders,^idj;onseo[uently  no  implied  right 
to  refuse  to  register  a  transfer  because„the_transferrer  is  indebted 
to  it.  .  .  . 

As  to  whether  a  corporation  has  the  implied  power  to  pass  a  by-law 
giving  itself  a  lien  on  its  shares  for  the  holders'  indebtedness  to  it, 
the  authorities  conflict.  A  number  of  decisions  hold  it  competent 
for  a  corporation  to  pass  such  a  by-law,  and  the  preponderance  of 
authority  is  certainly  to  the  eifect  that  a  general  power  possessed  by 
a  corporation  to  regulate  the  transfer  of  its  shares  authorizes  it  to 
create  by  a  by-law  a  lien  on  them  in  its  own  favor.  But  even  this 
last  proposition  has  been  disapproved ;  and  many  cases  strenuously 
deny  any  implied  power  in  a  corporation  to  pass  a  by-law  which 
creates  a  lien  on  its  shares,  or  in  any  material  way  interferes  with 
their  transferability.  But  in  order  to  decide  some  of  the  cases  where 
the  opinion  ofjthe  court  in  terms  denies  the  ^gowerjof^a  corporationJ:o 
pass  j,  by-law  of  this  character,  it^was  only  necessary  to  hold  (what 
those  cases  also  hold  with  perfect  justice  on  their  side,  and  little  or 
no  authority  against  them),  that  the  rights  of_a_person  purchasing 
shares  without  actual  notice  of  such  a  byj4awjiTe_^gLaJfected_bxit, 
Taylor  on  Corporations,  3d  ed.  ss.  600,  6OI.1 


[As  to  remedy  against  a  corporation  by  a  stockholder  whose  certifi- 
cate has  been  lost  or  destroyed  ;  see  Galveston  City  Co.  v.  Sibley,  a.  d. 
1882,  56  Texas,  269 ;  State,  ex  rel.  Seaton,  v.  New  Orleans  &  C.  B.  Co., 
A.  D.  1899,  51  Louisiana  Annual,  909 ;  Lowell  on  Transfer  of  Stock, 
ss.  128,  241.— Ed.] 

1  It  is  held,  that  a  national  bjink_isj)rolubit_e(l  bv  the  ter_msj)f  tlic  National  Banking  Acts 
from  reserving  a  lijn  on  the  shares  of  its  stockholders.  See  cases  cited  in  notes  to  1  Mora- 
wctz^2d  ed.^  s.  201,  and  in  notes  to  Taylor,  3d  ed.,  s.  602;  also  Buffalo  German  Ins.  Co.  r. 
Third  National  Bank  of  Buffalo,  162  New  York,  163.  —Ed. 


HEARD  V.   TALBOT. 


687 


CHAPTER  XVII. 

FOKFEITURE  OF  CHARTER  — HOW  ENFORCED.    SUIT  BY 

STATE,  OR  BY  CITIZEN,  TO  RESTRAIN  ULTRA  VIRES     ^ 
ACTS,    OR    TO    COMPEL    PERF0R:MANCE    OF  ,CORPO-V^  / 
RATE   DUTI|;^.  >  \f^/v/    ,^  ^./i/  ,/    ^ 


/^/A^'-^ 


/  \I!OMPt AIN 


itf 


r 


1856. 


lu6,  ror  flDwiug/land  b}'  the  water  of 


«^::u  / 


1  /. 

\to  '\/^OMPtAiNT  under  Rev.  Sts.  c, 

Concord  River,  raised  b}'  the  respondents'  dam  in  the  operation  of  their'^  Ar'^ 
mills.     Respondents  claim  the  right  to  now  maintain  the  dam  without  r 
pa3-ment  of  damages,  as  the  grantees  of  the  corporation,  styled  the  ,y 
Proprietors  of  the  Middlesex  Canal.     The  corporation  was  chartered^ 
in  1793  to  build  a  canal.     In  1798  an  additional  act  authorized  thee 
Proprietors  to  purchase  and  hold  any  mill  seats  on  the  waters  connected 
with  their  canal,  and  to  erect  mills  thereon.     The  charter  provided 
that  persons  whose  lands  were  flowed  might  obtain  compensation  by 
applying  to  the  Court  within  one  vear  from  the  time  of  the  damage 
done.     The  Proprietors,  so  long  as  they  were  in  active  operation  as  a  (^    J" 
canal  compan}-,  leased  and  sold  water  power  to  divers  persons,  to  be        ^    ^p 
drawn  from  the  head  of  water  raised  by  the  Proprietors'  dam,  and  tolWr|^'^ 


be  used  in  subordination  to  the  use  of  the  water  for  feeding  the  canal. 

In  1826,  the  Proprietors  built  the  present  dam,  by  which  the  plaint)ft"'s 

land  is  now  flowed.     In  1840,  the  plaintiff's  ancestor  applied  to  the 

Court  to  obtain  compensation  for  flowage.     The  petition  was  dismissed  ; 

the  Court  holding  that  the  damage  was  "•  done  "  when  the  dam  was  .y''     i^ ' 

completed,  and  that  no  application  could  be  made  after  one  3'ear  from    J^rj    , 

that  time  had  elapsed.     {Heard  v.  Froprietors,  5  Metcalf,  81.)  '^      J^  p/  ^iS 

In  1851,  the  canal  was  wholly  disused  by  the  Proprietors,  and  filled       iy^  /^ y^^^J^^ 
up  in  parts  of  it ;  and  it  has  now  become  wholl}'  unfit  for  use,  and  is  no  ^  ^^y*^  iJ^ 
longer  filled  with  water,  and  is  wholly  unused  by  the  Proprietors.  j^  \  e^y    Hj  y^  * 

At  the  time  of  the  abandonment  of  the  use  of  their  canal,  and  as  ^(y^ jJ^ y^  t^^  ■J'^' 
part  of  the  winding  up  of  their  affairs,  the  Proprietors  sold  all  their . ']  jt'^J'-'^^^  i^^ 
land  and  the  residue  of  the  water  power  by  them  unsold,  raised  by  ^"'*«f^^''''^'^  ^ 


their  dam  aforesaid,  to  the  respondents  by  deed  of  quitclaim,  "  subject 


expressly  to  the  reservation  of  all  easements  and  services  necessary-  for^^    ^    /  -^- 


or  incident  to  the  preservation  and  use  of  said  canal  for  the  purpose  ov^    ^y\ 

1  Statement  abrklged.     Arijuinent  omitted^r-^Ef  jj"  "^  ^^^ '^  \~s  • 


.^ 


^ 


jlyf 


688  HEAKD   V.   TALBOT. 

navigation,  and  of  all  the  rights  of  the  public  therein,  until  the  same 
shall  be  lawfully  discontinued  " ;  and  the  respondents  have  since  that 
sale  maintained  and  kept  up  the  water  by  said  dam  for  manufacturing 
purposes,  and  claim  to  use  the  same  in  such  manner  and  to  such  extent 
as  may  suit  their  convenience  for  such  manufacturing  purposes,  subject 
to  said  reserved  right  of  said  canal. 

After  abandoning  the  canal,  and  after  the  deed  to  the  respondents, 
the  Proprietors  applied  to  the  legislature  for  leave  to  wind  up  their 
affairs,  and  to  sell  their  land  and  water  power,  and  surrender  their 
charter,  which  application  was  denied.  Subsequentlj^  they  petitioned 
the  Supreme  Court  for  leave  to  wind  up  their  affairs  and  surrender 
their  charter  ;  which  petition  is  still  pending. 

J^.  F.  Butler^  for  plaintiff, 

J.  G.  Abbott,  for  respondents. 

BiGELOw,  J.  There  can  be  no  doubt,  that  the  proprietors  of  the 
Middlesex  Canal,  under  their  original  act  of  incorporation,  St.  1793, 
c.  21,  and  under  the  additional  act  of  1798,  c.  16,  by  which  they  were 
empowered  to  purchase  and  hold  mill  seats  on  the  waters  connected 
with  their  canal,  acquired,  as  part  of  their  franchise,  the  right  to  flow 
the  land  of  the  complainant  ;*  and  that  this  right  was  in  its  nature  a 
permanent  easement  or  servitude,  for  which  the  complainant  or  those 
under  whom  he  claims  title  had  an  ample  remedy  in  damages  provided 
in  the  third  section  of  the  original  charter  of  the  corporation.  That 
remedy  was  an  exclusive  one,  and  the  time  within  which  parties  could 
legally  avail  themselves  of  it  has  long  since  passed  awa}'.  These  points 
have  already  been  adjudicated.  Stevens  v.  Middlesex  Canal^  12  Mass, 
466.  Sudbury  Meadows  v.  Middlesex  Canal,  23  Pick.  36.  Heard  v. 
Middlesex  Canal ^  5  Met.  81. 

It  seems  to  us  very  clear  that  there  is  nothing  in  the  facts  of  the 
present  case  to  take  it  out  of  the  principles  settled  b}'  those  decisions, 
and  that  there  is  no  ground  on  which  the  claim  of  the  complainant  to 
damages  under  the  mill  act  can  be  sustained  against  these  respondents. 
They  hold  their  title  to  the  mills  and  water  power  raised  by  the  dam 
which  causes  the  land  of  the  complainant  to  be  flowed,  under  a  grant 
from  the  Proprietors  of  the  Middlesex  Canal.  By  the  deed  under 
which  they  claim,  the  right  is  expressly  reserved  to  the  grantors  to 
appropriate  the  water  raised  by  the  dam  at  all  times  to  the  purpose  of 
supplying  their  canal.  It  is  therefore  in  the  right  of  the  canal  corpora- 
tion, and  subject  to  this  reservation,  that  the  respondents  claim  to  use 
and  enjo}'  the  mill  privileges  created  by  the  dam  which  is  the  subject 
lof  this  complaint.  Unless,  therefore,  the  corporation  have  surrendered 
[or  lost  the  right  to  keep  up  and  maintain  this  dam,  it  having  been 
^already  settled  in  5  Met.  81,  that  the  complainant  has  no  claim  for 
/damages  on  account  thereof  against  the  corporation,  it  would  seem  to 
ifollow  that  he  has  none  against  these  respondents,  who  claim  under 
{the  corporation. 

The  8o]e  ground  on  which  he  now  rests  his  case  is,  that^the  canal 


HEARD   V.   TALBOT. 


689 


corporation  have  since  the^year  1851  wholly  disused  their  canal,  filled />^^ 
up  portions^  of  it,  and  suffered  it  to  remain  in  such  condition  as  to  be 
euth-eljjinfit  for  use.  The  argument  is,  that  the  right  of  erectjng  and 
maintaining  a  dam  was  granted_to  jthe  corporation  mainly  for  the 
purpose  of  enabling  them  to  raise_water  for  llie  supply  of  their  canal, 
and  the  power  to  hold  mills  was  whollyjncidental  to  and  dependeut_OQ 
the  appropriation  and  use  of  the  waterj-aised  by  the  dam  for  the  great 
object  for  which  the  corporation  was  established  and  their  franchise 
granted;  that  the  corporation,  having  abandoned  the^use  of  the  canal, 
and  ceased  to  supply  it  with  water,  can  no^lpn^er  claim  ^he  right, 
under  their  charter,  to  maintain  the  dam. 

Admitting,  for  the  sake  of  giving  full  force  to  this  argument,  the 
correctness  of  the  premises  on  which  it  rests,  we  do  not  think  the  con- 
clusion drawn  from  them  legitimately  follows.     An  essential  link  in  the 
chain  of  reasoning  is  wanting.     The  argument  assumes  that  the  neglect  J 
or  omission  to  use  a  r[ght  granted  to^  a^  corporation,  as  part  of  their 
franchise,  for  the  specific  purpose  for  which  it  was^iyen,  necessarily 
works  a  forfeiture  of  the  right  itself.     But  this^js  not^  s^ijjiulessjbhe. 
right  is  expressly  made  conditional  on  the  use^  which^s  not  done  in. 
the  act  incorporating  the  proprietors  of  the  canal.     The  rightjs  given  7')?.-^     ,>« 
absolutely,  and  without  express  condition  or  limitation.     The  corpora-  ^^^^J^      ^ 
tion  are  still  in  existence.     All  the  rights  and  powers  conferred  on  ■^,>^    -^-^ t  ^ 
them   hj  lawj^  and   comprehended   within   the  broad   terms   of  their    y^^  cJ  T 
franchise,  have  never  yet  been  legally  forfeited  or  extinguished.     Nor  ^^!^> 
can  they  be,  except  hy  a  surrender  of  the  charter  and  its  acceptance     p^ 
by  the  government,  or  by  a  forfeiture  declared  by  the  judgment_of_a 
competent  tribunal,  or  by  proceedings  under  St.  1852,  c.  55. 

In  the  absence" of  express  conditions  in  an  act  of  incorporation^Jb^ 
which  corporate  rights  and  powers  are  made  to  depend  on  their  diie 


yvi 


exercise,  a  nonuser  or  misuser  of  them  does  not  operate  as  a  surrender^ 
or  fojjeiture^  the  charter.     Although  the  disuse  of  the  canal  and  its 
abandonment  by  the  corporation  may  be  a  gross  disregard  of  the  duty 
imposed  on  them  by  lawTand  an  essential  violation  of  the  terms  and 
conditions  implied  from  the  contract  entered^into  with  the  government 
by  the  acceptance  of  theBiarter7and,"upon  due  proceedings  had,  mi^t 
be~a  sufficient  ground~upon  which  to^ decree  a  forfeiture  of  alf  their 
coijgoratejughts  and  privilege^lhey  do  not  constitute^nxyalid.ground 
uj)on  whiclTthe  exercise^%the^qrporationjof  any  of  the  powers  con- 
ferred by/theii^^arterjcan]^e_defeated^r  denied^  by  third  persons  in 
collateral  proceedings.     This  results'  from  the  very  nature  of  an  act  of  ^ 
Incqrporatioir^    It  is  not  a  contractj)etween  the  corporate  body,  onjhe    ".'' 
one  hand,  and  individuals  whose  rights  and  interests  may^be^flfected  ' ^ 
bylhe^xercise  of  its  powers, ^n  the  other.     It_ig  a  compact  between  ^ 
the^corpqratlon  and   tlie  .government  from   which   they  derive  their 
powers.     Individuajs^therefqre_cannot  take  it  upon  themselves  in  the 
assertion  o?  private  rights,  to  insist  on  breaches  of  the  contract  by  the 
corporation,  as  a  grouDd^forj;gsisting  or  denying  th^  exercise^ of  a  cor- 


^ 


k' 


-r^ 


l\ 


690  HEARD   V.   TALBOT. 

porate  power.  That  ^a  be  done  onlj  by  the  goyernmentjvith  which 
tEe^contract  was  made,  and  m  pipceedings  duly  instituted  against  the 
corporation.  It  would  not  only  be  a  great  anomaly  to  allow  persons, 
lioF  parties  to  a  contract,  to  insist  on  its  breach  and  enforce  a  penalty 
for  its  violation  ;  but  it  would  be  against  public  polic}',  and  lead  to  con- 
fusion of  rights,  if  corporate  powers  and  privileges  could  be  disputed 
and  defeated  by  every  person,  who  might  be  aggrieved  by  their  exercise. 
Therefore  it_has  been  often  held,  that  a  cause  of  forfeiture,  however 
m-eat,  cannot  be  tal^en__ad vantage  of  or  enforced„against  corporations 
collaterally  or  incidentally,  or  in  am^  other^modejjmn  by  a  direct  pro- 
ceedingjfor  that  objecMii  behalf  of^ the  gavernment,  Angell  &  Ames 
on  Corp.  §  777,  and  cases  cited.  Boston  Glass  Manufactory  v. 
Langdon,  24  Pick.  49,     Quincy  Canal  v.  Newcomh^  7  Met.  276. 

It  follows  from  these  principles,  that  the  franchise  of  the  Proprietors 

[of  the  Middlesex  Canal,  which  includes  the  right  of  keeping  up  and 

/maintaining  the  dam  which  flows  the  land  of  the  complainant,  being 

istill  in  existence,  it  is  not  competent  for  him  in  this  proceeding  to 

show  a  nonuser  or  abandonment  of  the  canal,  as  a  ground  for  denying 

Ithe  right  of  the  corporation  to  continue  the  dam  ;  and  as  the  respondents 

[hold  their  title  under  the  corporation,  and  justify  the  flowing  of  the 

complainant's  land  under  the  corporate  franchise,  there  is  no  ground  for 

sustaining  the  present  complaint  under  the  mill  act  against  the  respond- 

mts.     It  is  a  sufficient  answer  to  this  suit,  that  the  corporation  have 

the  legal  right  to  maintain  the  dam  as  against  the  complainant,  without 

payment  of  damages. 

This  view  of  the  case  renders  it  unnecessary  to  determine  the  question 
discussed  at  the  bar,  whether  the  right  to  purchase  and  hold  mills, 
which  was  conferred  on  the  corporation  by  the  act  of  1 798,  was  the 
grant  of  an  additional  and  distinct  franchise  or  right,  which  may  be 
used  and  enjoyed  by  the  corporation  or  their  grantees  separately  from 
and  independently  of  the  building  and  maintaining  of  a  canal ;  or 
whether  it  was  merely  secondary  and  subordinate  to  the  making  of  a 
canal  and  the  raising  of  water  for  its  supply,  and  was  to  cease  and 
become  extinguished  when  the  right  of  keeping  and  using  the  canal 
should  be  surrendered  or  forfeited.  Nor  have  we  occasion  to  decide 
whether  the  forfeiture  or  extinguishment  of  the  charter  of  the  corpora- 
tion would  operate  to  defeat  the  title  of  the  grantees  of  the  corporation 
to  the  mills  and  water  power  which  had  been  acquired  by  the  cor- 
poration lawfully,  and  conveyed  to  the  respondents  by  deeds  valid  at 
the  time  they  were  made,  by  which  the  title  became  vested  before  such 
extinguishment  or  forfeiture  took  place.  These  are  important  and 
interesting  questions  ;  but  it  will  be  quite  time  enough  to  settle  them, 
when  tlie  exigency  of  a  case  shall  require,  in  order  to  adjudicate  upon 
the  rights  of  parties,  that  they  should  be  judicially  determined. 

Complainant  nonsuit. 


^'^H^lLAMET,   &c.    CO.    V.   KITTKIDGE.  691  VO^      ^' 

yp  WALLAMET,  &c.  CO.  v.  KITTRIDGE.  rs^y^/^^j'^y^- 

\\jh4^  1877.     b  Sawyer  {U.S.  Circuit  Court),  U.-i-  ^^     ^  (^-^     [/yJ^ 

U.  S.  Circuit  Court.     District  of  Oregon.     Before  Deadt,  DiSTRictvO^/'^.u/ "^""^     , 

.COB.  vvy^^y 

Action  upon  a  bond,  conditioned  for  the  performance  of  a  contract.  ^^  \\y       ^    v    J^^ 
Defendants,  among  other  defenses,  pleaded  :  —  ujt     J^    y/   '/^ 

2.   That  on  May  1,  1876,  the  plaintiff  ceased  to  cany  on  the  hxxsX-J^.    \      k   ^ 
ness  for  which  it  was  formed,  and  has  not  since  transacted  or  carried      \y      '^^"^ c/^z 
on  any  of  such  business,  and  has  ceased  to  exist.  ^^T^  y    -:, 

Plaintiff  demurred.  >>     .   yO^ )    ^ 

The  above  plea  is  founded  on  section   16  of  the  corporation   act-^^^'^^  -/^       t^ 
(Oregon  Laws,  p.  528),  which  provides  that  if  any  corporation  organ-  -,  ^"    „        Lr^ 

k    lized  thereunder,   "shall  for  any  period  of  six  months  after  ihc  com-^ ^/^yv^'  ,^     ^j^ 
y\  jmencement  of  its  business,  neglect  and  cease  to  carry  on  the  same,  itSy   Jr^^Tj      )j^\ 
icorporate  powers  shall  also  cease."  fj       r     ^y   * 

I     Willkcm  Strong,  for  plaintiff.  '    g,J  '\tP^    /j/iJ  ^' 

Charles  B.   IJpton^  for  defendant.  ^0  (a^  ^ 

Deady,  J.  [After  stating  the  case.]  It  is  admitted  by  counsel  fortf^  \\  \  ^ 
the  defendant  that  a  forfeiture  of  the  plaintiff's  corporate  powers  can-  '^  '' 
not  be  set  up  to  defeat  this  action.  But  it  is  claimed  that  the  non-exist- 
ence of  a  corporation  may  always  be  pleaded  to  an  action  professed  to 
be  brought  b}'  it ;  as  that  it  was  never  duly  created  or  had  ceased  to 
exist  by  lapse  of  time  ;  and  that  under  the  provision  cited  from  section 
16,  supra,  whenever  a  corporation  neglects  to  use  its  powers  for  any 
one  period  of  six  months  it  ceases  to  exist,  the  same  as  if  its  corporate 
life  had  then  expired  by  lapse  of  time. 

But  in  nmjudgment  the  language  — ^Hjtsjjorporate  powers  shall 
cease,"  is  the  substantial  equivalent  of  the  phrase  "  its  corporate 
powers  shairbejm-fe^d."  In  either  case^the  s^a,tutejloes  not  execute 
itself^  Aji  inquiry  mustj)ejmade  to  ascertain  whether  the  corporation 
Jias^e2t^the^omliMons_subse(iuent  i^^  its  creationjjvas  author- 

izedjind^  permU,ted.  If  there  has  been  a  failure  to  keep  any  such  coji- 
dition  jQO^one  can  allege  it  or  take  advantage  of  it  but  the  State  which 
created  or  authorizedjhe  corporation^  In  thjs  respect  a  corporationjs 
like  anestate  in  fee^^  I  fa  condition -Subsequent  is  anjnexed  to  such  an 
estate,  no  one  but  tbe^rantor  px  his  successors  can  take  advantage  of 
its  non-performance.  {Schnlenherg  \.  ilarriman,  21  Wall.  63.)  UporT 
the  question  of  whether  the  words  —  "its  corporate  powers  shall 
cease,"  import  a  forfeiture  of  the  corporate  existence  rather  than  an 
actual  termination  of  the  same,  as  bv  lapse  of  time,  the  case  of 
Lessee  of  Frost  et  al.  v.  Frostburg  Coal  Co.,  24  How.  283,  is  in 
point.     There  the  law  provided  that  in  case  four  fifths  of  the  capital 

1  Statement  abridged.     Only  so  much  of  case  is  given  as  relates  to  one  point. -~Eix  ^ 


692  WALLAMET,   &c.    CO.  V.   KITTRIDGE. 

Btock  of  a  corporation  became  concentrated  in  tiie  hands  of  less  than 
five  persons  '"the  corporate  powers  and  privileges  shall  cease  and 
determine,"  and  it  appearing  that  the  stock  of  the  corporation  defend- 
ant was  so  owned,  the  court  held  that  it  was  a  cause  of  forfeiture  of 
which  a  private  party  could  not  take  advantage;  sa3-ing,  "  That  is  a 
question  for  the  sovereign  power,  which  may  waive  it  or  enforce  it  at 
its  pleasure."  In  Chesapeake  etc.  Canal  Co.  v.  Ohio  Ji.  Co.,  4  Gill  & 
John.  1,  it  was  held  that  a  violation  of  a  provision  in  a  charter  of  a 
corporation,  to  the  effect  that  on  a  breach  of  a  certain  condition  such 
corporation  should  not  be  entitled  to  any  privilege  under  the  act  of 
incorporation,  and  that  all  its  interest  thereunder  should  be  forfeited 
and  cease,  did  not  ipso  facto  work  a  dissolution  of  the  corporation. 
See,  also,  to  the  same  effect.  The  Peop)le  v.  The  Manhattan  Bank,  9 
Wend.  382  ;  Bradt  v.  Benedict  [17  New  York]  93  ;  Mlckles  v.  Roches- 
ter Bank,  11  Paige,  118.  That  this  provision  in  section  16,  supra, 
concerning  the  non-user  of  corporate  powers,  is  a  condition  subsequent 
and  not  a  limitation  upon  the  existence  of  the  corporation,  is  further 
shown  by  the  Code  of  Civ.  Pro.,  which  provides  (sec.  353,  sub.  4)  that 
an  action  may  be  maintained  in  the  name  of  the  state  "  for  the  purpose 
of  avoiding  the  charter  or  annulling  the  existence  of  such  corporation, 
.  .  .  whenever  it  has  forfeited  its  privileges  or  franchises,  by  failure  to 
exercise  its  powers." 

Here,  the  state  has  provided  a  direct  judicial  proceeding  to  annul  the 
existence  of  a  corporation  which  has  failed  to  exercise  its  powers  for 
such  a  period  and  under  such  circumstances  as  causes  a  forfeiture  of  its 
privileges — the  ver}^  case  described  in  section  16,  supra.  Indeed,  this 
declaration  of  the  statute  is  simply  intended  to  define  and  make  certain 
what  kind  and  duration  of  neglect  or  non  user  of  the  corporate  powers 
shall  be  a  sufficient  cause  of  their  forfeiture.  Without  the  statute  the 
question  in  each  case  was  involved  in  the  uncertainty  of  determining 
whether,  under  all  the  circumstances,  the  neglect  was  wilful  and  mate- 
rial. (A.  &  A.  on  Cor.  776.)  But  now  the  statute  furnishes  a  certain 
and  prescribed  rule.  A  neglect  to  exercise  the  powers  of  the  corpora- 
tion for  six  months  works  a  forfeiture  without  reference  to  the  cause  or 
consequence  of  such  neglect.  But  this  action  can  only  be  brought  in 
the  name  of  the  state  and  upon  leave  granted  by  the  judge  of  the 
court.  Neither  the  forfeiture  nor  the  fact  of  non-user  can  j)e  set  up  b^ 
a  private  person  for  any  purpose.  It  must  first  be  judicially  ascer^ 
tamed  and  declared  on  the  complaint  of  the  state.  (A.  &  A.  on  Cor., 
eec.  777^y    The  demurrei-  to  this  defense  is  sustained. 

[Remainder  of  opinion  omitted."! 


OAKLAND  R.  CO.  V.   OAKLAND,  BROOKLYN,  &c.  R.  CO.     693 


Jt, 


Ih»- 


^ 


,^' 


Belcher,  J.,  in  OAKLAND  R.  CO.  v.  OAKLAND,  BROOKLYN?     ^)tA    . 

&C.E.CO.  i^^      A^"^.^' 

1873.     45  Ca/{/brn(a,  365,  pp.  373,  374,  378.        4       r        ^^A^        ^ 

Conceding  that  the  plaintiff's  grant  was  upon  condition  subsequent,  ^       aj  ^^jX 

still  it  does  not  follow  that  its  right  in  that  part  of  the  street  where  it    ^  ^     • 
had  not  constructed  a  road  could  be  determined  only  by  a  judgment  of 
forfeiture. 

The  grant  was  of  a  franchise,  which  had  the  legal  character  of  an     '    ^C* 
estate  or  property.      "  An  estate,"  said  Chancellor  Kent,  "  iii_such_a 
franchise  aiid  an  estate  in  land  rest  upon  the  same_principle,  being  i        ^ 
equally  grants^  of-^ijght  or  privilege  foj^n^adequate^ consideration."  .  v^ 
3  Kent's  Com.  458. 

Now,  while  a  forfeiture  at  common  law  does  not  operate  to  divest  ^         >     , 
the  title  of  the  owner  until  by  a  proper  judgment  in  a  suit  instituted  for-^       ^''" 
that  purpose  the  rights  of  the  State  have  been  established,  it  is  other-    *-^      ' 
wise  when  the  forfeiture  is  declared  by  a  statute.     In  the  latter  case 
the  title  to  the  thing  forfeited  immediately  vests  in  the  State  upon  the 
commission  of  the  offense  or  the  happening  of  the  event  for  which  the 
forfeiture  is  declared,  or  at  such  other  time  and  upon  such  other  con- 
dition as  the  statute  may  name.      The  authorities  to  this  effect  are 
numerous  and  uniform. 

"  It  has  been  proved,"  said  Marshall,  C.  J.,  "  that  in  all  forfeitures 
accruing  at  common  law  nothing  vests  in  the  government  until  some 
legal  step  shall  be  taken  for  the  assertion  of  its  right,  after  which,  for 
raanj'  purposes,  the  doctrine  of  relation  carries  back  the  title  to  the 
commission  of  the  offense  ;  but  the  distinction  taken  by  the  counsel  for 
the  United  States  between  forfeitures  at  common  law  and  those  accru- 
ing under  a  statute  is  certainh'  a  sound  one.  When  a  forfeiture  is 
given  by  a  statute  the  rules  of  the  common  law  may  be  dispensed  with, 
and  the  thing  forfeited  may  either  vest  immediately  or  on  the  per- 
formance  of  some  particular  act,  as  shall  be  the  will  of  the  legislature. 
United  States  v.  Grundi/,  3  Cranch,  151." 

In  this  case  it  is  clear  that  the  legislature  intended,  by  the  restric- 
tion as  to  the  time  within  which  the  plaintiff^s  work  must  be  com- 
pleted, that  it  should  have  no  rights  in  the  streets  of  Oakland  if  it 
failed  to  exercise  them  within  five  years.  This  intention  was  expressed 
in  the  most  explicit  terms,  for,  as  we  have  seen,  it  declared  that 
upon  failure  to  comply  with  the  provisions  of  the  act,  •'  then  the  fran- 
chise and  privileges  herein  granted  shall  utterl}'  cease  and  be  forfeited." 
Not  to  give  effect  to  this  declaration  would  be  to  frustrate  and  defeat 
the  legislative  will. 


A 


\^ 


694        BKOOKLYN   STEAM   TRANSIT   CO.   V.   CITY   OF   BROOKLYN. 


BROOKLYN  STEAM  TRANSIT  CO.  v.  CITY  OF  BROOKLYN. 

1879.     78  New  York,  524.1 

Appeal  from  judgment  in  favor  of  defendant,  rendered  by  General 
Term  in  the  Second  Department. 

Tlie  action  was  brought  by  plaintiff,  Aug.  31,  1878,  to  restrain  de- 
fendant from  interfering  with  the  construction  of  its  road  in  defendant's 
streets. 

Plaintiff  was  incorporated  by  Chapter  940,  Laws  of  1871.  Section  17 
provides  as  follows:  "This  act  shall  take  effect  sixty  days  after  the 
N  passage  thereof;  but  unless  said  Brooklyn  Steam  Transit  Company  be 
.organized,  and  at  least  one  mile  of  such  railroad,  as  it  is  authorized  and 
'empowered  to  construct  under  this  act,  be  laid  within  three  3'ears  there- 
>after,  then  and  in  that  case  this  act  and  all  the  powers,  rights,  and 
franchises  herein  and  hereb}'  granted,  shall  be  deemed  forfeited  and 
I  terminated." 

Under  that  act  plaintiff  was  in  some  wa}'  organized.  By  a  subse- 
yquent  act  of  1873,  the  time  for  the  construction  of  the  one  mile  of  rail- 
road was  extended  to  Jul}'  4,  1876.  The  plaintiff  did  not  build  or  lay 
an}'  portion  of  its  railroad  until  June,  1878,  wlien  it  built  a  mile  outside 
the  city  of  Brooklyn,  and  commenced  to  lay  foundations  for  a  railroad 
within  the  city  limits. 

David  Dudley  Field,  for  appellant. 
William,  C.  De  Witt,  for  respondent. 

Earl,  J.  [After  stating  the  case.]  The  claim  of  the  defendant  is 
that  the  plaintiff  lost  its  corporate  existence  by  not  building  one  mile 
of  its  road  before  the  expiration  of  the  time  limited,  to  wit,  July  4, 
1876. 

The  general  principle  is  not  disputed  that  a  corporation,  by  omitting 
to  perform  a  duty  imposed  by  its  charter  or  to  comply  with  its  pro- 
visions does  not  ipso  facto  lose  its  corporate  character  or  cease  to  be  a 
corporation,  but  simply  exposes  itself  to  the  hazard  of  being  deprived 
of  its  corporate  character  and  franchises  by  the  judgment  of  the  court 
in  an  action  instituted  for  that  purpose  by  the  attoi-ney-general  in  be- 
half of  the  people ;  but  it  cannot  be  denied  that  the  Legislature  has 
the  power  to  provide  that  a  corporation  may  lose  its  corporate  exist- 
ence without  the  intervention  of  the  courts  by  any  omission  of  duty  or 
violation  of  its  charter  or  default  as  to  limitations  imposed,  and  whether 
the  Legislature  has  intended  so  to  provide  in  any  case  depends  upon 
the  construction  of  the  language  used.  Here  the  language  used  shows 
that  the  Legislature  intended  to  make  the  continued  existence  of  the 
plaintiff  as  a  corporation  depend  upon  its  compliance  with  tlie  require- 
ments of  section  seventeen  of  the  original  act.     In  case  of  non-compli- 

^  Statement  rewritten.     Argiiiiients  and  part  of  opiiiiuu  omitted.  —  Ed. 


BROOKLYN   STEAM   TRANSIT   CO.   V.   CITY   OF   BROOKLYN,         695 

ance  the  act  itself  was  to  cease  to  have  any  operation,  and  all  the 
])owers,  rights  and  franchises  thereby  granted  were  to  oe  "  deemed 
forfeited  and  terminated."  There  was  to  be  not  merely  a  cause  of 
forfeiture  which  could  be  enforced  in  an  action  instituted  by  the 
attorney-general,  but  the  powers,  rights  and  franchises  were  to  be 
taken  and  treated  as  forfeited  and  terminated.  At  the  end  of  the  time 
limited  the  corporation  was  to  come  to  an  end,  as  if  that  were  the  time 
limited  in  its  charter  for  its  corporate  existence.  A  precise  authority 
for  this  construction  of  this  statute  is  found  in  the  case  of  the  Brooklyn, 
Winfield  and  N'ev:ton  Railroad  Company  (72  N.  Y.  245).  That 
company  was  organized  under  the  general  railroad  act  of  1850,  as 
amended  by  the  act,  chapter  775  of  the  Law  of  1867.  By  the  last 
named  act  it  is  provided  that  "if  any  corporation  formed  under  the 
general  act  shall  not,  within  five  years  after  its  articles  of  association 
are  filed  and  recorded,  begin  the  construction  of  its  road  and  expend 
thereon  ten  per  cent  on  the  amount  of  its  capital,  or  shall  not  finish  its 
road  and  put  it  in  operation  in  ten  j'ears  from  the  time  of  filing  its 
articles  of  association,  as  aforesaid,  its  corporate  existence  and  powers 
shall  cease."  That  company  had  not  begun  the  construction  of  its 
road  within  the  time  Umited,  and  it  was  held  that  it  had  lost  its  corpor- 
ate existence,  and  the  same  view  was  emphaticall}'  reiterated  when  a 
similar  case  of  the  same  company  was  again  before  this  court  (75 
jS\  Y.  335).  It  was  held  that  the  statute  executed  itself,  and  that  the 
intervention  of  the  courts  in  an  action  instituted  by  the  attorn ej'-general 
was  not  necessary.  The  language  of  limitation  used  in  section  seven- 
teen of  the  act  of  1871,  more  plainly,  if  possible,  indicates  the  legisla- 
tive intention,  that  a  failure  to  complj'  with  the  limitations  should  put 
an  absolute  end  to  the  corporation,  than  the  language  used  in  the  act 
of  1867. 

An  effort  was  made  upon  the  argument  of  this  case  by  the  learned 
counsel  for  the  appellant  to  distinguish  this  case  from  the  one  cited,  but 
we  can  perceive  no  material  difference  between  the  two  cases.  In  that 
case  the  company-  was  fully  organized,  as  it  was  in  this.  That  com- 
pany had  a  corporate  existence  to  lose,  and  so  had  this.  It  is  probably 
true,  that  this  company  in  making  surveys  and  plans  within  the  three 
years  may  have  done  more  than  that  company  did,  but  that  is  imma- 
terial, so  long  as  it  failed  to  do  the  precise  thing  required  by  the  stat- 
ute. In  that  case  the  proceeding  was  to  interfere  with  private  property 
by  the  right  of  eminent  domain.  Here  this  compan}'  was  proceeding 
to  occupy  the  public  streets  which  were  under  the  charge  and  control 
of  the  city.  In  the  one  case,  as  in  the  other,  corporate  existence  and 
right  were  necessary  to  justify  the  act.  The  city  must  have  as  much 
right  to  question  this  use  of  its  streets  as  a  private  owner  would  to 
question  the  use  of  his  property.  If  a  private  owner  could  in  such 
case  question  the  corporate  existence  of  the  company,  the  city  must 
have  the  same  right.  The  fact  that  that  companj-  was  organized  under 
a  general  law,  while  this  is  organized  under  a  special  law,  can  make 


696  NEW   YORK   AND   LONG   ISLAND   BRIDGE   CO.   V.   SMITH. 

no  difference.  A  corporation  organized  under  a  general  law  is  upon 
precisely  the  same  footing  as  one  constitutionally  organized  under  a 
special  law  which  contains  all  the  provisions  of  the  general  law.  Nor 
can  the  fact  that  this  company  has  already  built  one  mile  of  its  road 
distinguish  this  case  from  the  one  cited.  If  we  are  right  thus  far,  it 
built  that  line  without  any  authority,  and  it  did  not  acquire  thereby 
the  right  to  enter  the  city  and  continue  its  wrongful  acts  there.  But  it 
is  not  necessary  to  determine  in  this  case  what  the  status  of  the  plain- 
tiff would  have  been  if  it  had  been  operating  its  road  upon  the  mile 
thus  constructed.  It  is  sufficient  now  to  determine  that  it  cannot  wage 
an  aggressive  warfare  either  upon  private  property  or  the  public  streets 
of  the  city  of  Brooklyn  without  further  or  other  legislative  authority 
than  it  invoked  upon  the  trial  of  this  action. 
[Remainder  of  opinion  omitted.] 


NEW  YORK   &  LONG  ISLAND   BRIDGE  CO.  v.  SMITH. 

1896.  148  New  York,  540.1 

Condemnation  Proceeding.  An  order  appointing  commissioners  of 
appraisal  was  affirmed  by  the  General  Term  in  the  First  Department. 
The  defendant  Smith  appealed. 

J)e  Lancey  Nicoll,  for  appellant. 

JuUen  T.  Davies,  and  William.  J.  Kelly ^  for  respondent. 

Bartlett,  J.  The  main  question  presented  by  this  appeal  is 
whether  the  New  York  and  Long  Island  Bridge  Company  was,  at  the 
time  this  proceeding  was  instituted,  an  existing  corporation  duly  author- 
ized to  acquire  title  to  the  land  of  the  defendant  Smith,  for  the  purposes 
of  constructing  the  bridge  and  its  approaches. 

The  learned  counsel  for  the  appellant  rests  his  attack  upon  the  cor- 
porate existence  on  various  distinct  grounds,  and  a  proper  considera- 
tion of  them  involves  a  full  examination  of  the  legislation  under  which 
the  bridge  company  claims  the  right  to  maintain  this  proceeding. 

The  appellant  takes  a  preliminary  point  which,  if  sound,  would 
require  a  reversal  of  the  order  appealed  from,  and  a  dismissal  of  this 
proceeding. 

The  act  incorporating  the  bridge  company  (Chap.  395,  Laws  of 
1867),  provides  in  the  twelfth  section  thereof  that  the  bridge  shall  be 
commenced  within  two  3'ears  from  the  passage  of  the  act,  and  shall  be 
continued  without  unreasonable  delay,  until  it  is  completed,  "  or  this 
act  and  all  rights  and  privileges  granted  hereby  shall  be  null  and  void." 

1  Statement  abridged.  Arguments  omitted.  Only  so  much  of  the  opinion  is  given 
Ks  relates  to  one  ooint.  —  Ed. 


Y^it/H'^'^^ 


NEW   YORK   AND   LONG   ISLAND   BRIDGE   CO.   V.   SMITH.  697 

It  is  the  contention  of  appellant's  counsel  that  this  forfeiture  clause 
is  self-executing,  and  as  it  is  admitted  that  the  work  was  not  com- 
menced within  two  years  from  the  passage  of  the  act,  the  bridge  com- 
pany, ipso  facto,  ceased  to  exist. 

We  are  referred  to  a  large  number  of  authorities  as  sustaining  this 
position,  and,  among  others,  to  several  cases  in  this  court. 

It  is  to  be  observed  that  the  question  as  to  whether  a  forfeiture  clause 
is  or  is  not  self-executing,  depends  wholly  upon  the  language  employed 
b}-  the  legislature. 

Our  attention  is  called  particularly  to  In  re  Brooklyn,  Winfield  & 
Newtoxon  Ry.  Co.  (72  N.  Y.  245)  and  Brooklyn  Steam  Transit  Co. 
V.  City  of  Brooklyn  (78  N.  Y.  524). 

In  the  first  case  the  words  of  forfeiture  were,  "  its  corporate  exist- 
ence and  powers  shall  cease,"  and  this  court  held  that  upon  default  the/ 
corporation's  existence  and  powers  ceased,  without  judicial  proceed-/ 
ings.  In  the  second  case  the  words  of  forfeiture  were,  "this  act  and 
all  the  powers,  rights  and  franchises  herein  and  hereb}'  granted  shall 
be  deemed  forfeited  and  terminated,"  and  this  court  held  the  clause  ta 
be  self-executing,  thereby  recognizing  the  undoubted  power  of  the! 
legislature  to  provide  that  corporate  existence  shall  cease  b}'  the  mere 
fact  of  failure  of  the  corporation  to  perform  certain  acts  imposed  by  the/ 
charter. 

It  requires,  however,  strong  and  unmistakable  language,  such  as 
each  of  the  cases  referred  to  presents,  to  authorize  the  court  to  hold 
that  it  was  the  intention  of  the  legislature  to  dispense  with  judicial  J- 

proceedings  on  the  intervention  of  the  attorney-general.  ir^^ 

In  the  case  at  bar  the  words  of  forfeiture  are,  "  all  rights  and  privi-/  ^      ^ 
leges  granted  hereby  shall  be  null  and  void."  '       *^'^^^\!^^ 

It  cannot  be  said  that  the  words  ' '  shall  be  null  and  void  "  disclose   ^^..^  jU^^ ' 

the  legislative  intent  to  make  this  clause  self-executing.     The  words    ^l-  ^^'^^'^ 
"null  and  void,"  as  used  in  this  connection,  clearly  mean  voidable.  j 

The  word  "  void  "  is  often  used  in  an  unlimited  sense,  implying  an  act 
of  no  effect,  a  nullity  ah  initio  {Inskeep  v.  Lecony,  1  N.  J.  L.  112)  ; 
in  the  case  at  bar  it  was  not  so  employed,  but  rather  in  its  more  lim- 
ited meaning. 

We  think  these  words  mean  no  more  than  if  the  legislature  had  said, 
in  case  of  default  the  corporation  "  shall  be  dissolved."  The  attorne}'- 
general  was  authorized  to  treat  the  charter  of  the  bridge  company  as 
voidable,  and  by  appropriate  legal  proceedings  to  have  terminated  its 
corporate  existence. 

The  Supreme  Court  of  the  United  States,  in  passing  upon  the  mean- 
ing of  the  words  "void  and  of  no  effect,"  uses  this  language:  "  But 
these  words  are  often  used  in  statutes  and  legal  documents,  ...  in 
the  sense  of  voidable  merely,  that  is,  capable  of  being  avoided,  and  not 
as  meaning  that  the  act  or  transaction  is  absoluteh'  a  nullity,  as  if  it 
never  had  existed,  incapable  of  giving  rise  to  any  rights  or  obligations 
nnder  any  circumstances.     {Ewell  v.  Daggs,  108  U.  S.  148.)  " 


698  COMMONWEALTH   V.  UNIOX,    &o.    INS.   CO. 

Holding,  as  we  do,  that  the  forfeiture  clause  in  the  act  of  1867  was 
not  self-executing,  we  find  in  the  various  acts  amending  the  act  of 
1867  repeated  waivers  by  the  legislature  of  the  failure  of  the  bridge 
company  to  begin  its  work  within  two  3'ears  from  the  passage  of  the 
act  of  1867. 

[The  learned  Judge  then  referred  to  acts  of  1871,  1879,  1885,  and 
1892.] 

[Opinion  on  other  points  omitted.]  Order  affirmed. 


COMMONWEALTH  v.  UNION,  &c.  INS.  CO. 

1809.     5  Mass.  230.1 

This  was  a  motion  for  a  rule  upon  the  defendants  to  shew  cause  why 
the  Solicitor  General  should  not  be  directed  to  file  an  information  in 
the  nature  of  a  quo  warranto  against  them,  that  the  said  companj^ 
might  be  dissolved,  and  their  corporate  powers  be  adjudged  void.  The 
motion  was  made  by  Sullivan  in  behalf  of  seventeen  persons  alleging 
themselves  to  be  members  of  the  corporation,  .   .  . 

Jackson,  for  defendants. 

The  Solicitor  General,  for  the  relators  (but  not  appearing  in  his 
official  character). 

Parsons,  C.  J. 

Informations  of  this  nature  are  properly  grantable  for  the  purpose  of 
enquiring  into  the  election  or  admission  of  an  officer  or  member  of  a 
corporation,  when  moved  for  by  any  person  interested  in,  or  injured  by 
such  election  or  admission,  if  the  same  was  unduly  made.  And  upon 
such  information,  if  the  election  or  admission  was  illegal,  judgment  of  a 
motion  might  be  entered,  and  a  fine  might  also  be  imposed  on  the 
party  who  had  usurped  upon  the  commonwealth. 

In  this  case  the  parties  applying  for  the  rule  do  not  complain  of  any 
illegal  election  or  admission,  of  any  officer  or  member  of  the  corpora- 
tion :  but  the  object  of  the  application  is  to  obtain  a  judgment  of  for- 
feiture of  the  franchises  of  the  corporation,  and  a  seizure  of  them  by 
the  commonwealth. 

We  are  well  satisfied  that  a  corporation,  as  well  when  created  by 
chai'ter  under  the  seal  of  the  commonwealth,  as  by  a  statute  of  the 
legislature,  may  by  nonfeazance  or  malfeazance  forfeit  its  franchises, 
and  that  by  judgment  on  an  information  the  commonwealth  may  seize 
them.  And  if  the  allegations  stated  in  the  motion  for  the  rule  in  this 
case  were  true,  and  the  conimonwealth  had  caused  an  information  to 

1  Statement  abridged.    Arguments  and  part  of  opinion  omitted.  —  Ed, 

24 


STATE   V.  FOURTH   X.    H.    TURNPIKE. 


699 


be  filed  and  prosecuted,  for  the  purpose  of  seizing  the  corporate  fran- 
chises for  such  malfeazauce,  judgment  for  those  causes  might  have 
been  rendered  for  the  commonwealth. 

But  an  information  for  the  purpose  of  dissolving  the  corporation,  or 
of  seizing  its  franchises,  cannot  be  prosecuted  but  by  the  authorit}'  of 
the  commonwealth,  to  be  exercised  by  the  legislature,  or  b}'  the  attor- 
ney or  solicitor  general,  acting  under  its  direction,  or  ex  officio  in  its 
behalf.  For  the  commonwealth  may  waive  any  breaches  of  anj-  condi- 
tion expressed  or  implied,  on  which  the  corporation  was  created ;  and 
we  cannot  give  judgment  for  the  seizure  b}-  the  commonwealth  of  the 
franchises  of  an}'  corporation,  unless  the  commonwealth  be  &  party  in 
interest  to  the  suit,  and  thus  assenting  to  the  judgment. 

This  distinction  between  informations  in  the  nature  of  a  quo  warranto^ 
to  impeach  an}-  election  or  admission  of  a  corporate  officer  or  member, 
and  informations  to  dissolve  a  corporation  is  well  settled,  and  upon 
sound  principles  of  law.^  Mule  discharge' 


Information  in  the  nature  of  quo  warranto,  filed  %  the  Attorney 


STATE 


1844 


FOURTH  N.   H.   TURN] 

15  New  Hampshire,  162.^ 


.vXV 


General  against  the  defendants,  and  charging  them  with  usurping  the '  '     ^ 


privilege  and  franchise  of  maintaining  a  toll  gate  and  demanding  andt,^*^  ^  * 
receiving  tolls.  \     ^^ 

The  case  came  before  the  Court  upon  the  state's  demurrer  to  the  de-'^ 
fendants'  rejoinder.     Upon  the  pleadings  the  following  facts  appeared : 

The  defendants  were  incorporated  in  1800,  with  power  to  maintain  a 
turnpike  road  and  collect  tolls.  Soon  after  incorporation,  they  built  the 
road  and  establisiied  toll  gates.  The  chai-ter  enacts,  that,  at  the  end 
of  ever}'  six  years  after  the  setting  up  of  any  toll  gate,  an  account  of 
the  expenditures  and  profits  of  the  road  shall  be  laid  before  the  legisla- 
ture, under  forfeiture  of  the  privileges  of  said  act  in  future.  No  ac- 
counts were  furnished  until  1830.  In  1830,  1836,  and  18-42.  accounts 
were  laid  before  the  legislature,  and  were  received  by  the  legislature  as 
sufficient  and  satisfactory.  In  1833  an  act  was  passed  authorizing 
defendants  to  change  the  route  of  the  road  in  certain  towns.  The 
defendants  accepted  this  act,  and  changed  the  route  at  great  expense. 

1  Under  the  statutes  of  some  jurisdictions,  a  private  individual,  whose  private  interest  is 
specially  affected  by  corporate  acts,  may  maintain  a  proceeding  to  test  the  ritrhts  of  a  cor- 
poration to  exercise  a  particular  franchise.  In  at  least  one  instance,  the  statute  provides 
that  an  action  to  vacate  the  charter  of  a  corporation  may  be  brought  by  a  private  party  in 
the  name  of  the  State,  on  leave  f^rantcd  by  the  court.  The  latter  provision  applies  where 
the  corporation  has  misconducted  in  certain  specified  ways.  —  Ed. 

2  Statement  abridged.    Arguments  omitted.  —  Ed. 


700  STATE   V.  FOURTH  N.    H.   TURNPIKE. 

Perley^  for  defendants. 

Walker,  Attorney  General,  for  state. 

Gilchrist,  J.  The  charter  makes  it  the  duty  of  the  corporation  to 
lay  before  the  legislature,  at  the  end  of  every  six  years  after  the  setting 
up  of  any  toll-gate,  an  account  of  the  expenditures  and  profits  of  the 
road,  under  the  penalty  of  forfeiting  the  privileges  of  the  act  in  future. 
These  accounts,  however,  were  not  submitted  until  the  years  1830,  1836 
and  1842,  in  which  years  they  were  submitted  to  the  legislature,  and 
accepted  by  them  as  sufficient  and  satisfactory'.  In  the  j'ear  1833  the 
legislature  passed  an  act  authorizing  the  corporation  to  change  the 
route  of  their  road  in  certain  places.  These  are  the  facts  laid  before 
us,  upon  which  we  are  to  determine  whether  the  defendants  are  now 
an  existing  corporation. 

The  accounts  not  having  been  laid  before  the  legislature,  the  penalty 
of  forfeiture  was  incurred  in  terms.  But  the  subsequent  accounts  were 
accepted  by  the  legislature  as  sufficient  and  satis  facto  rj',  and  farther 
powers  were  conferred  upon  the  defendants  b}'  the  act  of  1833.  Has 
the  legislature  power  to  waive  the  forfeiture?  And  if  it  has,  do  these 
facts  amount  to  such  waiver?  These  are  the  questions  presented  to  us 
by  the  pleadings. 

The  doctrine  of  the  waiver  of  a  forfeiture  by  the  legislature  by  sub- 
sequent legislative  acts  does  not  appl}-,  if,  by  the  terms  of  the  charter, 
the  franchise  absolutely'  determines  on  failure  to  perform  the  condition  ; 
for  as  in  such  case  the  corporation  has  ceased  to  exist,  the  doctrine  of 
waiver  is  inapplicable.  The  charter  in  this  case  provides  that  the 
accounts  shall  be  laid  before  the  legislature,  "under  forfeiture  of  the 
privileges  of  the  act  in  future."  The  meaning  of  this  is,  that  the  for- 
feiture shall  be  proved  in  the  regular,  legal  manner ;  upon  the  institu- 
tion and  prosecution  of  proceedings  in  the  established  course,  such 
neglect  of  this  duty  shall  be  cause  of  forfeiture.  It  probably  would 
not  be  competent  for  a  debtor  of  the  corporation,  when  sued,  to  set  up 
b}'  way  of  defence  that  the  charter  of  the  corporation  was  forfeited, 
unless  the  forfeiture  had  been  established  by  the  judgment  of  this  court. 
Chester  Glass  Co.  vs.  Dewey ^  16  llass.  102 ;  Bank  of  Niagara  vs. 
Johnson,  8  Wend.  645  ;  The  People  vs.  The  Manhattayi  Co.,  9  Wend. 
382.  That  is  a  matter  to  be  judicially  tried  and  determined,  and  not 
to  be  inquired  into  collaterally.  Where  a  charter  imposes  the  duty  of 
making  stated  returns  of  the  expenditures  and  profits,  the  government 
alone  can  enforce  a  forfeiture  for  a  neglect  of  the  duty.  Peirce  vs. 
Somersworth,  \Q  JSF.  II.  Rep.  369  ;  The  State  vs.  Carr,  5  JSf.  11.  Rep. 
367.  In  the  case  of  the  Bear  Camp  River  Co.  vs.  Woodman,  2 
Greenl.  404,  the  charter  was  to  become  void,  if,  at  the  end  of  one  j^ear, 
the  river  should  not  be  cleared  of  certain  obstructions.  In  an  action 
of  assumpsit  to  recover  tolls  of  the  defendant,  he  offered  to  prove  that 
the  removal  of  the  obstructions  had  never  been  effected  ;  but  the  evi- 
dence was  rejected  at  the  trial,  and  the  ruling  was  held  to  be  correct. 
This  case  affords  a  strong  illustration  of  the  necessity  of  specific  judicial 


STATE   V.   FOURTH   N,   H.   TUKNPIKE.  701 

proceedings  for  the  purpose  of  causing  the  charter  to  he  declared  for- 
feited. And  in  the  case  before  us,  we  think  that  by  the  omission  to 
la}-  the  accounts  before  the  legislature,  the  corporation  did  not,  ipso 
facto^  cease  to  exist,  but  proceedings  must  have  been  instituted,  to 
establish  the  fact  that  the  penalty  of  forfeiture  was  incui'red.  Rex  vs. 
Pasmore,  3  T.  H.  244.  A  quo  tvarranto  is  necessai'y  where  there  is 
a  body  corporate  de  facto,  who  take  upon  themselves  to  act  as  a  body 
corporate,  but,  from  some  defect  in  their  constitution,  cannot  legally 
exercise  the  powers  they  affect  to  use.  Ashhurst,  J.  Chancellor 
ITent  says  that  he  believes  there  is  no  instance  of  calling  in  ques- 
tion the  right  of  a  corporation,  as  a  body,  for  the  purpose  of  declaring 
its  franchises  forfeited  and  lost,  but  at  the  instance  and  on  behalf  of 
the  government.  /Slee  vs.  Boom,  5  Johns.  Ch.  381.  In  The  People 
vs.  The  Manhattan  Co.,  9  Wend.  382,  Mr.  Justice  Sutherland  says, 
"  where  the  corporation  expires  b}'  lapse  of  time,  it  may  be  otherwise, 
and  in  such  case  onl}'."  A  corporation  may  forfeit  its  franchises  for 
misfeasance  or  nonfeasance,  but  the  information  for  that  purpose  must 
be  presented  under  the  authority  of  the  State,  which  must  be  a  party 
to  the  suit  and  a  party  to  the  judgment  for  the  seizure  of  the  franchise. 
The  Commoiucealth  vs.  Union  Ins.  Co.,  5  Mass.  230 ;  Hex  vs. 
Amery,  2  T.  R.  515  ;    Vernon  Society  vs.  Hills,  6  Coicen,  23. 

The  corporation,  then,  being  in  existence  in  the  year  1830,  did  the 
reception  of  the  accounts  and  the  passage  of  the  act  of  1833  constitute 
a  waiver  of  the  preexisting  ground  of  forfeiture,  so  that  it  cannot  now 
be  insisted  on?  It  is  said  expressly,  by  Parsons,  C.  J.,  in  The  Com- 
momoealth  vs.  Union  Ins.  Co.,  5  Mass.  232,  that  the  commonwealth 
may  waive  any  breaches  of  any  condition,  expressed  or  implied,  on 
which  the  corporation  was  created.  The  surrender  of  a  charter  can  be 
made  only  by  some  solemn,  formal  act  of  the  corporation,  and  will  be 
of  no  avail  until  accepted  b}'  the  government.  There  must  be  the 
same  agreement  of  the  parties  to  dissolve  that  there  was  to  form  the 
compact.  Morton,  J.,  Boston  Glass  Man.  vs.  Langdon,  24  Pick. 
53.  If  acts  of  the  legislature  recognize  the  subsequent  and  continued 
existence  of  the  corporation,  such  recognition  will  be  a  waiver  of  a  for- 
feiture. The  People  vs.  The  Manhattan  Co.  In  the  case  of  TJie 
People  vs.  The  Kingstown  Turnpike  Co.,  23  Wend.  193,  it  was  held, 
that  an  act  extending  the  time  for  the  completion  of  the  road  was  not 
a  waiver  of  breaches  of  conditions  ;  for  such  was  not  expressh-  declared 
to  be  the  intent  of  the  legislature,  nor  was  the  intent  necessaril}-  to  be 
implied  from  the  act.  From  this  position  Mr.  Justice  Careen  dissented, 
and  held  that  a  statute  expressly  giving  time  to  complete  the  road  was 
equivalent  to  a  renewal  or  confirmation  of  the  original  charter. 

In  the  present  case,  the  legislature  did  not  expressly  declare  that 
they  recognized  the  corporation  as  in  existence,  or  confirmed  its  privi- 
leges, but  we  think  no  other  construction  can  be  given  to  their  proceed- 
ings. It  is  a  reasonable  doctrine,  that  a  breach  of  condition  may  be 
waived.    It  is  an  important  element  in  the  law  relating  to  landlord  and 


702         STATE   V.    OBEELIN    BUILDING   AXD   LOAN   ASSOCIATION. 

tenant.  In  Goodright  vs.  Davids,  Cowp.  803,  Lord  Mansfield  ob- 
served that  forfeitures  are  not  favored  in  law,  and  where  the  forfeiture 
is  once  waived  the  court  will  not  assist  it.  Coon  vs.  JBHckett,  2  JV.  IT. 
Be}).  163  ;  Doe  vs.  Pritchard,  5  B.  &  Ad.  765.  There  is  as  rancli 
reason  for  considering  the  acts  of  a  legislative  body  as  a  waiver  of  a 
forfeiture,  as  there  is  for  giving  that  effect  to  the  act  of  a  landlord. 
The  State  can  claim  no  exemption  from  the  ordinary-  rules  which  govern 
contracts,  and  there  is  not  to  be  one  law  for  them  and  another  for  pri- 
vate persons.  The  legislature  accepted  the  accounts  laid  before  them 
in  1830,  and  the  subsequent  3'ears,  as  sufficient  and  satisfactor}' ;  that 
is,  they  were  satisfied  with  the  accounts  as  a  sufficient  compliance  with 
the  charter.  The  act  of  1833  is  an  equally  clear  waiver  of  a  forfeiture. 
Notwithstanding  what  had  occurred,  they  authorized  the  corporation 
to  alter  the  route  of  their  road.  The  act  is  susceptible  of  no  other 
construction  in  this  regard,  than  that  the  legislature  intended  to  waive 
an}'  forfeiture  consequent  on  the  prior  omissions  of  the  corporation. 
If  they  had  intended  to  insist  on  any  forfeiture,  the  act  certainly  would 
not  have  been  made.  The  act  was  intended  to  be  beneficial  to  the  cor- 
poration. But  it  would  not  have  been  so  unless  they  retained  the  other 
corporate  powers  necessar}^  to  enable  them  to  carr}^  into  effect  the  pur- 
poses of  the  act.  We  are,  therefore,  of  opinion  that  the  rejoinder  is  a 
sufficient  answer  to  the  replication,  and  that  upon  the  demurrer  there 
must  be  Judgment  for  the  defendants} 


STATE  V.  OBERLIN  BUILDING  AND  LOAN  ASSOCIATION. 

1879.     35  Ohio  State,  258.^ 

Quo  Warranto.  Information  filed  by  the  Attornej'  General,  on  the 
relation  of  Colburn,  praying  for  a  judgment  of  ouster  against  the 
defendant  corporation.  Colburn  is  a  member  of  the  corporation,  and 
was  former!}'  a  director.  The  case  was  heard  on  the  pleadings,  an 
agreed  statement  of  facts,  and  certain  testimony. 

Isaiah  Pillars,  Attorney  General,  and  N.  L.  Johnson,  for  plaintiff 

I.  A.  'Webster,  and  Geo.  K.  Nash,  for  defendant. 

1  The  governor  and  senate,  without  the  concurrence  of  the  assembly,  have  no  power  to 
waive  a  forfeiture.  Bronson,  J.,  in  People  v.  Phtenix  Bank,  A.  d.  3840,  24  Wendell,  431, 
p.  43-3. 

As  to  whether  lapse  of  time  constitutes  a  bar  to  a  proceeding  by  the  State  to  enforce  a 
forfeiture,  or  to  test  the  legality  of  assumed  corporate  existence,  see  2  Morawetz  on  Corp., 
•2d  ed.  s.  1029,  note  2;  Taylor  on  Corp.,  3d  ed.  s.  4G0;  State  v.  Pawtuxet  Turnpike  Co.,  A.  D. 
18f;7  8  Rhode  Island,  521;  People  v.  Oakland  County  Bank,  A.  n.  1844,  1  Douglas,  Mich. 
282;  Com.  v.  Bala,  ^c,  Co.,  A.  u.  1893,  153  I'a.  State,  47;  State  v.  Janesville  Water  Power 
Co.,  A.  D.  1896,  92  Wise.  490;  Peojde  v.  Reclamation  District,  a.  d.  1898,  121  Calif.  522. 
-Ed. 

'^  Statement  abridged.     Part  of  opinion  omitted.  —  Ed. 


STATE   V.   OBEELIN   BUILDING   AND   LOAN  ASSOCIATION.  703 

Oket,  J.  [After  quoting  various  sections  of  the  act  under  which 
the  corporation  was  organized,  and  stating  certain  facts  as  to  the  con- 
duct of  the  corporation.] 

On  this  state  of  facts  our  conclusions  are  as  follows  :  — 

1.  That  the  association  has  abused  its  corporate  powers  in  several 
particulars,  admits  of  no  doubt.  It  has  refused  to  loan  its  funds  to  its 
members,  and  it  has  established  such  rules  and  regulations,  and  so 
conducted  its  business  by  dividing  its  funds  and  otherwise,  as  to  pre- 
vent the  loan  of  its  funds  to  a  member,  under  the  system  of  competi- 
tive bidding  contemplated  in  the  statute,  and  provided  for  in  the 
bj'-laws  of  the  company.  It  has,  indeed,  loaned  its  funds,  in  many 
instances,  to  persons  who  were  not  members  of  the  association.  The 
illegality  of  such  a  course  is  clearly  stated  in  /State  ex  rel.  v.  Greenville 
Building  and  Saving  Association,  29  Ohio  St.  92. 

Again,  the  association  has  been  in  the  habit  of  borrowing  money  for 
the  purpose  of  lending  it.  We  do  not  deny  that  corporations  possess 
the  power  to  borrow  money  which  may  be  needed  in  the  transaction  of 
their  necessary  business  ;  but  these  transactions  fall  within  no  such 
principle.  The  monej'  to  be  loaned  b}'  associations  like  this  if,  as  here, 
deposits  are  not  received,  can  onl}'  be  properly  accumulated  in  the 
manner  contemplated  by  the  statute,  that  is  by  dues,  fines,  premiums, 
and  interest ;  and  the  acts  complained  of,  and  fully  proved  by  the  tes- 
timon}-,  cannot  be  readil}-  distinguished  from  the  business  of  a  banker, 
They  are  clearly  illegal. 

Equally  illegal  was  the  act  of  dividing  the  money  and  securities 
among  certain  stockholders.  It  was  opposed  to  the  principle  upon 
which  such  associations  are  organized.  It  was,  indeed,  even  if  it  had 
been  done  with  perfect  impartiality,  a  plain  violation  of  the  statute, 
which  contemplates  that  no  such  division  shall  be  made  until  "  said 
shares  are  full}*  paid." 

Finall}',  it  was  illegal  for  the  association  to  traffic  in  shares  of  its  own 
stock.  We  do  not  deny  that  a  corporation  has  power  to  receive  shares 
of  its  stock  as  security  for  a  debt  or  other  similar  purpose  ;  but  here 
the  association  purchased  its  own  shares  of  stock,  in  several  instances, 
for  the  purpose  of  disposing  of  them  to  persons  not  intending  to  become 
members  of  the  association,  with  a  view  of  making  such  shares  the 
basis  of  loans  to  such  persons.  The  law  will  not  uphold  such 
transactions. 

2.  The  association  compromised  with  several  of  its  members,  and 
released  them  from  further  obligation  to  the  corporation,  as  well  on 
account  of  indebtedness  for  loans,  as  on  subscription.  We  have  ex- 
amined the  evidence,  and  we  do  not  find  there  was  any  want  of  good 
faith  in  these  transactions.  The  interest  of  the  stockholders  as  well  as 
the  public,  seems  to  have  been  kept  in  view.  Of  course,  without  this 
such  acts  could  not  be  upheld  ;  but  we  are  not  able  to  find  in  the  statute 
any  inhibition  of  the  power  to  make  such  compromises,  and,  on  the 
fullest  consideration,  we  unite  in  holding  that  the  power  exists. 


704      PEOPLE   EX   EEL.    ATTORNEY   GENERAL   V.   IMPROVEMENT   CO. 


3.  "Where  a  corporation  has  been  guilty  of  acts  which,  by  statute, 
are  made  a  cause  of  forfeiture  of  its  franchise  to  be  a  corporation,  this 
court  has  no  discretion  to  refuse  such  judgment.  /State  ex  rel.  v.  Penn, 
&  0.  Canal  Co.,  23  Ohio  St.  121.  But,  in  other  cases,  we  are 
vested  with  discretion  to'determine  whetlier  judgment  of  ouster  of  the 
franchise  to  be  a  corporation  shall  be  rendered,  or  whether  the  corpora- 
tion shall  be  ousted  from  the  exercise  of  the  powers  illegally  assumed. 
With  some  hesitation,  a  majorit}^  of  the  court  have  reached  the  conclu- 
sion that  it  will  be  for  the  interest  of  the  stockholders,  as  well  as  the 
public,  that  we  should  render  the  latter  instead  of  the  former  judgment. 
The  evidence  satisfies  us  that  if  the  corporation  is  permitted  to  wind  up 
its  affairs,  the  work  will  be  accomplished  in  a  few  months ;  but  if  the 
association  should  be  ousted  from  its  franchise  to  be  a  corporation,  we 
would  be  required  to  appoint  trustees  under  the  act  of  1878  (75  Ohio 
L.  817,  22;  Rev.  Stats.  6781),  and  this  would  occasion  delay  and 
involve  increased  expense.  Accordingl}',  the  corporation  will  be  ousted 
from  the  exercise  of  its  powers  referred  to  in  the  first  paragraph  of  the 
syllabus,  and  from  the  power  of  permitting  an}^  member  to  hold  in  his 
own  right  more  than  twenty  shares  of  stock,  but  not  from  its  franchise 
to  be  a  corporation,  nor  from  the  exercise  of  the  power  referred  to  in 
the  second  paragraph  of  the  syllabus. 

GiLMORE,  C.  J.  I  dissent  only  as  to  the  judgment  entered.  Such 
flagrant  and  persistent  violations  of  corporate  powers  and  duties  as  are 
shown  in  this  case,  in  my  opinion,  call  for  and  require  an  application 
of  the  severest  penalties  of  the  law.  The  judgment  should  oust  the 
defendant /rom  being  a  corporation. 

jJJ^  J.J-^ — judgment  of  ouster  as  to  sj)ecified  powers. 


IaT^      ^ 


PEOPLE  EX  REL.  ATTORNEY   GENERAL  v.  KANKAKEE 
RIVER  IMPROVEMENT   CO. 

1882.      103 ///inois,  491.1 

Information  in  the  nature  of  a  quo  warranto  ;  alleging  that  defend- 
ant, without  any  warrant,  was  exercising  the  power  of  controlling  the 
navigation  of  the  Kankakee  and  Iroquois  Rivers,  and  collecting  tolls, 
and  requiring  the  company  to  show  cause  by  what  warrant  it  claimed 
to  exercise  such  powers. 

To  this  information  the  defendant  filed  a  plea,  which  was  demurred 
to.  The  Circuit  Court  overruled  the  demurrer,  and  gave  judgment  for 
defendant,  dismissing  the  information.     Plaintiff  appealed. 

The  facts  set  out  in  the  plea  were  in  part  as  follows :  — 

In  1847,  an  act  was  passed  incorporating  the  Kankakee  and  Iroquois 
Navigation  Company,  with  power  to  improve  the  navigation  of  both 
*  Statement  abridged.     Arguments  and  part  of  opinion  omitted.  —  Ed. 


PEOPLE   EX   EEL.    ATTORNEY   GENERAL   V.    LMPROYEMENT   CO.      705 

rivers  from  certain  points  up  to  the  Indiana  State  line.  No  time  was 
prescribed  for  completing  any  part  of  tlie  improvements.  Prior  to 
1865  improvements  on  a  part  of  the  Kankakee  river  had  been  made 
and  used.  In  1865  an  amendatory  act  was  passed,  and  was  accepted 
by  the  corporation.  Section  6  of  this  act  provides  that  "  said  company 
shall  lock  and  slack-water  said  Kankakee  river  from  Kankakee  Citv  to 
the  east  line  of  the  State  of  Illinois,  within  eight  years  from  the  pass- 
age of  this  act,  .  .  ."  The  plea  admits  that  the  improvement  from 
Kankakee  City  to  the  east  line  of  the  State  of  Illinois  has  not  been 
commenced,  and  is  no  longer  in  contemplation  by  the  defendant.  The 
defendant  corporation  was  formed  about  1879  b}-  persons  who  had 
purchased  at  a  mortgage  foreclosure  sale  the  franchise,  improvement, 
and  real  estate  of  the  original  corporation. 

James  McCartney^  Attorney  General,  for  the  people. 

G.  D.  A.  Parks,  for  appellee. 

Sheldon,  J. 

We  can  see  here  but  one  entire  franchise  for  the  improvement  of 
these  streams,  and  that  this  obligation  to  make  the  improvement  above 
Kankakee  City  was  a  condition  annexed  to  this  entire  franchise.  And 
we  can  not  admit  the  idea,  so  ably  and  ingeniously  pressed  upon  us,  of 
the  divisibility  of  the  franchise,  that  there  became  a  separate,  independ- 
ent franchise  as  to  the  completed  portion  of  the  improvement  below 
Wilmington,  and  a  like  one  as  to  the  portion  of  the  improvement  above 
Kankakee  City,  to  which  latter  only  the  condition  was  annexed,  and 
that  it  was  the  franchise  as  to  this  last  named  portion  of  the  improve- 
ment onl}'  which  was  forfeitable  for  breach  of  the  condition.  We  think 
the  non-compliance  with  tiie  requirement  in  question  was  cause  of  for- 
feiture of  the  entire  franchise.  An  abuse  in  a  particular  department 
of  an  entire  franchise  is  cause  of  forfeiture  of  the  whole  franchise. 
Angell  &  Ames  on  Corp.  sec.  776. 

The  hardship  upon  the  company  of  enforcing  a  forfeiture  is  urged  as 
a  reason  against  applying  this  remedy.  This  is  the  common  argument 
addressed  to  courts  in  these  cases,  and  the  answer  the}'  make  is,  that 
the  appeal  is  made  to  the  wrong  forum,  —  that  this  is  a  question  for  the 
legislature  that  prescribed  the  requirements  of  the  charter.  The  courts 
have  no  dispensing  power  ;  that  the  only  questions  for  a  court  in  such 
cases  are,  is  the  act  required,  and  has  it  been  performed.  Yielding  to 
such  considerations  of  hardships  would  be  a  doing  away  with  the  estab- 
lished legal  remedy  of  forfeiture  for  the  breach  of  conditions  annexed 
to  estates.  Inconvenience  is  the  necessary  result  of  the  application  of 
such  a  remedy.  It  is  held  to  be  most  important  to  the  public  interest 
that  the  grantees  of  public  franchises  should  be  held  to  a  faithful  per- 
formance of  the  obligations  which  they  assume,  and  to  secure  this, 
courts  must  administer  the  prescribed  remedy  in  case  of  failure. 

Lastly,  the  court  is  invoked  to  exercise  its  discretionary  power  uuder 
the  statute,  and  only  assess  a  fine,  the  statute  providing  that  instead  of 


706  WHEELER  V.    PULLMAN   IRON   AND   STEEL   CO. 

judgiJient  of  ouster  from  a  franchise  for  an  abuse  thereof,  unless  the 
court  is  of  the  opinioji  that  the  public  good  demands  such  judgment,  a 
fine  may  be  assessed  instead.  Had  there  been  but  the  omission  of  some 
dut}'  of  minor  importance,  the  alternative  of  a  fine  might  properly  be 
considered  ;  but  the  non-performance  here  is  of  a  thing  which  is  of  the 
essence  of  the  contract,  —  it  goes  to  the  object  of  the  incorporation, 
not  doing  the  very  thing  the  performance  of  which  was  the  purpose  and 
object  for  which  the  company  was  instituted.  It  is  failure  by  the  cor- 
poration to  act  up  to  the  end  of  its  creation.  The  demand  of  public 
good  is  nothing  less  than  that  there  should  be  a  resumption  by  the 
State  of  the  corporate  franchise  of  which  there  has  been  such  misuser,  — 
that  the  company  should  be  made  to  give  wa}',  so  as  to  afford  oppor- 
tunit}',  through  some  other  instrumentality,  for  the  accomplishment  of 
this  work  of  public  advantage,  the  improvement  of  the  navigation  of 
these  two  rivers,  or  at  least  of  the  Kankakee,  to  the  Indiana  State  line. 

Being  of  opinion  the  demurrer  to  the  plea  should  have  been  sustained, 
the  judgment  of  the  Circuit  Court  is  reversed  and  the  cause  remanded. 

Judgment  reversed. 


WHEELER  V.  PUXLMAN   IRON    &   STEEL   CO. 

1892.     143  Illinois,  197.1 

Bill  in  equity  by  two  stockholders  in  the  Pullman  Iron  &  Steel 
Co.  against  said  company  and  certain  other  defendants  ;  praying  (inter 
alia)  that  the  corporation  be  dissolved  and  its  business  closed  up ;  that 
a  receiver  be  appointed ;  and  that  an  accounting  be  had  between  the 
parties  growing  out  of  matters  stated  in  the  bill.  A  demurrer  to  the 
bill  was  sustained  and  the  bill  dismissed.  On  appeal  to  the  Appellate 
Court  tills  decree  was  aflSrmed.  Plaintiffs  now  prosecute  this  further 
appeal. 

Ullman  &  Hacker^  for  appellants. 

John  S.  Runnells^  and  'William  Burry,  for  appellees. 

SnoPE,  J.  Without  pausing  to  consider  the  ground  of  objection 
that  the  bill  is  multifarious,  we  are  of  opinion  that  the  demurrer  thereto 
was,  on  other  grounds,  properly  sustained,  and  complainants  electing  to 
stand  b}'  their  bill,  it  was  properly  dismissed. 

It  is  insisted  that  the  bill  may  be  maintained  upon  either  of  two 
grounds  :  First,  as  a  bill  to  dissolve  the  corporation,  wind  up  its  affairs, 
and  distribute  its  assets ;  and  second,  as  a  bill  for  an  accounting  be- 
tween this  corporation  and  the  Pullman  Palace  Car  Company  and  other 
creditors. 

In  the  absence  of  statutory  authority,  courts  of  chancery  had  no 
jurisdiction  to  decree  a  dissolution  of  a  corporation  by  declaring  a  for- 
1  Statement  abridged.    Arguments  and  part  of  opinion  omitted.  —  Ed. 


WHEELER  V.  PULLMAN   IRON   AND   STEEL   CO.  ,707 

feitiire  of  its  franchise,  either  at  the  suit  of  an  individual  or  of  the 
State.  Verplanck  v.  Merchants'  Ins.  Co.  1  Edw.  Ch.  84  ;  Doyle  v. 
Peerless  Petroleum  Co.  44  Barb.  239  ;  Folger  v.  Columbian  Ins.  Co. 
99  Mass.  274;  Attorney  OeyieralY.  Bank  of  Niagara,  1  Hopk.  354; 
Benike  v.  Neto  York,  etc.  80  N.  Y.  605.  The  mode  of  enforcing  a 
forfeiture  of  the  charter  at  common  law  was  b}'  scire  facias  or  quo 
warranto  in  courts  of  law  only,  and  at  the  suit,  onlj-,  of  the  sovereign. 
The  judgment  in  such  cases,  at  law,  relates  solelj-  to  the  right  to  exer- 
cise the  corporate  franchise,  and  operates  to  extinguish  corporate  ex- 
istence. In  respect  of  trade  corporations,  independentl}-  of  statutory 
provision,  and  notwithstanding  the  dissolution  of  the  corporation,  its 
assets  belong  to  those  who  contributed  to  its  capital  and  for  whom  it 
stood  as  representative  in  the  business  in  which  it  was  engaged,  and 
are  treated  in  equit}'  as  a  trust  fund,  to  be  administered  for  the  benefit 
of  the  bona  fide  holders  of  stock,  subject  to  the  just  claims  of  creditors 
of  the  corporation.     Morawetz  on  Corporations,  1032,  and  cases  cited. 

The  necessit}'  for  invoking  the  aid  of  a  court  of  equity  after  judg- 
ment of  forfeiture  at  law,  that  court  alone  being  competent  to  reach 
and  administer  tlie  fund,  has  led  to  statutory  enactments  vesting  courts 
of  equity  with  jurisdiction  to  decree  a  dissolution  of  the  corporation 
and  to  wind  up  its  affairs,  in  given  cases,  at  the  suit  of  an  individual 
beneficiary  of  the  fund.  The  power  to  confer  such  jurisdiction  b}'  stat- 
ute, as  one  of  the  powers  over  corporations  reserved  by  the  State,  has 
been  uniforml}^  recognized,  and  nowhere  more  clearh*  than  in  this  State, 
(  Ward  V.  Faricell  et  al.  97  111.  593  ;  Chicago  Mutual  Life  hidemnity 
Ass.  V.  Hunt.,  127  id.  257,)  and  whenever  the  power  of  the  court  of 
chanceiy  has  been  properl}'  invoked  the  jurisdiction  has  been  sus- 
tained. Life  Ass.  of  America  v.  Fassett,  102  111.  315  ;  Chicago  Life 
Ins.  Go.  V.  I'he  Auditor,  101  id.  82  ;  Mining  Co.  v.  Mining  Co.  116 
id.  170,  and  cases  supra. 

By  the  25th  section  of  the  statute  for  the  incorporation  of  companies 
for  pecuniary  profit,  being  the  only  section  applicable  here,  it  is  pro- 
vided :  "  If  any  corporation,  or  its  authorized  agents,  shall  do  or  re- 
frain from  doing  any  act  which  shall  subject  it  to  a  forfeiture  of  its 
charter  or  corporate  powers,  or  shall  allow  any  execution  or  decree  of 
any  court  of  record  for  the  payment  of  money,  after  dem.and  made  by 
the  officer,  to  be  returned,  '  no  property  found,'  or  to  remain  unsatis- 
fied not  less  than  ten  days  after  such  demand,  or  shall  dissolve  or 
cease  doing  business,  leaving  debts  unpaid,  suits  in  equit}'  may  be 
brought  against  all  persons  who  were  stockholders  at  the  time,  or  in 
any  way  liable  for  the  debts  of  the  corporation,  by  joining  the  corpora- 
tion in  such  suits,"  etc.  And  after  providing  for  jyro  rata  liability  of 
stockholders  upon  unpaid  subscriptions,  etc.,  and  for  enforcing  the 
same,  proceeds  :  "  And  courts  of  equity  shall  have  full  power,  on  good 
cause  shown,  to  dissolve  or  close  up  the  business  of  any  corporation,  to 
appoint  a  receiver  therefor,"  with  authorit}-  to  wind  up  its  alTairs. 

It  is  not  pretended  that  the  facts  alleged  bring  the  bill  within  the 


?08  WHEELER   V.    PULLMAN   IRON   AND   STEEL   CO. 

provisions  of  the  clause  of  the  statute  first  quoted.     It  is  not  alleged, 
nor  are  facts  set  forth  showing,  that  any  of  the  causes  exist  for  which 
hills  in  equit}'  are  b}-  this  statute  authorized  to  be  filed.     The  bilHn- 
vokes,  not  the ^^ower^onferredLby  the  statute,  but_the.generai chancery 
powers  of  the  court.     But  it  is  said,  in  effect,  that  as  the  second  clause 
of  the  statute  quoted  gives  courts  of  equity  power  to  decree  the  disso- 
lution of  a  corporation  "on  good  cause  shown,"  it  ma}- exercise  that 
jurisdiction  whenever  the  interests  of  the  stockholders,  or  any  of  them, 
in  equity  and  good  conscience  demand  it.     We  do  not  think  the  statute 
capable  of  that  construction.     It  is  clear  that  the  purpose  of  the  pro- 
vision was  to  enable  the  court,  in  all  cases  in  which  the  jurisdiction  of 
the  court  was  properly  invoked  under  the  statute,  to  afford  complete 
relief.     By  the  first  clause  a  remedy  is  provided  by  which  the  assets  of 
the  corporation,  in  the  cases  enumerated  in  the  statute,  may  be  applied 
in  payment  of  its  liabilities,  and  if  insufficient  therefor,  that  subscribers 
for  and  holders  of  unpaid  stock  of  the  corporation  may  be  compelled  to 
contribute  to  the  payment  of  any  balance  of  corporate  indebtedness 
after  the  application  of  the  corporate  effects,  without  first  procuring 
a  judgment  of  forfeiture  at  law.     No  judgment  forfeiting  the  charter  of 
the  corporation  is  necessary  to  authorize  the  court  to  afford  this  relief, 
but  by  the  later  provision  the  court  may,  in  cases  where  cause  of  for- 
feiture exists,  declare  the  same,  and  b}'  its  decree  dissolve  the  corpora- 
tion, and  through  its  receiver  administer  and  distribute  the  corporate 
estate,   thus  making  the  remedy  in  equity,   in  such  cases,  complete. 
(St.  Zouis,  etc.  Mining  Co.  v.  Mining  Co.  116  III.  170;  Ailing  v. 
Wenzel,  133  id.  264.)     As  said  by  this  court,  in  construing  this  pro- 
vision of  the  statute,  in  Chicago  Mutual  Life  Ins.  Co.  v.  Hunt.,  127 
111.  274  :  "  Courts  of  equity  are  given  full  power,  on  good  cause  shown, 
as  a  portion  of  the  relief  provided  for  by  that  section,  to  dissolve  or 
close  up  the  business  of  the  corporation  and  to  appoint  a  receiver  of 
its  effects."     We  are  of  opinion  that  it  is  only  •'  as  a  portion  of  the 
relief  provided  for  by  that  section  "  that  the  power  to  dissolve  the  cor- 
poration can  be  invoked.     Moreover,  "  good  cause  "  for  dissolving  the 
corporation  would  necessarily  be  a  legal  cause,  —  a  cause  for  which  the 
sovereign  authority  might  by  law,  resume  the  franchise  granted.     It 
can  not  be  presumed  that  the  legislature  intended,  by  the  use  of  the 
language  here  employed,  to  authorize  a  decree  forfeiting  the  corporate 
franchise  for  causes  for  which  the  State  might  not  procure  judgment  of 
forfeiture  at  law.     The  bill  is  not  maintainable  upon  this  ground. 
[Remainder  of  opinion  omitted.] 

Judgment  affirmed. 


ATTORNEY   GENERAL  V.   TUDOR   ICE   CO.  709 

ATTORNEY  GENERAL  v.  TUDOR  ICE  CO. 

1870.     104  Mass.  239. 

Information  in  equity  by  the  attorney  general,  on  behalf  of  the 
Commonwealth,  and  at  the  relation  of  Richard  Price,  to  restrain  the 
defendants  from  engaging  in  or  carrying  on  any  business  other  than 
the  cutting,  storing  and  selling  of  ice.  Hearing,  on  a  motion  for  an 
injunction,  before  the  chief  justice,  who  reported  the  case  as  follows: 

"The  compan}'  was  organized  in  1861,  under  the  Gen.  Sts.  c.  61, 
for  the  purpose  of  cutting,  storing  and  selling  ice.  Its  capital  stock 
was  fixed  at  $360,000.  It  has  carried  on  this  business  ever  since,  but 
has  also  carried  on  various  other  branches  of  business  ;  has  been  in  the 
habit  of  chartering  vessels  for  the  East  Indies,  loading  them  with  ice 
so  far  as  was  proper,  and  completing  the  cargo  by  purchasing  and 
exporting  kerosene  oil,  tobacco,  rosin  and  lumber ;  and  has  also  im- 
ported merchandise  of  various  kinds,  including  padd}',  jute,  linseed  and 
tea.  It  has  also  erected  buildings,  and  placed  machinery  in  them, 
which  cost  about  S400,000.  Some  of  the  machinery  is  for  the  manu- 
facture of  tobacco,  but  the  manufacture  was  discontinued  about  two 
jears  ago.  Some  of  it  is  for  cleaning  rice,  some  for  the  manufacture 
of  jute  into  gunn}'  cloth,  and  some  for  the  manufacture  of  linseed  into 
oil.  These  branches  of  business  it  still  carries  on,  and  the  capital 
invested  in  them  is  three  or  four  times  larger  than  its  capital  stock. 
The  business  is  connected  with  the  exportation  of  ice,  and  has  increased 
the  profits  of  the  company,  but  does  not  appear  to  be  necessary  to  its 
legitimate  business.  It  has  imported  two  cargoes  of  tea,  worth  8300,000, 
which  had  no  connection  with  the  ice  trade.  It  does  not  appear  that 
any  of  the  creditors  of  the  company  are  in  danger  of  losing  by  it,  and 
there  is  no  objection  to  its  proceedings,  except  that  they  are  not 
authorized  by  its  act  of  incorporation  and  are  alleged  to  be  against 
public  policy  for  that  reason.  I  report  the  case  for  determination  upon 
the  questions,  whether  this  information  in  equity  can  be  maintained, 
and,  if  it  can  be  maintained,  whether  a  temporary  injunction  ought  to 
be  issued,  upon  the  facts  above  stated." 

/S.  Bartlett^  for  the  Attorney  General. 

C.  B.  Goodrich  &  H.  W.  Paine.,  for  the  defendants. 

Gray,  J.  This  court,  sitting  in  equit}',  does  not  administer  punish- 
ment or  enforce  forfeitures  for  transgressions  of  law  ;  but  its  jurisdiction 
is  limited  to  the  protection  of  civil  rights,  and  to  cases  in  which  full 
and  adequate  relief  cannot  be  had  on  the  common  law  side  of  this  court 
or  of  the  other  courts  of  the  Commonwealth. 

The  Tudor  Ice  Company  is  a  private  trading  corporation.  It  is  not 
in  any  sense  a  trustee  for  public  purfDOscs.  This  is  not  a  suit  b}'  a 
stockholder  or  a  creditor.  The  acts  complained  of  are  not  shown  to 
have  injured  or  endangered  any  rights  of  the  public,  or  of  any  individual 


710  ATTORNEY  GENERAL  V.    TUDOR  ICE  CO. 

or  other  corporation  ;  and  cannot,  upon  any  legal  construction,  be  held 
to  constitute  a  nuisance.  It  is  expressly  stated,  in  the  report  of  the 
chief  justice,  that  "  it  does  not  appear  that  an}-  of  the  creditors  of  the 
company-  are  in  danger  of  losing  b}-  it,  and  there  is  no  objection  to  its 
proceedings,  except  that  the}^  are  not  authorized  b}-  its  act  of  incor- 
poration and  are  alleged  to  be  against  public  polic}'  for  that  reason." 
No  case  is  therefore  made,  upon  which,  according  to  the  principles  of 
equity  jurisprudence  and  the  practice  of  this  court,  an  injunction  should 
be  issued  upon  an  information  in  chancery. 

In  Attorney  General  v,  Utica  Insurance  Co.  2  Johns.  Ch.  371, 
Chancellor  Kent,  in  a  very  able  and  elaborate  judgment,  after  a 
thorough  discussion  of  the  question  on  principle,  and  an  extensive 
examination  of  the  earlier  authorities,  held  that  such  an  information 
could  not  be  maintained  to  restrain  an  insurance  company  from  exer- 
cising banking  powers  in  violation  of  a  statute  of  New  York  ;  but  that 
the  proper  remedy  was  at  law,  b}-  information  in  the  nature  of  a  quo 
vKirranto  ;  and  no  appeal  appears  to  have  been  taken  from  his  decree. 
An  information  in  the  nature  of  a  quo  vmrranto  was  thereupon  filed, 
and  sustained  by  the  supreme  court  of  New  York,  and  judgment 
rendered  thereon  that  the  corporation  be  ousted  from  the  franchise 
which  it  had  usurped.  People  v.  TJtica  Insxirance  Co.  15  Johns.  358. 
Similar  proceedings  ma}'  be  had  at  law  in  this  Commonwealth  in  a 
proper  case.  Goddard  v.  Smithett,  3  Gray,  116,  122,  123.  Attorney 
General  v.  Salem,  103  Mass.  138.  Boston  S  Providence  Railroad 
Co.  V.  Midland  Railroad  Co..,  1  Gray,  340.  Gen.  Sts.  c.  145, 
§§  16-24. 

One  early  English  case  of  high  authority,  not  cited  by  Chancellor 
Kent,  nor  at  the  argument  of  the  present  case,  is  so  much  in  point  as 
to  be  worth  quoting  in  full.  Upon  a  bill  in  equity,  filed  by  the  attorne}' 
general,  at  the  relation  of  several  freemen  of  the  Weavers'  Compan}-, 
against  the  oflScers  of  that  company,  setting  forth  "  that  the  defendants 
had  been  guilty  of  many  breaches  and  violations  of  their  charters,  and 
had  oppressed  the  freemen,  &c.,  and  mentioned  some  particulars ;  and 
for  a  discovery  of  the  rest,  and  that  they  might  be  decreed  for  the 
future  to  observe  the  charters,  and  to  have  an  account  of  the  revenue 
of  the  corporation  which  the  defendants  had  misspent,  &c.,  was  the 
end  of  the  bill.  To  which  the  defendants  demurred,  because,  as  to 
part  of  the  bill,  it  was  to  subject  them  to  prosecutions  at  law,  and  to  a 
quo  warranto  ;  and  as  to  the  other  parts,  the  plaintiffs  had  remedy  by 
mandamus.,  information,  or  otherwise,  and  not  here.  And  of  the  same 
opinion,"  the  report  proceeds,  was  Lord  Cowper,  "  who  said  it  would 
usurp  too  much  on  the  king's  bench ;  and  that  he  never  heard  of  any 
precedent  for  such  a  case  as  this  ;  and  so  allowed  the  demurrer." 
Attorney  General^.  Reynolds,  1  Eq.  Cas.  Ab.  (3d  ed.)  131. 

The  modern  English  cases,  cited  in  support  of  this  information, 
were  of  suits  against  public  bodies  or  olliccrs  exceeding  the  powers 
conferred  upon  them  by  law,  or  against  corporations  vested  with  the 


ATTORNEY  GENERAL  V.   TUDOR  ICE  CO.  711 

power  of  eminent  domain  and  doing  acts  which  were  deemed  incon- 
sistent with  rights  of  the  public. 

Some  of  them  were  cases  of  misapplication  of  funds  raised  b}'  taxation 
and  held  by  municipal  corporations  or  officers  upon  specific  public 
trusts.  Such  were  Attorney  General  \.  JVbrivich,  16  Sim.  225,  Attor* 
ney  General  v.  Guardians  of  Poor  of  Southam^pton^  17  Sim.  6,  and 
Attorney  General  v.  Andrews,  2  Macn.  &  Gord.  225. 

The  hypothetical  case,  in  which  Lord  Westbur}',  in  Stockport  District 
Watent:ork-s  v.  Manchester^  9  Jur.  (N,  S.)  266,  said  that  he  should 
"probably'  not  hesitate"  to  act  upon  the  information  of  the  attorney 
general,  was  of  a  suit  to  restrain  the  making  of  a  contract  between  an 
aqueduct  corporation  and  a  cit}-  to  carry  water  beyond  the  limits  which 
the  city  was  authorized  hs  law  to  supply. 

The  passages  cited  from  Liverpool  v.  Chorley  Water  Works  Co.  2 
De  Gex,  Macn.  &  Gord.  852,  860,  and  Ware  v.  Eegenfs  Canal  Co.  3 
De  Gex  &  Jones,  212,  228,  were  but  dicta  that  an  unauthorized 
diversion  of  water  or  flowing  of  land  hy  an  aqueduct  or  canal  corpora- 
tion, without  proof  of  actual  or  imminent  injury  to  property,  gave  no 
right  of  suit  to  an  individual,  and  could  only  be  checked  on  an 
application  to  the  court  by  the  attorne}^  general. 

The  case  of  Attorney  General  v.  Great  Northern  RaUicay  Co. 
4  De  Gex  &  Smale,  75,  was  a  clear  case  of  nuisance,  the  unlawful 
obstruction  of  a  public  highway  by  a  railroad.  That  of  Attorney 
General  v.  Oxford,  Worcester  &  Wolverhampton  Railway  Co.  2 
Weekly  Rep.  330,  was  the  case  of  the  opening  of  a  railwa3'  line  in 
violation  of  an  order  which  an  authorized  public  board  had  made  upon 
the  ground  that  it  would  be  unsafe  to  the  pubhc. 

The  single  case,  in  which  an  information  has  been  sustained  in  an 
English  court  of  chancer}-  against  a  corporation  for  carrying  on  a 
business  beyond  its  corporate  powers,  is  Attorney  General  v.  Great 
Northern  Baihcay  Co.  1  Drewr}^  &  Smale,  154,  in  which  Vice  Chan- 
cellor Kindersley  in  1860  restrained  a  railway  compan}'  from  trading 
in  coal  in  large  quantities,  upon  the  ground  that  there  was  danger  that, 
if  allowed  to  go  on,  it  might  get  into  its  hands  the  coal  trade  of  the 
whole  district  from  or  through  which  its  railwa}'  ran,  and  thus  acquire 
a  monopoly  injurious  to  the  public.  That  case  is  evidently'  the  founda- 
tion of  the  dictum  of  Vice  Chancellor  Wood,  two  years  later,  in  Hare 
V.  London  c6  Northwestern  Railway  Co.  2  Johns.  &.  Hem.  SO,  111. 

In  Attorney  General  v.  Mid  Kent  Railway  Co.  Law  Rep.  3  Ch. 
100,  a  mandatory  injunction  was  granted  upon  the  information  of  the 
attorney  general  to  compel  a  railway  compan}-  to  construct  a  bridge 
over  a  public  road,  and  with  as  gradual  a  slope  as  was  required  bv  a 
special  clause  in  its  charter  ;  and  the  objection  that  the  attorney  general 
might  have  had  an  equal  and  complete  remedy  at  law  was  stated  b}'  each 
of  the  lords  justices  as  if  it  required  no  answer  and  aiforded  no  ground 
for  refusing  to  entertain  jurisdiction  in  equit}'.  It  is  often  said,  in  the 
English  books,  that  the  king  or  his  attorncj-  general,  suing  in  behalf  of 


712  ATTOENEY   GENERAL  V.    TUDOR   ICE   CO. 

the  public,  has  the  election  to  sue  in  either  of  his  courts,  and  may 
therefore  enforce  a  legal  right  in  the  court  of  chancery.  1  Dan.  Ch. 
Pract.  (3d  Am.  ed.)  6,  7.  Attorney  General  v.  Galioay,  1  Molloy,  9.5, 
103.  However  that  m&y  be,  by  our  statutes  the  general  equity  juris- 
diction of  this  court  is  limited  to  cases  where  there  is  no  plain,  adequate 
and  complete  remedy  at  law,  as  well  in  suits  by  the  Commonwealth 
as  in  those  brought  by  private  persons.  Gen.  Sts.  c.  113,  §  2.  Com- 
momcealth  v.  Smithy  10  Allen,  448.  Clouston  v.  Shearer,  99  Mass. 
209,  211,  and  other  cases  there  cited.  The  38th  of  the  former  rules  in 
chancery  of  this  court  (14  Gra^',  360)  by  which  the  court  adopted,  as 
the  outlines  of  its  practice,  the  practice  of  the  high  court  of  chancery 
in  England,  so  far  as  the  same  was  not  repugnant  to  the  Constitution 
and  laws  of  the  Commonwealth,  nor  to  those  or  such  other  rules  as  the 
court  might  from  time  to  time  make,  cannot  enlarge  the  jurisdiction  of 
this  court  as  defined  hy  statute,  and  has  been  repealed  by  the  new  rules 
recently  established.     Rules  of  \S1Q,  post,  555. 

The  only  cases  in  which  informations  in  equity  in  the  name  of  the 
attorney  general  have  been  sustained  b}'  this  court  are  of  two  classes. 
The  one  is  of  public  nuisances,  which  affect  or  endanger  the  public 
safety  or  convenience,  and  require  immediate  judicial  interposition, 
like  obstructions  of  highways  or  navigable  waters.  District  Attorney 
V.  Lynyi  <&  Bostoji  Bailroad  Co.  16  Gray,  242.  Attorney  General  v. 
Cambridge,  lb.  247.  Attorney  General  v.  Boston  Wharf  Co.  12 
Gray,  553.  Rowe  v.  Granite  Bridge  Co.  21  Pick.  344,  347.  The 
other  is  of  trusts  for  charitable  purposes,  where  the  beneficiaries  are 
so  numerous  and  indefinite  that  the  breach  of  trust  cannot  be  eflfectivel}' 
redressed  except  by  suit  in  behalf  of  the  public.  County  Attorney  v. 
May,  5  Cush.  336.  Jackson  v.  Phillips,  14  Allen,  539,  579.  Attor- 
ney General  v.  Garrison,  101  Mass.  223.  Gen.  Sts.  c.  14,  §  20.  If 
there  are  anj'  other  cases  to  which  this  form  of  remedy-  is  appropriate, 
that  of  a  private  trading  corporation,  whose  proceedings  are  not  shown 
to  have  injured  or  endangered  anj'  public  or  private  rights,  and  are 
objected  to  solel}'  upon  the  ground  that  they  are  not  authorized  by  its 
act  of  incorporation  and  are  therefore  against  public  policy,  is  not  one 
of  them.  Information  dismissed. 

1  But  see  Ryan,  C.  J.,  in  Attorney  General  v.  R.  R.  Companies,  a.  d.  1874,  35  Wisconsin, 
425,  pp.  523-550;  and  McGill,  Cliancellor,  in  Stockton,  Attorney  General,  v.  Central  R.  R. 
Co.  of  New  .Jersey,  a.  d.  1892,  50  New  Jersey  Kquity,  52,  pp.  78-85.  In  the  first  case  there 
was  a  petition  for  an  injunction  to  restrain  the  railroad  companies  from  charging  tolls  in 
excess  of  the  maximum  rates  established  by  statute.  In  the  second  case  the  ultimate  object 
was  to  obtain  a  decree,  declaring  void  a  lease  which  was  ultra  vires  and  positively  for- 
bidden by  law,  and  the  practical  effect  of  which  was  to  partially  destroy  competition  in 
the  production  and  sale  of  coal.  The  purpose  of  the  immediate  a])i)licatioii  was  to  secure 
a  temporary  injunction.  In  both  cases  it  was  held,  that  the  attorney  general  could  main- 
tain a  proceeding  in  equity.  — Ed. 


PEOPLE  V.    NEW  YORK  CENTRAL,  &c.   R. 


PEOPLE 


1883. 


'A 

NEW  YOKK  CENTRAL,  &^ 

35  New  York  Supreme  Court  (28  Hun),  ,543.1 


li^^ 


''^^ 


yyJ^ 


0^ 


(3 


Appeals  from  orders  of   the  Special    Term,  granting  motions  to>^         J*< 
quash  and  dismiss  the  petitions  and  orders  to  show  cause  of  the  appel'-'yC^^^''^^^ 
lants,  and  denying  the  application  of  the  appellants  for  peremptory      ' 0^  1^0^ 
writs  of  viandamus.  y^'^     tA^T 

Upon  the  facts  set  forth   in  the  petition  and  accompanying  am-  jr^^ 
davits,  an  order  was  made  in  each  of  the  above  entitled  proceedings  ^^^    -^  ^ 
requiring  the  respondent  to  show  cause  "  why  a  peremptory  writ  o^v^'^'^ 
mandamus  to  compel  the  said  corporation  to  exercise  its  franchises, 
and  to  receive  and  transport  freight  upon  such  terms  as  are  reason-/ 
able  and  usual,  and  to  perform  its  duties  as  a  common  carrier"  should 
not  issue  in  each  case. 

Leslie  W.  Russell,  attorney-general,  and  E.  C.  James,  Simon  Sterne, 
and  Daniel  G.  Thompson,  for  the  appellants.  . 

W.  D.  Shipman  and  Boscoe  Conkliiig,  for  the  respondents.  O^  .j^^         . 

Davis,  P.  J.  .  .  .  The  question  presented  by  the  motion  is  one  oil/C*^yf)  '^ 

signal  importance.  It  is  whether  the  people  of  the  State  can  invoke;  J^ 
the  power  of  the  courts  to  compel  the  exercise  by  railroad  corpora 
tions  of  the  most  useful  public  functions  with  which  they  are  clothed 
If  the  people  have  that  right,  there  can  be  no  doubt  that  their  attor- 
ney-general is  the  proper  officer  to  set  it  in  effective  operation  on  thei 
behalf  (1  R.  S.  179,  §  1 ;  Code  of  Civ.  Proc.  §  1993 ;  People  v.  Halsexj, 
37  N.  Y.  344  ;   People  v.  Collins,  19  Wend.  56). 

The  question  involves  a  consideration  of  the  nature  of  this  class  o£     <^ 
corporations,  the  objects  for  which  they  are  created,  the  powers  conU-^    ^   '^ ' 'fj"^^ 
ferred  and  the  duties  imposed  upon  them  by  the  laws  of  their  crea-^/*-'*''^      < 
tion,  and  of  the  State.     As  bodies  corporate,  their  ownership  may  bejo-i^^'' 
and  usually  is  altogether  private,  belonging  wholly  to  the  holders  of  >^,fi-^ 
their  capital  stock  ;  and  their  management  may  be  vested  in  such  offi- 
cers or  agents  as  the  stockholders  and  directors  under  the  provisions 
of  law  may  appoint.     In  this  sense  they  are  to  be  regarded  as  trad-*"^"^^ 
ing  or  private  corporations,  having  in  view  the  profit  or  advantages  of 
the  corporators.     But  these  conditions  are  in  no  just  sense  in  cow^aoX Jj^ 
with  their  obligations  and  duties  to  the  public.     The  objects  of  their      ^.^/.^^ 
creation  are,  from  their  very  nature,  largely  different  from  those  of  ^^ 

ordinary  private  and  trading  corporations.  Railroads  are,  in  every 
essential  quality,  public  highways,  created  for  public  use,  but  per- 
mitted to  be  owned,  controlled,  and  managed  by  private  persons.  Bufc 
for  this  quality  the  railroads  of  the  respondents  could  not  lawfullyl 
exist.  Their  construction  depended  upon  the  exercise  of  the  right  of  j 
eminent  domain,  which  belongs  to  the  State  in  its  corporate  capacity 
alone,  and  cannot  be  conferred,  except  upon  a  "public  use."  The 
1  Portions  of  opinion  omitted.  —  Ed. 


^ 


c 


714  PEOPLE   V.   NEW   YORK   CENTRAL,   &C.   R.  R.  CO. 

State  has  no  power  to  grant  tlie  right  of  eminent  domain  to  any  cor- 
poration or  person  for  other  than  a  public  use.  Every  attempt  to  go 
beyond  that  is  void  by  the  Constitution ;  and  although  the  legislature 
may  determine  what  is  a  necessary  public  use,  it  cannot  by  any  sort 
of  enactment  divest  of  that  character  any  portion  of  the  right  of  emi- 
nent domain  which  it  may  confer.  This  characteristic  of  jDublic  use 
is  in  no  sense  lost  or  diminished  by  the  fact  that  the  use  of  the  i;ail- 
roadby the  corporation  which  constructsj)r  owns  it,  must,  from  its 
nature  be  exclusive.  That  incident  grows  out  of  the  meThodTof^use 
winch  does  not  admit  of  any  enjoyment  in.  common  by  the  public. 
The  general_aiid  popular  use  of  a  railroad  as  a  highway  is  therefore 
handed  over  exclusivelyto  corporate  management  an^control  because 
that  is  for  the  best  and  manifest  advantage  of  the  public.  The  progress 
oFscience^ andTsToll  has  shown  that  highways  may  be  created  for  pub- 
lic use,  of  such  form  and  kind  that  the  best  and  most  advantageous 
enjoyment  by  the  people  can  only  be  secured  through  the  ownership, 
management,  and  control  of  corporate  bodies  created  for  that  purpose, 
and  the  people  of  the  State  are  not  restricted  for  availing  themselves 
of  the  best  modes  for  the  carriage  of  their  persons  and  property. 
There  is  nothing  in  the  Constitution  hostile  to  the  adoption  and  use 
by  the  State  of  any  and  every  newly  developed  form  or  kind  of  travel 
and  traffic,  which  have  a  public  use  for  their  end  and  aim,  and  giving 
to  them  vital  activity  by  the  use  of  the  power  of  eminent  domain. 

When  the  earliest  Constitution  of  our  State  was  adopted,  railroads 
were  unknown.  The  public  highways  of  the  State  were  its  turnpikes, 
ordinary  roads,  and  navigable  waters.  The  exercise  of  eminent 
domain  in  respect  of  them  was  permitted  by  the  Constitution  for 
the  same  reasons  that  adapt  it  now  to  the  greatly  improved  methods 
of  travel  and  transportation  ;  and  in  making  this  adaptation,  there 
is  no  enlarged  sense  given  to  the  language  of  the  Constitution,  so 
long  as  its  inherent  purpose  —  the  creation  only  of  public  uses  —  be 
faithfully  observed. 

These  principles  are  abundantly  sustained  by  authority.  In  Bloods 
good  V.  The  Mohawk  and  Hudson  River  Railroad  Coiwpany  (18  Wend. 
9),  the  court  of  last  resort  in  this  State  first  announced  them,  and 
affixed  to  railroads  their  true  character  as  public  highways.  It  is 
there  declared  that  the  fact  that  railroad  corporations  may  remuner- 
ate themselves  by  tolls  and  fares,  "  does  not  destroy  the  public  na- 
ture of  the  road,  or  convert  it  from  a  public  to  a  private  use.  ...  If 
it  is  a  public  franchise  and  granted  to  the  company  for  the  purpose  of 
providing  a  mode  of  public  conveyance,  the  company,  in  accepting  it, 
engages,  on  its  part,  to  use  it  in  such  manner  as  will  accomplish  the 
object  for  which  the  legislature  designed  it."  (Pages  21,  22.)  And 
in  OlcMt  V.  The  Supervisors  (16  Wall.  078,  on  p.  694).  the  Supreme 
Court  of  the  United  States  adjudged  :  "  that  railroads,  though  con- 
structed by  private  corporations  and  owned  by  them,  are  public  high- 
ways, has  been  the  doctrine  of  nearly  all  the  courts  ever  since  such 


PEOPLE   V.   NEW   YOPvK   CENTRAL,   &c.   R.  E.    CO.  715 

conveniences  for  passage  and  transportation  have  had  any  existence. 
Very  early  the  question  arose  whether  a  State's  right  of  eminent 
domain  could  be  exercised  by  a  private  corporation  created  for  the 
purpose  of  constructing  a  railroad.  Clearly  it  could  not,  unless  tak- 
ing land  for  such  a  purpose  by  such  an  agency  is  taking  land  for 
public  use.  The  right  of  eminent  domain  nowhere  justifies  taking  pro- 
perty for  private  use.  Yet  it  is  a  doctrine  universally  accepted,  that 
a  State  legislature  may  authorize  a  private  corporation  to  take  land 
for  the  construction  of  such  a  road,  making  compensation  to  the 
owner.  What  else  does  this  doctrine  mean,  if  not  that  building  a 
railroad,  thovigh  it  be  built  by  a  private  corporation,  is  an  act  done  for 
a  public  i;se  ?  And  the  reason  why  the  use  has  always  been  held  a 
public  one  is  that  such  a  road  is  a  highway,  whether  made  by  the 
government  itself,  or  by  the  agency  of  corporate  bodies,  or  even  by 
individuals,  when  they  obtain  their  power  to  construct  it  from  legis- 
lative grant.  .  .  .  Whether  the  use  of  a  railroad  is  a  public  or  a  pri- 
vate one,  depends  in  no  measure  upon  the  question  who  constructed 
it  or  who  owns  it.  It  has  never  been  considered  a  matter  of  any  im- 
portance that  the  road  was  built  by  the  agency  of  a  private  corpora- 
tion. No  viatter  tvho  is  the  agent,  the  function  'performed  is  that  of  the 
State.  Though  the  ovmership  is  private,  the  use  is  public.  .  .  .  The 
owners  may  be  private  companies,  htt  they  are  compellable  to  permit 
the  public  to  use  their  works  in  the  manner  in  which  such  works  can  be 
used.  That  all  persons  may  not  put  their  own  cars  upon  the  road, 
and  use  their  own  motive  power,  has  no  bearing  upon  the  question 
whether  the  road  is  a  public  highway.  It  bears  only  upon  the  mode 
of  use,  of  which  the  legislature  is  the  exclusive  judge." 

All  public  highways  are  subjects  of  general  State  jurisdiction,  be- 
cause the  uses  are  the  common  property  of  the  public.  This  prin- 
ciple of  the  common  law  is  in  this  State  of  universal  application. 
As  to  the  class  of  public  highways  known  as  railroads,  the  common 
law  is  fortified  by  the  express  conditions  of  the  statutes  creating  or 
regulating  or  controlling  them. 

The  general  railroad  act  of  this  State  may  now  be  regarded  as  the 
general  charter  of  all  such  corporations.  It  authorizes  the  organiza- 
*"ion  of  corporations  for  "  the  constructing,  maintaining  and  operat- 
ing "  of  railroads  "for  public  use,'^  and  it  imposes  upon  them  the 
duty  "to  furnish  accommodations  for  all  passengers  and  property, 
and  to  transport  all  persons  and  property  on  payment  of  fare  or 
freight."  (Laws  of  1850,  chap.  140,  §§  1,  36.)  These  words  are  a 
brief  summary  in  respect  of  the  duties  imposed  upon  such  corpora- 
tions by  all  the  provisions  of  the  act.  Those  duties  are  consigned  to 
them  as  public  trusts,  and  as  was  said  in  Messenger  v.  The  Pennsylva- 
nia Railroad  Company  (36  N.  J.  407),  "although  in  the  hands  of  a 
private  corporation,  they  are  still  sovereign  franchises,  and  must  be 
used  and  treated  as  such ;  they  must  be  held  in  trust  for  the  general 
good."     This  relation  of  such  a  corporation  to  the  State  is  forcibly 


716  PEOPLE   V.   NEW   YORK   CENTEAL,   &c.   K.   R.   CO. 

expressed  by  Emmons,  J.,  in  Talcott  v.  Township  of  Pine  Grove  (1 
riippin  U.  S.  Circuit  Ct.  Rep.  144) :  "  The  road  once  constructed  is, 
instanter,  and  by  mere  force  of  the  grant  and  law,  embodied  in  the 
governmental  agencies  of  the  State  and  dedicated  to  public  use.  All 
and  singular  its  cars,  engines,  rights  of  way  and  property  of  every 
description,  real,  personal  and  mixed,  are  but  a  trust  fund  for  the 
political  power,  like  the  functions  of  a  public  office.  The  judicial 
personage  —  the  corporation  created  by  the  sovereign  power  expressly 
for  this  sole  purpose  and  no  other  —  is,  in  the  most  strict  technical 
and  unqualified  sense,  but  its  trustee.  This  is  the  primary  and  sole 
legal  political  motive  for  its  creation.  The  incidental  interest  and 
profits  of  individuals  are  accidents,  both  in  theory  and  practice." 

The  acceptance  of  such  trusts  on  the  part  of  a  corporation,  by  the 
express  and  implied  contracts  already  referred  to,  makes  it  an  agency 
of  the  State  to  perform  public  functions  which  might  otherwise  be 
devolved  upon  public  officers.  The  maintenance  and  control  of  most 
other  classes  of  public  highways  are  so  devolved,  and  the  performance 
of  every  official  duty  in  respect  of  them  may  be  compelled  by  the 
courts,  on  application  of  the  State,  while  private  damages  may  also 
be  recoverable  for  individual  injuries.  The  analogy  between  such 
officials  and  railroad  corporations  in  regard  to  their  relations  to  the 
State,  is  strong  and  clear,  and  so  far  as  affects  the  construction  and 
proper  and  efficient  maintenance  of  their  railways  will  be  questioned 
by  no  one.  It  is  equally  clear,  we  think,  in  regard  to  their  duty  as 
carriers  of  persons  and  property.  This  springs  sharply  out  of  the 
exclusive  nature  of  their  right  to  do  those  things.  On  other  public 
highways  every  person  may  be  his  own  carrier ;  or  he  may  hire  whom- 
soever he  will  to  do  that  service.  Between  him  and  such  employe  a 
special  and  personal  relation  exists,  independent  of  any  public  duty, 
and  in  which  the  State  has  no  interest.  In  such  a  case,  the  carrier 
has  not  contracted  with  the  State  to  assume  the  duty  as  a  public  tvust, 
nor  taken  the  right  and  power  to  do  it  from  the  State  by  becoming  the 
special  donee  and  depositary  of  a  trust.  A  good  reason  may,  there- 
fore, be  assigned  why  the  State  will  not  by  mandamtcs  enforce  the 
performance  of  his  contract  by  such  a  carrier.  But  the  reason  for 
such  a  rule  altogether  fails  when  the  public  highway  is  the  exclusive 
property  of  a  body  corporate,  which  alone  has  power  to  use  it,  in  a 
manner  which  of  necessity  requires  that  all  management,  control  and 
user  for  the  purposes  of  carriage  must  be  limited  to  itself,  and  which, 
as  a  condition  of  the  franchise  that  grants  such  absolute  and  exclu- 
sive power  over  and  user  of  a  public  highway,  has  contracted  with 
the  State  to  accept  the  duty  of  carrying  all  persons  and  property 
within  the  scope  of  its  charter,  as  a  public  trust.  The  relation  of  the 
State  to  such  a  body  is  entirely  different  from  that  which  it  bears  to 
the  individual  users  of  a  common  highway,  as  between  whom  and  the 
State  no  relation  of  trust  exists ;  and  there  is  small  reason  for  seek- 
ing analogies  between  them.     It  is  the  duty  of  the  State  to  make  and 


PEOPLE   V.  NEW   YORK   CENTRAL,   &c.   R.   R.   CO.  717 

maintain  public  highways.  That  duty  it  performs  by  a  scheme  of 
laws,  which  set  in  operation  the  functions  of  its  political  divisions 
into  counties,  towns  and  other  municipalities,  and  their  officers.  It 
can  and  does  enforce  those  duties  whenever  necessary  through  its 
courts.  It  is  not  the  duty  of  the  State  to  be  or  become  a  common 
carrier  upon  its  public  higliways  ;  but  it  may,  in  some  cases,  assume 
that  duty,  and  whenever  it  lawfully  does  so,  the  execution  of  the  duty 
may  be  enforced  against  the  agents  or  officers  upon  whom  the  law 
devolves  it.  It  may  grant  its  power  to  construct  a  public  highway  to 
a  corporation  or  an  individual  and  with  that  power  its  right  of  emi- 
nent domain  in  order  to  secure  the  public  use ;  and  may  make  the 
traffic  of  the  highway  common  to  all  on  such  terms  as  it  may  impose. 
In  such  case  it  is  its  duty  to  secure  that  common  traffic,  when  refused, 
by  the  authority  of  its  courts.  {People  v.  Collins,  19  Wend.  56 ;  Peo- 
ple v.  Commissioners  of  Salem,  1  Cow.  23.)  Or  it  may  grant  the  same 
powers  of  construction  and  maintenance  with  the  exclusive  enjoyment 
of  use  which  the  manner  of  use  requires,  and  if  that  excludes  all  com- 
mon travel  and  transportation  it  may  impose  on  the  corporation  or 
person,  the  duty  to  furnish  every  requisite  facility  for  carrying  pas- 
sengers and  freight,  and  to  carry  both  in  such  manner  and  at  such 
times  as  public  needs  may  require.  Why  is  that  duty,  in  respect  of 
the  power  to  compel  its  performance  through  the  courts,  not  in  the 
category  of  all  others  intrusted  to  such  a  body  ?  The  writ  of  man- 
damus has  been  awarded  to  compel  a  company  to  operate  its  road  as 
one  continuous  line  {Union  Pacific  R.  R.  Co.  v.  Hall,  91  U.  S.  343)  ; 
to  compel  the  running  of  passenger  trains  to  the  terminus  of  the  road 
{State  V.  H.  and  N.  H.  Ry.  Co.,  29  Conn.  538) ;  to  compel  the  com- 
pany to  make  fences  and  cattle  guards  {People  ex  rel.  Garbutt  v,  Ro- 
chester State  Line  R.  R.  Co.,  14  Hun,  373 ;  s.  c.  76  N.  Y.  294)  ;  to 
compel  it  to  build  a  bridge  {People  ex  rel.  Kimball  v.  B.  &  A.  R.  R. 
Co.,  70  N.  Y.  569)  :  to  compel  it  to  construct  i^s  road  across  streams, 
so  as  not  to  interfere  with  navigation  {State  v.  N.  E.  R.  R.  Co.,  9  Rich- 
ardson, 247)  ;  to  compel  it  to  run  daily  trains  {In  re  New  Brunswick, 
etc.,  R.  R.,  1  P.  &  B.  667) ;  to  compel  the  delivery  of  grain  at  a  par- 
ticular elevator  {Chicago  and  NortMvestern  R.  R.  Co.  v.  Peoptle,  56  111. 
365)  ;  to  compel  the  completion  of  its  road  {Farmers'  Loan  and  Trust 
Co.  V.  Henning,  17  Am.  Law  Reg.  [n.  s.]  266) ;  to  compel  the  grading 
of  its  track  so  as  to  make  crossings  convenient  and  useful  {People 
ex  rel.  Green  v.  D.  and  C.  R.  Co.,  58  N.  Y.  152  ;  N.  Y.  C.  and  H.  R. 
R.  R.  Co.  V.  People,  12  Hun,  195 ;  s.  c.  74  N.  Y.  302  ;  Indianapolis  R. 
R.  Co.  V.  The  State,  37  Ind.  489)  ;  fo  compel  the  reestablishment  of 
an  abandoned  station  {State  v.  R.  R.,  37  Conn.  154)  ;  to  compel  the 
replacement  of  a  track  taken  up  in  violation  of  its  charter  {Rex  v. 
Severn  and  Wye  Ry.  Co.,  2  Barn.  &  Aid.  646)  ;  to  prevent  the  aban- 
donment of  a  road  once  completed  {Talcott  v.  Pine  Grove,  supra,  1 
Flippin,  145)  ;  and  to  compel  a  company  to  exercise  its  franchise. 
{People  V.  A.  and  V.  R.  E.  Co.,  24  N.  Y.  261.)     These  are  all  express 


718  PEOPLE   V.  NEW   YOKE   CENTRAL,   &c.   R.   E.    CO. 

or  implied  obligations  arising  from  the  charters  of  the  railroad  com- 
panies,  but  not  more  so  than  the  duty  to  carry  freight  and  passengers. 
That  duty  is,  indeed,  the  ultima  ratio  of  their  existence ;  the  great 
and  sole  public  good  for  the  attainment  and  accomplishment  of  which 
all  the  other  powers  and  duties  are  given  or  imposed.  It  is  strangely 
illogical  to  assert  that  the  State,  through  the  courts,  may  compel  the 
performance  of  every  step  necessary  to  bring  a  corporation  into  a  con- 
dition of  readiness  to  do  the  very  thing  for  which  it  is  created,  but  is 
then  powerless  to  compel  the  doing  of  the  thing  itself. 

We  cannot  bring  our  minds  to  entertain  a  doubt  that  a  railroad  cor- 
poration is  compellable  by  mandamus  to  exercise  its  duties  as  a  car- 
rier of  freight  and  passengers ;  and  that  the  power  so  to  compel  it 
rests  equally  firmly  on  the  ground  that  that  duty  is  a  public  trust, 
which  having  been  conferred  by  the  State  and  accepted  by  the  corpo- 
ration may  be  enforced  for  the  public  benefit ;  and  also  upon  the  con- 
tract between  the  corporation  and  the  State,  expressed  in  its  charter 
or  implied  by  the  acceptance  of  the  franchise  {Abbott  v.  Johnstown  B,. 
R.  Co.,  80  N.  Y.  31) ;  and  also  upon  the  ground  that  the  common  right 
of  all  the  people  to  travel  and  carry  upon  every  public  highway  of 
the  State  has  been  changed  in  the  special  instance,  by  the  legislature 
for  adequate  reasons  into  a  corporate  franchise,  to  be  exercised  solely 
by  a  corporate  body  for  the  public  benefit,  to  the  exclusion  of  all 
other  persons,  whereby  it  has  become  the  duty  of  the  State  to  see  to 
it  that  the  franchise  so  put  in  trust  be  faithfully  administered  by  the 
trustee. 

But  it  is  said  that  the  State  is  not  injured  and  has  no  interest  in  the 
question  whether  the  corporation  perform  the  duty  or  not.  The  State 
may  suffer  no  direct  pecuniary  injury,  as  it  may  not  by  the  neglect  of 
one  or  more  of  its  numerous  political  officers  who  hold  in  trust  for 
the  people  the  official  duties  reposed  in  their  hands ;  but  that  is  no 
test  of  the  power  or  duty  of  the  State  in  either  case.  The  sover- 
eignty of  the  State  is  injured  whenever  any  public  function  vested  by 
it  in  any  person,  natural  or  artificial,  for  the  common  good  is  not  used 
or  is  misused,  or  is  abused ;  and  it  is  not  bound  to  inquire  whether 
some  one  or  more  of  its  citizens  has  not  thereby  received  a  special 
injury  for  which  he  may  recover  damages  in  his  private  suit.  Such 
an  injury  wounds  the  sovereignty  of  the  State  and  thereby,  in  a  legal 
sense,  injures  the  entire  body  politic.  The  State,  in  such  a  case  as 
this,  has  no  other  adequate  remedy.  It  may  proceed,  it  is  true,  to 
annul  the  corporation,  as  has  been  held  in  many  cases  where  corpora- 
tions had  neglected  public  duties.*  {People  v.  Fishkill  &  B.  P.  R.  Co., 
27  Barb.  452,  458  ;  Peojde  v.  H.  and  C.  Turnpike  Co.,  23  Wend.  254 ; 
Turnpike  Co.  v.  Staie,  3  Wall.  210 ;  Peoj^le  v.  K.  &  M.  Turnpike  Co., 
23  Wend.  208 ;  People  v.  B.  &  R.  Turnpike  Co.,  Id.  222 ;  Charles  River 
Bridge  Co.  v.  Warren  Bridge,  7  Pick.  344.)  But  that  remedy  is  not 
adequate,  for  it  only  destroys  functions  where  the  public  interests 
require  their  continued  existence  and  enforcement.     It  has,  therefore, 


PEOPLE   V.    NEW   YORK   CENTKAL,   &c.   R.    R.   CO.  719 

an  election  which  of  these  remedies  to  pursue.  {State  v.  H.  &  N.  H. 
Railroad  Co.,  29  Conn.  538  ;  Peojde  v.  A.  &  V.  Railroad  Co.,  24  X.  Y. 
261 ;  Talcott  v.  Pine  Grove,  supra.) 

Undoubtedly  a  sound  discretion  is  vested  in  its  law  officer  to  decide 
whether  the  exigency  is  such  as  to  call  for  the  use  of  either  remedy, 
as  it  is  ultimately  for  the  court  to  judge  whether  the  elected  remedy 
should  be  applied.  But  upon  the  question  of  power  and  of  sufficient 
legal  injury  to  justify  its  use,  where  the  corporation  neglects  or  re- 
fuses to  exercise  its  franchise  or  perform  its  duties,  there  seems  to  us 
no  reason  to  doubt. 

Nor  do  we  think  the  fact  that  injured  individuals  may  have  private 
remedies  for  the  damages  they  have  sustained  by  neglect  of  duties, 
precludes  the  State  from  its  remedy  by  mandamus.  Where  the  injury 
is  to  a  single  person  under  circumstances  which  do  not  affect  the  gen- 
eral public  the  courts,  in  the  exercise  of  their  discretion,  have  pro- 
perly refused  this  remedy  on  his  relation.  The  injured  party  is  then 
the  suitor ;  he  has  an  adequate  remedy  by  private  action  for  damages. 
That  was  the  case  of  People  ex  rel.  Olden  v.  Erie  Raihoay  Companij 
(22  Hun,  533),  relied  upon  by  the  court  below,  in  which  the  court  held 
that  the  relator's  remedy  was  by  suit  for  damages  and  not  by  manda- 
mus. That  case  is  not  authority  for  denying  the  writ  to  the  Attorney- 
General  for  a  neglect  or  refusal  by  corporations  to  exercise  their  fran- 
chises to  an  extent  which  affects  a  great  number  of  citizens,  and 
continues  for  a  considerable  period  of  time ;  nor  does  it  deny  the 
right  of  the  people  acting  on  their  own  behalf  and  in  their  own  suit 
to  pursue  this  remedy  in  any  case  of  neglect  or  refusal  to  exercise  a 
public  function  which  the  interest  of  the  people  require  should  be 
kept  in  vigorous  and  efficient  use. 

The  court,  in  that  case,  recognizes  the  distinction,  when  it  says, 
"  an  exception  exists,"  ..."  where  a  corporation  suspends  the  exer- 
cise of  its  franchises."  The  suspension  of  the  exercise  of  corporate 
functions  is  the  gravamen  of  the  complaint  in  this  case  ;  and  the 
case  cited  is  no  authority  for  denying  the  writ  when  the  people  come 
into  court  with  their  own  suit,  by  their  attorney-general  to  move  for 
a  writ  of  mandamus  on  allegations  of  an  alleged  long  continued  and 
very  general  suspension  of  a  corporate  duty. 

It  was  supposed  by  the  court  below  that  the  provisions  of  section 
28  of  the  act  of  1850  (chap.  140)  as  amended  by  chapter  133  of  the 
Laws  of  1880,  which  provide  that  railroad  corporations  shall  have 
power  "to  regulate  the  time  and  manner  in  which  passengers  and 
property  shall  be  transported,"  interfere  in  some  way  with  the  power 
to  grant  the  writ.  Undoubtedly  that  provision  gives  the  discretion 
which  the  learned  judge  states  ;  but  it  cannot  be  so  construed  as  to 
justify  a  general  or  partial  suspension  of  the  duty  of  receiving  and 
transporting  freight.  Language  of  that  kind  in  a  similar  act  was  cor- 
rectly construed  by  Dickerson,  J.,  in  the  Railroad  Commissioners  v. 
Portland  and  Oxford  Railroad  Company  (63  ^le.  269).  We  adopt, 
but  have  not  room  to  quote  his  language. 


720  PEOPLE   V.    NEW   YORK   CENTRAL,   &c.   R.   R.   CO. 

Having  determined  the  question  of  tlie  right  of  the  State  to  prose- 
cute the  writ  of  mandamus  on  the  ground  of  refusal  or  neglect  of  a 
corporation  to  exercise  its  duty  of  carrier,  it  remains  to  be  seen 
whether  a  case  which  would  justify  the  granting  of  the  writ  was  pre- 
sented. The  case  stands  altogether  upon  the  facts  presented  by  the 
appellants.  The  course  taken  by  the  respondents  must  be  regarded 
as  an  admission  of  the  material  facts  contained  in  the  petition  and 
affidavits. 

[The  affidavits  show  that,  for  about  two  weeks,  the  railroad  com- 
pany failed  and  neglected  to  receive  from  three-quarters  to  seven- 
eighths  of  the  goods  offered  for  transportation  from  the  city,  and  large 
quantities  seeking  transportation  to  the  city  ;  and  in  many  instances 
refused  to  receive  goods  offered. 

The  excuse  offered  by  the  railroad  company  was,  in  substance,  as 
follows  : 

The  skilled  freight-handlers  of  the  company  refused  to  work  with- 
out an  increase  of  wages  to  the  amount  of  three  cents  per  hour.  The 
company  refused  to  pay  such  increase.  The  skilled  laborers  then 
abandoned  the  work.  Their  abandonment  of  the  work,  and  the  in- 
efficiency of  the  unskilled  men  afterwards  employed,  caused  the 
neglect  and  refusal  complained  of ;  the  company  not  procuring  other 
laborers  competent  or  sufficient  in  number  to  do  the  work.  It  was 
not  alleged  or  shown  that  the  former  workmen  committed  any  unlaw- 
ful act ;  and  no  violence,  no  riot,  and  no  unlawful  interference  with 
other  employees  of  the  respondent  appeared. 

The  foregoing  facts  do  not  constitute  a  valid  excuse  for  the  railroad 
company's  failure  to  perform  their  public  duties. 

If  it  had  been  shown  that  a  "  strike  "  of  their  skilled  laborers  had 
been  caused  or  compelled  by  some  illegal  combination  or  organized 
body,  which  held  an  unlawful  control  of  their  actions,  and  sought 
through  them  to  enforce  its  will  upon  the  railroad  company,  and  that 
the  company,  in  resisting  such  unlawful  efforts,  had  refused  to  obey 
unjust  and  illegal  dictation,  and  had  used  all  the  means  in  their  power 
to  employ  other  men  in  sufficient  numbers  to  do  the  work,  and  that 
the  refusal  and  neglect  complained' of  had  grown  out  of  such  a  state 
of  facts,  a  very  different  case  for  the  exercise  of  the  discretion  of  tlie 
court,  as  well  as  of  the  attorney  general,  would  have  been  presented.]  ^ 

We  think  the  court  below  had  power  to  award  the  writ,  and  that 
upon  the  case  presented  it  was  error  to  refuse  it. 

Order  reversed. 
Daniels  and  Brady,  JJ.,  concurred.^ 

1  The  passages  enclosed  in  [  ]  are  an  abridgment  of  the  opinion  of  the  court  on  this 
branch  of  the  case.  —  Ed. 

2  "There  are  many  cases,  however,  where  the  performance  of  a  public  duty  by  a  corpora- 
tioh  cannot  be  compelled  by  writ  of  mandamus,  though  the  duty  itself  be  clear.  The 
propriety  of  issuing  the  writ  of  mandamus  depends  in  part  upon  the  character  of  the  acts  to 


Iowa 


UNION   PACIFIC   R.   CO.  V.    HALL.  >        "^  r>^J     ±/ 

UNION  PACIFIC   R.  CO.  v.ifALL.^/^.       ^ a/*  "jf  \ 

1875.     n  United  States,  3i3^y-^    .a^*^^    '7''^^       1/^     'J^^       M"    , 

Error  to  the  Circuit  Court  of  the  United  States  for  the.Dt)&*^t  oi^nr       (^    y^ 

A.  J.  PoppLeton,  for  plaintiff  in  error.  U>^  J^  ly^iy^    f)^^^ ^i 

John  N.  Rogers,  contra.  ^^/^"^   ^^^ "^         J'^^'"'^^ 

Strong,  J.     This  is  a  proceeding  instituted  under  the  act  olCorf^/  jh  ^^  L 

gress  of  March  3,  1873  (17  Stat.  509,  sect.  4),  which  confers  upon  i\\^\  'j      ^    -  fA 
proper  Circuit  Court  of  the  United  States  jurisdiction  to  hear  and  1,^  ^\   Aj/ 
determine  all  cases  of  mandamus  to  compel  the  Union  Pacific  Rail-     ^       ^j^ 
road  Company  to  operate  its  road  as  required  by  law.     The  altern?^     I    j^'j^ 
tive  writ,  as  amended,  commanded  the  railroad  company  to  operate  fl>J    \l. 
the  whole  of  their  road  from  Council  Bluffs  westward  (including  that^*^  (hfC^lyf    t^ 
portion  thereof  between  Council  Bluffs  and  Omaha,  and  constructedu-      I^ \ 
over  and  across  their  bridge  spanning  the  Missouri  River)  as  one  9^*^^^' 
continuous  line  for  all  purposes  of  communication,  travel,  and  trans-  'r^ 
portation  ;   and  especially  commanded  them  to  start   from  Council^  ,,  ^ 
Bluffs  their  regular  through  freight  and  passenger  trains  westward  ^^"^^^ 
bound,  and  to  run  their  eastern-bound  trains   of  both  descriptions^^^^,^ 
through  and  over  said  bridge  to  Council  Bluffs  under  one  nnitovm  ^J,J^      j^'- 
time-schedule  with  the  remainder  of  their  road,  and  to  desist  and  /^H 

refrain  wholly  from  operating  said  last-mentioned  portion   of   said^A^^ 
road  as  an  independent  and  separate  line,  and  from  causing  freight  oxj^^^^  "      i 
passengers  bound  westward  or  eastward  to  be  transferred  at  Omaha,'    j,  ^^% 
or  to  show  cause  why  they  did  not  obey  the  writ. 

To  the  alternative  mandamus  the  railroad  company  put  in  a  return, 
which  was  met  by  an  answer  filed  by  the  relators ;  and  the  case  was 
heard  by  the  Circuit  Court  on  the  facts  started  in  the  writ,  the  return, 
and  the  answer  (the  averments  of  the  answer  not  being  controverted), 
and  a  peremptory  mandamus  was  ordered.  It  is  of  this  final  judg- 
ment that  the  plaintiffs  in  error  now  complain. 

The  obligation  of  the  Union  Pacific  Railroad  Company  to  operate 

be  enforced.  A  court  should  never  attempt  to  compel  the  specific  performance  of  an  obli- 
gation, where  it  is  apparent  that  the  attempt  would  prove  unavailing;  and  hence  the  writ 
of  mandamus  should  not,  as  a  rule,  be  issued  in  order  to  enforce  the  performance  of  a  duty 
involving  the  exercise  of  a  large  measure  of  good  faith  and  discretion  on  the  part  of  the 
obligor. 

"It  may  be  doubted,  therefore,  whether  it  be  a  rule  applicable  in  all  cases,  that  the 
courts  will  compel  a  railroad  company  to  operate  its  line  of  road,  even  though  the  duty  of 
the  company  be  clear.  The  difficulty  of  supervising  unwilling  agents  in  the  performance 
of  a  continuing  duty  of  so  complicated  a  nature  as  that  of  properly  managing  a  railroad, 
involving  the  exercise  of  a  large  amount  of  discretion  and  technical  skill,  would  in  many 
cases  prove  a  serious  obstacle  in  the  way  of  such  an  attempt.  Whether  a  writ  of  manda- 
mus shall  be  issued,  is  in  every  case  a  matter  resting  largely  in  the  discretion  of  the  court, 
and  depends  upon  all  the  surrounding  facts  and  circumstances."  2  Morawetz  on  Corpora- 
tions, 2d  ed.  s.  1134.  —Ed. 

1  Part  of  opinion  omitted. —  Ed. 


^ 


722  UNION  PACIFIC  E.  CO.  V.  HALL. 

their  road  as  a  continuous  line,  throughout  its  entire  length,  is  not 
denied.  The  company  is  a  creature  of  congressional  legislation.  It 
was  incorporated  by  the  act  of  Congress  of  July  1,  1862  (12  Stat. 
489) ;  and  its  powers  and  duties  were  prescribed  by  that  act,  and 
others  amendatory  thereof.  By  the  twelfth  section  it  was  enacted 
that  the  "  whole  line  of  the  railroad  and  branches  and  telegraph  shall 
be  operated  and  used  for  all  purposes  of  communication,  travel,  and 
transportation,  so  far  as  the  public  and  government  are  concerned,  as 
one  connected,  continuous  line."  A  similar  requisition  was  made  in 
the  fifteenth  section  of  the  amendatory  act  of  July  2,  1864.  13  Stat. 
356.  The  contest  in  the  case  does  not  relate  to  the  existence  of  this 
duty :  it  is  principally  over  the  question,  whether  the  railroad  bridge 
over  the  Missouri  River,  between  Omaha  in  Nebraska  and  Council 
Bluffs  in  Iowa,  is  a  part  of  the  Union  Pacific  Eailroad ;  for,  if  it  is, 
there  can  be  no  doubt  that  the  company  are  required  by  law  to  use  it 
in  connection  with,  and  as  a  part  of,  their  entire  road,  operating  all 
parts  together  as  a  continuous  line. 

The  answer  to  this  question  must  be  found  in  the  legislation  of 
Congress,  and  in  what  has  been  done  under  it. 

[After  a  discussion  of  this  question.] 

Holding  then,  as  we  do,  that  the  legal  terminus  of  the  railroad  is 
fixed  by  law  on  the  Iowa  shore  of  the  river,  and  that  the  bridge  is  a 
part  of  the  railroad,  there  can  be  no  doubt  that  the  company  is  under 
obligation  to  operate  and  run  the  whole  road,  including  the  bridge, 
as  one  connected  and  continuous  line.  This  is  a  duty  expressly 
imposed  by  the  acts  of  1862  and  1864,  and  recognized  by  that  of  1871. 
What  this  means  it  is  not  difficult  to  understand.  It  is  a  requisition 
made  for  the  convenience  of  the  public.  An  arrangement,  such  as 
the  company  has  made,  by  which  freight  and  passengers  destined  for 
or  beyond  the  eastern  terminus  are  stopped  two  or  three  miles  from 
it  and  transferred  to  another  train,  and  again  transferred  at  the  ter- 
minus, or  by  which  freiglit  and  passengers  going  west  from  the  east- 
ern end  of  the  line  must  be  transferred  at  Omaha,  breaks  the  road 
into  two  lines,  and  plainly  is  inconsistent  with  continuous  operation 
of  it  as  a  whole.  If  not,  the  injunction  of  the  statute  has  no  mean- 
ing. The  mandamus  awarded  in  this  case,  therefore,  imposes  no  duty 
beyond  what  the  law  requires. 

Such  is  our  opinion  of  the  merits  of  this  case.  A  single  objection 
made  and  urged  against  the  form  of  proceeding  remains  to  be  con- 
sidered. The  appellants  contend  that  the  court  erred  in  holding  that 
Hall  and  Morse,  on  whose  petition  the  alternative  writ  was  issued, 
could  lawfully  become  relators  in  this  suit  on  behalf  of  the  public 
without  the  assent  or  direction  of  the  Attorney-General  of  the  United 
States,  or  of  the  district  attorney  for  the  district  of  Iowa.  They  were 
merchants  in  Iowa,  having  frequent  occasion  to  receive  and  ship 
goods  over  the  company's  road  ;  but  they  had  no  interest  other  than 
such  as  belonged  to  others  engaged  in  employments  like  theirs,  and 


UNION   PACIFIC   R.    CO.  V.    HALL.  723 

the  duty  they  seek  to  enforce  by  the  writ  is  a  duty  to  the  public 
geuerally.  The  c|uestion  raised  by  the  objection,  therefore,  is,  whether 
a  writ  of  mandamus  to~compei  the  performance  of  a  public~duty  may 
be  issuedat  the  instance  of  a  private  relator.  Clearly  m  EnglandTt 
may.  Tapping  on  Mandamus,  p.  28,  asserts  the  rule  in  that  country 
to  be,  that,  "  in  general,  all  those  who  are  legally  capable  of  bringing 
an  action  are  also  equally  capable  of  applying  to  the  Court  of  King's 
Bench  for  the  writ  of  mandamus."  This  is  true  in  all  cases,  it  is 
believed,  where  the  defendant  owes  a  duty,  in  the  performance  of 
which  the  prosecutor  has  a  peculiar  interest ;  and  it  is  equally  true, 
we  think,  in  case  of  applications  to  compel  the  performance  of  duties 
to  the  public  by  corporations.  In  The  King  v.  The  Severn  &  Wye 
Raihoay  Co.,  2  Barn.  &  Ad.  646,  a  private  individual,  without  any 
allegation  of  special  injury  to  himself,  obtained  a  rule  upon  the  com- 
pany to  show  cause  why  a  mandamus  should  not  issue  commanding 
them  to  lay  down  again  and  maintain  part  of  a  railway  which  they 
had  taken  up.  Under  an  act  of  Parliament,  the  railway  was  a  public 
highway ;  and  all  persons  were  at  liberty  to  pass  and  repass  thereon, 
with  wagons  and  other  carriages,  upon  payment  of  the  rates.  What 
the  prosecutor  complained  of  was  the  loss  by  the  public,  and  particu- 
larly by  the  owners  of  certain  collieries  (of  which  he  does  not  appear 
to  have  been  one),  of  the  benefit  of  using  the  railway  taken  up.  The 
writ  was  awarded.  It  was  not  even  claimed  that  the  intervention  of 
the  Attorney-General  was  needed.  Other  cases  to  the  same  effect  are 
numerous.  Clarke  v.  The  Leicestershire  &  Northamptonshire  Union 
Canal  Co.,  6  Ad.  &  El.  x.  s.  898 ;  1  Chit.  700. 

In  this  country  there  has  been  diversity  of  decision  upon  the  ques- 
tion whether  private  persons  can  sue  out  the  writ  to  enforce  the  per- 
formance of  a  public  duty,  unless  the  non-performance  of  it  works 
to  them  a  special  injury  ;  and  in  several  of  the  States  it  has  been 
decided  that  they  cannot.  An  application  for  a  mandamus,  not  here 
a  prerogative  writ,  has  been  supposed  to  have  some  analogy  to  a  bill 
in  equity  for  the  restraint  of  a  public  nuisance.  Yet,  even  in  the  sup- 
posed analogous  case,  a  bill  may  be  sustained  to  enjoin  the  obstruction 
of  a  public  highway,  when  the  injury  complained  of  is  common  to  the 
public  at  large,  and  only  greater  in  degree  to  the  complainants.  It 
was  in  the  Wheeling  Bridge  Case,  13  How.  518,  where  the  wrong  com- 
plained of  was  a  public  wrong,  an  obstruction  to  all  navigation  of  the 
Ohio  Kiver. 

The  injury  to  the  complainants  in  that  case  was  no  more  peculiar 
to  Pennsylvania  than  is  the  injury  to  Hall  and  Morse  in  this  peculiar 
and  special  to  them. 

There  is,  we_think,  a  decided  preponderance  of  American  authority 
in  favor  of  the  doctrine,  that  private  persons  may  move  for  a  mnndn- 
•mus  to  enforce  a  public  duty,_not  due  to  the  government  as  juch^ 
without  the  intervention  of  the  government  law-officer.  People  v. 
Collins,  19  WendTse  J  County  of  Pike  v.  The  State,  11  111.  202  ;  Ottawa 


724         NORTHERN   PACIFIC   R.   CO.  V.    WASHINGTON   TERRITORY. 

V.  The  People,  48  id.  233 ;  Hamilton  v.  The  State,  3  Ind.  452 ;  Hall 
V.  The  People,  57  N.  Y.  307 ;  People  v.  Halsey,  37  id.  344 ;  State  v. 
The  County  Judge  of  Marshall,  7  Iowa,  186 ;  State  v.  Railway,  33 
N.  J.  Law,  110  ;  Watts  v.  Carroll  Parish,  11  La.  Ann.  141.  See  also 
Dillon  on  Mun.  Corp.,  sect.  695,  and  High  on  Ex.  Kern.,  sections  431, 
432 ;  Cannon  v.  Janvier,  3  Houst.  27 ;  State  v.  Rahway,  33  N.  J.  Law, 
110.  The  principal  reasons  urged  against  the  doctrine  are,  that  the 
writ  is  prerogative  in  its  nature,  —  a  reason  which  is  of  no  force  in 
this  country,  and  no  longer  in  England,  —  and  that  it  exposes  a 
defendant  to  be  harassed  with  many  suits.  An  answer  to  the  latter 
objection  is,  that  granting  the  writ  is  discretionary  with  the  court, 
and  it  may  well  be  assumed  that  it  will  not  be  unnecessarily  granted. 

There  is  also,  perhaps,  a  reasonable  implication  that  Congress,  when 
they  authorized  writs  of  mandamus  to  compel  the  Union  Pacific  Rail- 
road Company  to  operate  their  road  according  to  law,  did  not  con- 
template the  intervention  of  the  Attorney-General  in  all  cases.  The 
act  of  1873  does  not  prescribe  who  shall  move  for  the  writ,  while  the 
Attorney-General  is  expressly  directed  to  institute  the  necessary  pro- 
ceedings to  secure  the  performance  of  other  duties  of  the  company. 
For  these  reasons  we  think  the  Circuit  Court  did  not  err  in  holding 
that  Hall  and  Morse  were  competent  to  apply  for  the  writ  in  this 
case. 

The  decree  of  the  Circuit  Court  is  affirmed. 

[Bradley,  J.,  dissented ;  differing  from  the  majority  as  to  the 
eastern  terminus  of  the  railroad.] 


dk- 


NORTHERN  PACIFIC  R.  CO.  v.  WASHINGTON  TERRI- 
TORY ex  rel.    DUSTIN. 


71  f 


1892.     142  United  States,  492.1 

'Iju^  -_^      Error  to  the  Supreme  Court  of  the  Territory  of  Washington. 
'  "  "  ""^etition,  in  the  name  of  the  Territory  of  Washington,  at  the  rela- 

of  the  prosecuting  attorney  for  the  county  of  Yakima  and  four 


//^,v>  ^I'O/.  ^.^0ther  counties,  praying  for  a  mandamus  to  compel  the  Northern 
1^  li^^  ^.ny'  Pacific  R.  Co.  to  erect  and  maintain  a  station  at  Yakima  City,  on  its 
ii  ^'  x^^^  "TAf '  road  ;  and  to  stop  its  trains  there  to  receive  and  deliver  freight,  and 
'    ^  /     S'^  kJ^^  receive  and  let  off  passengers. 

A.   J^  >     .    'J^  The  company  was  incorporated  by  an  Act  of  Congress,  authorizing 

-^(^^       ku^      it  to  construct  and  maintain  a  railroad  between  certain  points.     By 

"^^    ijr  H*"^^  Cy^^   s-  ^  of  ^^6  charter  it  was  enacted  "  that  said  Northern  Pacific  Railroad 

^          I  oy^^'    }       shall  be  consti'ucted  in  a  substantial  and  workmanlike  manner,  with 

^'^^  D  ■    '^"^^^^    ^ '^^  necessary  draws, culverts,  bridges,  viaducts,  crossings,  turnouts, 

^iiA'*'*^^^,^^^^*^'"^^  stations  and  watering  places,  and  all  other  appurtenances,  including 

\    ^^ ,    ,  v^'    .-./-   ._    1        1  Statement  abridged  from  opinion.    Portions  of  opinion  omitted.  —  Ed. 


'^^<?:>'>f^Z'^V 


'^..-^^   A--"        ./'^k^ 


NORTHERN   PACIFIC   R.   CO.  V.  WASHINGTON  TERRITORY.  725 

furniture  and  rolling  stock,  equal  in  all  respects  to  railroads  of  the 
first  class  when  prepared  for  business,  with  rails  of  the  best  quality, 
manufactured  from  American  iron ;  and  a  uniform  gauge  shall  be 
established  throughout  the  entire  length  of  the  road." 

The  petition  set  forth  at  length  the  size  and  importance  of  Yakima 
City  and  its  need  of  railroad  accommodations  ;  alleged  that  it  was 
the  county  seat  of  Yakima  county,  a  county  having  more  than  4000 
inhabitants,  and  had  a  courthouse  where  courts  of  the  United  States 
and  of  the  Territory  were  held,  and  a  United  States  land  office ;  that 
the  defendant  had  refused  to  establish  a  freight  and  passenger  station 
or  to  stop  its  trains  at  Yakima  City,  but  was  building  a  freight  and 
passenger  station  and  stopping  its  trains  at  the  rival  town  of  North 
Yakima,  four  miles  further  north,  which  it  had  laid  out  on  its  own 
unimproved  land,  and  was  ruining  Yakima  City  for  the  purpose  of 
enhancing  the  value  of  its  own  town  site. 

The  answer,  filed  June  1,  1885,  said  nothing  as  to  the  courthouse ; 
admitted  that  at  the  time  of  filing  the  petition  there  was  a  United 
States  land  office  at  Yakima  City,  but  alleged  that  it  had  since  been 
removed  by  order  of  the  President  of  the  United  States  to  North 
Yakima ;  admitted  that  Yakima  City  heretofore  had  500  inhabitants, 
but  alleged  that  since  the  construction  of  the  defendant's  railroad  two- 
thirds  of  them  had  removed  with  their  houses  and  other  buildings  to 
North  Yakima,  and  others  were  continually  abandoning  it,  and  no 
buildings  or  business  were  replacing  those  taken  away  ;  denied  that 
it  had  laid  out  the  town  of  North  Yakima  for  the  purpose  of  enhan- 
cing the  value  of  its  own  property,  or  for  the  purpose  of  injuring  the 
property  of  any  other  person,  town  or  city ;  and  alleged  that  there 
was  not  business. enough  to  warrant  more  than  one  station  on  this  part 
of  its  road,  and  that  North  Yakima  was  a  much  larger  and  more 
prosperous  town  than  Yakima  City  ever  was,  and  was  a  more  con- 
venient point  for  the  people  of  the  neighboring  valleys,  who  were 
more  than  fifteen  times  as  many,  and  had  more  than  fifteen  times  as 
much  taxable  property,  as  the  people  living  in  Yakima  City  and  its 
immediate  vicinity. 

The  parties  also  made  allegations  and  denials,  and  (after  the  filing 
of  a  replication  not  copied  in  the  record)  introduced  evidence  at  the 
trial  by  a  jury,  as  to  the  matters  afterwards  stated  in  the  special  ver- 
dict, which  was  returned  October  17,  1885,  in  answer  to  forty-six 
questions  submitted  by  the  court,  and  was  in  substance  as  follows  : 

In  January,  1885,  the  defendant  carried  freight  and  passengers  for 
hire  on  its  railroad  to  and  from  Yakima  City,  and  kept  an  agent  there 
who  attended  to  the  freight  and  sold  tickets  to  passengers.  But  be- 
fore February  20,  1885,  having  completed  its  road  to  North  Yakima, 
it  ceased  to  stop  its  trains  at  Yakima  City,  and  established  a  freight 
and  passenger  station  at  North  Yakima  ,•  and  pursuant  to  §  4  of  its 
charter,  tendered  its  road  to  the  United  States  as  fully  completed  and 
equipped  from  Pasco  Junction  to  or  beyond  Yakima  City,  and  caused 


726        NOETHEKN  PACIFIC  R.   CO.  V.   WASHINGTON  TERRITORY. 

to  be  appointed  by  the  President  of  the  United  States  commissioners 
to  examine  and  report  on  the  condition  of  the  road.  On  March  16, 
1885,  that  part  of  its  road  from  Pasco  Junction  by  Yakima  City  to 
Xorth  Yakima  had  not  been  turned  over  to  the  operating  department 
of  the  company,  but  the  freight  and  passenger  trains  were  not  run  as 
subordinate  to  the  construction  of  the  road. 

In  January,  1885,  Yakima  City  was  the  oldest  and  largest  town, 
and  the  most  important  business  centre,  on  the  Cascade  Branch  of  the 
defendant's  railroad,  between  the  Columbia  River  and  Puget  Sound. 
On  February  20,  1885,  and  when  the  defendant  built  and  operated  its 
road  to  Yakima  City,  the  amount  of  business  done  at  Yakima  City 
annually  was  $250,000,  its  population  was  500,  and  there  was  no  other 
town  or  business  centre  of  any  importance  in  Yakima  County. 

On  October  17,  1885,  Yakima  City  was  the  largest  town,  and  the 
most  important  business  centre  in  the  count}^,  except  the  town  of 
North  Yakima ;  the  population  of  Yakima  City  was  150 ;  there  were 
seventy  children  attending  school  there ;  and  it  had  two  hotels,  a 
flour  mill,  thirteen  stores  and  places  of  business,  twenty-seven  dwell- 
ing-houses and  but  a  limited  amount  of  industries  requiring  railroad 
facilities.  The  amount  of  business  furnished  by  Yakima  City  to  the 
defendant  over  that  portion  of  its  road  between  Pasco  Junction  and 
North  Yakima  in  the  summer  of  1885  was  in  June  16,000  lbs.,  in  July 
4000  lbs.,  in  August  none,  in  September  2400  lbs.,  in  October  none  ; 
and  during  that  period  no  product  of  Yakima  City  or  the  country 
adjoining  was  furnished  by  any  one  to  be  carried  over  the  defendant's 
road. 

There  is  a  safe  and  suitable  place  for  a  freight  and  passenger  station 
in  Yakima  City  on  the  line  of  the  defendant's  road  and  the  defendant 
has  the  ability  to  construct  and  maintain  such  a  station  there,  with 
freight  and  passenger  facilities.  If  the  defendant  had  done  so, 
Yakima  City  would  have  retained  its  former  size  and  importance. 
No  demand  was  ever  made  upon  the  defendant  for  the  establishment 
of  a  freight  and  passenger  station  there.  The  expense  of  construct- 
ing and  fitting  for  practical  use  a  station  and  warehouse  at  Yakima 
City  would  be  about  $8000,  and  of  keeping  the  requisite  agents  there 
$150  a  month.  The  wear  and  tear  and  cost  of  stopping  a  train  at  a 
station  is  $1. 

The  passenger  and  freight  traffic  of  the  people  living  in  the  valleys 
of  the  streams  entering  the  Yakima  River  at  and  near  Yakima  City 
and  North  Yakima,  considering  them  as  a  community,  would  be  better 
accommodated  at  North  Yakima  than  at  Yakima  City.  There  are 
other  stations  for  receiving  freight  and  passengers  on  that  part  of  the 
defendant's  railroad,  extending  from  Pasco  Junction  to  North  Yakima, 
called  Yakima  Division,  furnishing  sufficient  facilities  for  all  the 
country  below  North  Yakima,  and  the  earnings  of  that  division  are 
not  sufficient  to  pay  its  running  expenses. 

On  the  verdict  of  the  jury  and  the  admissions  in  the  pleadings,  each 


NORTHERN   PACIFIC   R.   CO.   V.   WASHINGTON  TERRITORY.         727 

party  moved  for  judgment;  and  on  April  23,  1886,  the  District  Court 
ordered  a  peremptory  mandamus  to  issue,  in  accordance  with  the 
prayer  of  the  petition.  The  record  showed  that  the  District  Court 
during  the  previous  proceedings  in  the  case  was  held  at  Yakima  City, 
but  at  the  time  of  rendering  judgment  was  held  at  North  Yakima,  to 
which  the  county  seat  and  the  courthouse  had  been  removed  pursuant 
to  the  statute  of  the  Territory  of  January  9,  1886.  Laws  of  Wash- 
ington Territory  of  1885-6,  pp.  57,  457.  On  appeal  to  the  Supreme 
Court  of  the  Territory,  the  judgment  of  the  District  Court  was 
affirmed.  3  Wash.  Terr.  303.  The  defendant  thereupon  sued  out 
this  writ  of  error.  .  .  . 

A.  H.  Garland,  for  plaintiff  in  error  {James  McNaught,  and  H.  J. 
May  with  him). 

No  appearance  for  defendant  in  error. 

Gray,  J.  A^vmtpf_mandamusjbo_compel_a^ 
do  a  particular  actjn  constnictingjts^road  or  buildings,  or  in  running 
Jts_trams,  can  beJssued_only  when  there  is  a  specific  legal  duty  on  its 
part  to_do_that^.t,  and  clear  proof  of  a  breacli  of  that  duty. 
^if,  as  \\\Unio7i  Pacific  Railroad  v.  Hall,  91  U.  S.  343,  the  charter  of 
a  railroad  corporation  expressly  requires  it  to  maintain  its  railroad  as 
a  continuous  line,  it  may  be  compelled  to  do  so  by  mandamus.  So  if 
the  -charter  requires  the  corporation  to  construct  its  road  and  to  run 
its  cars  to  a  certain  point  on  tide  water  (as  was  held  to  be  the  case  in 
State  V.  Hartford  &  New  Haven  Railroad,  29  Conn.  538),  and  it  has 
so  constructed  its  road,  and  used  it  for  years,  it  may  be  compelled  to 
continue  to  do  so.  And  mandamus  will  lie  to  compel  a  corporation  to 
build  a  bridge  in  accordance  with  an  express  reql^irement  of  statute. 
Neiv  Orleans  etc.  Railumy  v.  Mississippi,  112  U.  S.  12  ;  People  v. 
Boston  &  Albany  Railroad,  70  N.  Y.  569. 

But  if  the  charter^of  a_railroad  corporation  simply  authorizes  the 
corporation,  without^equiring  it^o  construct  and  maintain  a  railroad 
to^a  certain  point,  it  has  been  held  that  it  cannot  be  compelled  by  man- 
damus to  complete  or  to  maintain  its  road  to  that  point,^  when  it 
would  not  be  remunerative..  York  &  North  Midland  Railway  v.  The 
Queen,  1  El.  &  Bl.  858 ;  Great  Western  Railway  v.  The  Queen,  1  El.  & 
Bl.  874 ;  Commonwealth  v.  Fitchhurg  Railroad,  12  Gray,  180 ;  State 
V.  Southern  Minnesota  Railroad,  18  Minnesota,  40. 

The  difficulties  in  the  way  of  issuing  a  mandamus,  to  compel  the 
maintenance  of  a  railroad  and  the  running  of  trains  to  a  terminus  fixed 
by  the  charter  itself,  are  much  increased  when  it  is  sought  to  compel 
the  corporation  to  establish  or  to  maintain  a  station  and  to  stop  its 
trains  at  a  particular  place  on  the  line  of  its  road.  The  location  of 
stations  and  warehouses  for  receiving  and  delivering  passengers  and 
freight  involves  a  comprehensive  view  of  the  interests  of  the  public 
as  well  as  of  the  corporation  and  its  stockholders,  and  a  consideration 
of  many  circumstances  concerning  the  amount  of  population  and  busi- 
ness at,  or  near,  or  within  convenient  access  to  one  point  or  another, 


728         NOETHERN   PACIFIC   R.    CO.  V.   WASHINGTON   TERRITORY. 

which  are  more  appropriate  to  be  determined  by  the  directors,  or,  in 
case  of  abuse  of  their  discretion,  by  the  legislature,  or  by  administra- 
tive boards  entrusted  by  the  legislature  with  that  duty,  than  by  the 
ordinary  judicial  tribunals. 

The  defendant's  charter,  after  authorizing  and  empowering  it  to 
locate,  construct,  and  maintain  a  continuous  railroad  *'by  the  most 
eligible  route,  as  shall  be  determined  by  said  company,"  within  limits 
described  in  the  broadest  way,  both  as  to  the  terminal  points  and  as 
to  the  course  and  direction  of  the  road ;  and  vesting  it  with  "  all  the 
powers,  privileges,  and  immunities  necessary  to  carry  into  effect  the 
purposes  of  this  act  as  herein  set  forth ; "  enacts  that  the  road 
"  shall  be  constructed  in  a  substantial  and  workmanlike  manner,  with 
all  the  necessary  draws,  culverts,  bridges,  viaducts,  crossings,  turn- 
outs, stations  and  watering  places,  and  all  other  appurtenances."  The 
words  last  quoted  are  but  a  general  expression  of  what  would  be  other- 
wise implied  by  law,  and  cover  all  structures  of  every  kind  needed  for 
the  completion  and  maintenance  of  the  railroad.  They  cannot  be  con- 
strued as  imposing  any  specific  duty,  or  as  controlling  the  discretion 
in  these  respects  of  a  corporation  entrusted  with  such  large  discretion- 
ary powers  upon  the  more  important  questions  of  the  course  and  the 
'  termini  of  its  road.  The  contrast  between  these  general  words  and 
the  specific  requirements,  which  follow  in  the  same  section,  that  the 
rails  shall  be  manufactured  from  American  iron,  and  that  "  a  uniform 
gauge  shall  be  established  throughout  the  entire  length  of  the  road  " 
is  significant. 

To  hold  that  the  directors^  of^  this^corp^oration,  in  determining  the 
number,  place"and  size  of  its  stations  an d^ other  structures,  having 
regard  to  the  public ^oiwenience^ as  well^j^to  it^own  pecuniary  in- 
terests, can  be  controlled  by  the  courts  by  writ  of  mandamus,  would 
be  inconsistent  with  many  decisions  of  high  authority  in  analogous 
cases.  '^ 

[The  learned  judge  then  cited  and  commented  upon  various  cases ; 
some  of  which  are  here  abridged  as  follows  : 

Atchison,  T.  &  S.  F.  B.  v.  Denver  &  New  Orleans  B.,  110  U.  S.  667. 
The  constitution  of  Colorado  provided  that  "  every  railroad  company 
shall  have  the  right  with  its  road  to  intersect,  connect  with,  or  cross 
any  other  railroad  ;  "  also  that  there  should  be  no  unreasonable  dis- 
crimination in  facilities  for  transportation.  The  court  held,  that  the 
above  constitutional  right  to  connect  railroads  was  confined  to  their 
connection  as  physical  structures,  and  did  not  imply  a  connection  of 
business  with  business ;  and  that  neither  the  common  law,  nor  the 
constitution  and  statutes  of  Colorado,  compelled  one  railroad  corpora- 
tion to  establish  a  station  or  to  stop  its  cars  at  its  junction  with  the 
railroad  of  another  corporation,  although  it  had  established  a  union 
station  with  the  connecting  railroad  of  a  third  corporation,  and  had 
made  provisions  for  the  transaction  there  of  a  joint  business  with 
that  corporation.     Waite,  C.  J.,  said  that,  as  a  general  rule,  remedies 


NOKTHEEN   PACIFIC   R.    CO.   V.   WASHINGTON   TERRITORY.         729 

for  injustice  of  this  kind  could  only  be  obtained  from  the  legisla- 
ture. 

People  V.  Neiv  York,  L.  E.  &  W.  R.,  104  New  York,  58.  The 
court  refused  to  grant  a  mandamus  to  compel  a  railroad  corporation 
to  construct  and  maintain  a  station  and  warehouse  of  sufficient  capa- 
city to  accommodate  passengers  and  freight  at  a  village  containing 
1200  inhabitants,  and  furnishing  to  the  defendant  at  its  station 
therein  a  large  freight  and  passenger  business  ;  although  it  was  admit- 
ted that  its  present  building  at  that  place  was  entirely  inadequate ; 
that  the  absence  of  a  suitable  one  was  a  matter  of  serious  damage  to 
large  numbers  of  persons  doing  business  at  that  station  ;  tliat  the 
railroad  commissioners  of  the  state,  after  notice  to  the  defendant,  had 
adjudged  and  recommended  that  it  should  construct  a  suitable  build- 
ing there  within  a  certain  time ;  and  that  the  defendant  had  failed 
to  take  any  steps  in  that  direction,  not  for  want  of  means  or  ability, 
but  because  its  directors  had  decided  that  its  interests  required  it  to 
postpone  doing  so.  (Under  the  statutes  of  New  York  the  so-called 
adjudications  of  the  railroad  commissioners  had  no  effect  save  byway 
of  advice  or  suggestion,  and  could  not  be  judicially  enforced.)  Dax- 
FORTH,  J.,  said  :  "As  the  duty  sought  to  be  imposed  upon  the  defend-1 
ant  is  not  a  specific  duty  prescribed  by  statute,  either  in  terms  or  by) 
reasonable  construction,  the  court  cannot,  no  matter  how  apparent  the! 
necessity,  enforce  its  performance  by  mandamus." 

Com..  V.  Eastern  R.  R.,  103  Mass.  254.  The  court  held,  that  a  rail- 
road corporation,  whose  charter  was  subject  to  amendment,  alteration, 
or  repeal  at  the  pleasure  of  the  legislature,  might  be  required  by  a 
subsequent  statute  to  construct  a  station  and  stop  its  trains  at  a  par- 
ticular place  on  its  road. 

State  V.  Republican  Valley  R.  R.,  17  Nebraska,  647.  The  decision 
proceeded  upon  the  theory  that,  independently  of  any  statute  require- 
ments, a  railroad  corporation  might  be  compelled  to  establish  a  sta- 
tion and  to  stop  its  trains  at  any  point  on  the  line  of  its  road  at  which 
the  court  thought  it  reasonable  that  it  should.] 

The  leading  facts  of  this  case,  then,  as  appearing  by  the  special  ver- 
dict, taken  in  connection  with  the  admissions,  express  or  implied,  in 
the  answer,  are  as  follows:  The  defendant  at  one  time  stopped  its\ 
trains  at  Yakima  City,  but  never  built  a  station  there,  and,  after  com- 
pleting its  road  four  miles  further  to  North  Yakima,  established  a 
freight  and  passenger  station  at  North  Yakima,  which  was  a  town  laid 
out  by  the  defendant  on  its  own  unimproved  land,  and  thereupon 
ceased  to  stop  its  trains  at  Yakima  City.  In  consequence,  apparently, 
of  this,  Yakima  City,  which  at  the  time  of  filing  the  petition  for  man- 
damus was  the  most  important  town,  in  population  and  business,  in 
the  county,  rapidly  dwindled,  and  most  of  its  inhabitants  removed  to 
North  Yakima,  which  at  the  time  of  the  verdict  had  become  the  largest 
and  most  important  town  in  the  county.    No  other  specific  facts  as 


/ 


730         NORTHERN   PACIFIC   R.   CO.  V.   WASHINGTON   TERRITORY. 

to  North  Yakiina  are  admitted  by  the  parties  or  found  by  the  jury. 
The  defendant  could  build  a  station  at  Yakima  City,  but  the  cost  of 
building  one  would  be  $8000,  and  the  expense  of  maintaining  it  $150 
a  month,  and  the  earnings  of  the  whole  of  this  division  of  the  defend- 
aj^t's  road  are  insufficient  to  pay  its  running  expenses.  The  special 
erdict  includes  an  express  finding  (which  appears  to  us  to  be  of  pure 
matter  of  fact,  inferred  from  various  circumstances,  some  of  which 
are  evidently  not  specifically  found,  and  to  be  in  no  sense,  as  assumed 
by  the  court  below,  a  conclusion  of  law)  that  there  are  other  stations 
for  receiving  freight  and  passengers  between  North  Yakima  and  Pasco 
Junction,  which  furnish  sufficient  facilities  for  the  country  south  of 
North  Yakima,  which  must  include  Yakima  City ;  as  well  as  an  equally 
explicit  finding  (which  appears  to  have  been  wholly  disregarded  by 
the  court  below)  that  the  passenger  and  freight  traffic  of  the  people 
living  in  the  surrounding  country,  considering  them  as  a  community, 
would  be  better  accommodated  by  a  station  at  North  Yakima  than  by 
one  at  Yakima  City.  It  also  appears  of  record  that,  after  the  verdict 
and  before  the  District  Court  awarded  the  writ  of  mandamus,  the 
county  seat  was  removed,  pursuant  to  an  act  of  the  territorial  legisla- 
ture, from  Yakima  City  to  North  Yakima. 

The  mandamus  prayed  for  being  founded  on  a  suggestion  that  the 
defendant  had  distinctly  manifested  an  intention  not  to  perform  a 
definite  duty  to  the  public,  required  of  it  by  law,  the  petition  was 
rightly  presented  in  the  name  of  the  Territory  at  the  relation  of  its 
prosecuting  attorney ;  Attorney  General  y.  ^os^on,  123  Mass.  460,  479 ; 
Code  of  Washington  Territory,  §  2171 ;  and  no  demand  upon  the  de- 
fendant was  necessary  before  applying  for  the  writ.  Commonwealth 
V.  Allegheny  Commissioners,  37  Penn.  St.  237 ;  State  v.  Board  of  Fi- 
nance, 9  Vroom,  259 ;  Mottii  v.  Primrose,  23  Maryland,  482 ;  Attorney 
^       General  v.  Boston,  123  Mass.  460,  477. 

,     But  upon  the  facts  found  and  admitted  no  sufficient  case  is  made 

\y     for  a  writ  of  mandamus,  even  if  the  court  could  under  any  circum- 
\\       'Stances  issue  such  a  writ  for  the  purpose  set  forth  in  the  petition. 
v\ -^  The  fraudulent  and  wrongful  intent,  charged  against  the  defendant  in 
y^  jthe  petition,  is  denied  in  the  answer,  and  is  not  found  by  the  jury. 

■^  The  fact  that  the  town  of  North  Yakima  was  laid  out  by  the  defend- 
ant on  its  own  land  cannot  impair  the  right  of  the  inhabitants  of  that 
town,  whenever  they  settled  there,  or  of  the  people  of  the  surrounding 
country,  to  reasonable  access  to  the  railroad.  No  ground  is  shown  for 
requiring  the  defendant  to  maintain  stations  both  at  Yakima  City  and 
at  North  Yakima ;  there  are  other  stations  furnishing  sufficient  facili- 
ties for  the  whole  country  from  North  Yakima  southward  to  Pasco 
^Junction ;  the  earnings  of  the  division  of  the  defendant's  road  be- 
tween those  points  are  insufficient,  to  pay  its  running  expenses ;  and 
to  order  the  station  to  be  removed  from  North  Yakima  to  Yakima 
City  would  inconvenience  a  much  larger  part  of  the  public  than  it 
would  benefit,  even  at  the  time  of  the  return  of  the  verdict.     And, 


NORTHERN   PACIFIC   R.   CO.    V.   WASHINGTON   TERRITORY.         731 

before  judgment  in  the  District  Court,  the  legislature,  recognizing  that 
the  public  interest  required  it,  made  North  Yakima  the  county  seat. 
The  question  whether  a  mandamus  should  issue  to  protect  the  interest 
of  the  public  does  not  depend  upon  a  state  of  facts  existing  when  the 
petition  was  filed,  if  that  state  of  facts  has  ceased  to  exist  when  the 
final  judgment  is  rendered.  In  this  regard,  as  observed  by  Lord  Chief 
Justice  Jervis  in  GreatWestern  Railway  v.  The  Queen,  already  cited, 
"  there  is  a  very  great  difference  between  an  indictment  for  not  ful- 
filling a  public  duty,  and  a  mandamus  commanding  the  party  liable 
to  fulfil  it."  1  El.  &  Bl.  878,  The  court  will  never  order  a  railroad 
station  to  be  built  or  maintained  contrary  to  the  public  interest.  Texas 
&  Pacific  Railway  v.  Marshall,  136  U.  S.  393. 

For  the  reasons  above  stated,  the  judgment  of  the  Supreme  Court 
of  the  Territory  must  be  reversed,  and  the  case  remanded,  with  di- 
rections to  enter  judgment  for  the  defendant  dismissing  the  petition  ; 
and  Washington  having  been  admitted  into  the  Union  as  a  State  by 
act  of  Congress  passed  while  this  writ  of  error  was  pending  in  this 
court,  the  mandate  will  be  directed,  as  the  nature  of  the  case  requires, 
to  the  Supreme  Court  of  the  State  of  Washington.  Act  of  February 
22,  1889,  c.  180,  §§  22,  23 ;  25  Stat.  682,  683. 

Judgment  reversed,  and  mandate  accordingly. 

Mr.  Justice  Brewer,  with  whom  concurred  Mr.  Justice  Field 
and  Mr.  Justice  Harlan,  dissenting. 

I  dissent  from  the  opinion  and  judgment  in  this  case. 

The  question  is  not  whether  a  railroad  company  can  be  compelled 
to  build  a  depot  and  stop  its  trains  at  any  place  where  are  gathered 
two  or  three  homes  and  families ;  nor  whether  courts  can  determine 
at  what  locality  in  a  city  or  town  the  depot  shall  be  placed ;  nor  even 
whether,  when  there  are  two  villages  contiguous,  the  courts  may 
determine  at  which  of  the  two  the  company  shall  make  its  stopping 
place,  or  compel  depots  at  both.  But  the  case  here  presented  is  this : 
A  railroad  company  builds  its  road  into  a  county,  finds  the  county  seat 
already  established  and  inhabited,  the  largest  and  most  prosperous 
town  in  the  county,  and  along  the  line  of  its  road  for  many  miles.  It 
builds  its  road  to  and  through  that  county  seat ;  there  is  no  reason  of 
a  public  nature  why  that  should  not  be  made  a  stopping  place.  For 
some  reason,  undisclosed,  perhaps  because  that  county  seat  will  not  pay 
to  the  managers  a  bonus,  or  because  they  seek  a  real  estate  speculation 
in  establishing  a  new  town,  it  locates  its  depot  on  the  site  of  a  "  paper  " 
town  the  title  to  which  it  holds,  contiguous  to  this  established  county 
seat ;  stops  only  at  the  one,  and  refuses  to  stop  at  the  other  ;  and  thus, 
for  private  interests,  builds  up  a  new  place  at  the  expense  of  the  old ; 
and  for  this  subservience  of  its  public  duty  to  its  private  interests, 
we  are  told  that  there  is  in  the  courts  no  redress ;  and  this  because 
Congress'  in  chartering  this  Northern  Pacific  road  did  not  name  Ya- 
kima City  as  a  stopping  place,  and  has  not  in  terms  delegated  to  the 
courts  the  power  to  interfere  in  the  matter. 


732         NOETHERN   PACIFIC   R.    CO.   V.    WA-SHINGTON   TERRITORY. 

A  railroad  corporation  has  a  public  duty  to  perform,  as  well  as  a 
private  interest  to  subserve,  and  I  never  before  believed  that  the  courts 
would  permit  it  to  abandon  the  one  to  promote  the  other.  Nowhere 
in  its  charter  is  in  terms  expressed  the  duty  of  carrying  passengers 
and  freight.  Are  the  courts  impotent  to  compel  the  performance  of 
this  duty  ?  Is  the  duty  o^  carrying  passengers  and  freight  any  more 
of  a  public  duty  than  that  of  placing  its  depots  and  stopping  its  trains 
at  those  places  which  will  best  accommodate  the  public  ?  If  the  State 
of  Indiana  incorporates  a  railroad  to  build  a  road  from  New  Albany 
through  Indianapolis  to  South  Bend,  and  that  road  is  built,  can  it  be 
that  the  courts  may  compel  the  road  to  receive  passengers  and  trans- 
port freight,  but  in  the  absence  of  a  specific  direction  from  the  legis- 
lature, are  powerless  to  compel  the  road  to  stop  its  trains  and  build  a 
depot  at  Indianapolis  ?  I  do  not  so  belittle  the  power  or  duty  of  the 
courts. 


> 


V 


LAW  UBRART 


-"^^S"-™ 


JC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


A  A    000  866  418    7 


